Page 340 - THE MARKET WHISPERER

336 PART 10 - Winning Trades

A good reason for scalpers to work Citi hard prior to its reverse split
was the fact that its price was so low! To buy 10,000 shares at $4 required
them to provide a relatively small capital of just $10,000 which, leveraged
at 4:1, allowed them buying power of $40,000. Some time ago, I watched
a trader whose entire trading involved scalps of one cent on Citigroup
shares. For several hours I watched how an account of $100,000 and a
quantity of 100,000 shares per trade brought him to a profit of $32,000 by
the end of the trading day. The next day he did return some $18,000 to the
market when Citi moved a few cents against him and did not pull back, but
for the most part, he held that positive balance over time.

But the story is not all rose-colored. He was forced to change brokers
once every few months, because sooner or later the new broker would
realize that this person is involved in what is known as toxic trading. More
on that later.

Types of Orders

Generally we do not route orders direct to market makers, but for quantities
of tens of thousands of shares, you will find that it is the market makers
who will provide the fastest execution. Market makers are pleased with
large quantities, so you should consider executing your orders through
businesses such as NITE (Knight Capital Group) and SBSH (Salomon Smith
Barney). For example, with a quantity of 100,000 shares, it is preferable
to place two separate orders of 50,000 with each of these two market
makers, and during trading, observe which of them fills the order faster.
The advantage of this method of using market makers is execution speed;
the disadvantage is that you will not receive the ECN’s refund commission.

How can market makers fill orders faster than the ECN? Because they
themselves are trading within these small spreads. The role of market
makers, as we have learned, is to provide the market with liquidity, which
they do not do in return for a guaranteed place in heaven. They provide
liquidity since they want to profit, just like you do, from the gaps between
the bid and ask prices. What you are doing with thousands or tens of
thousands of shares, they do with millions. Relative to stocks traded at
locked prices, they do this best and easily because they have one advantage
over you: they are allowed to trade in fractions of a cent.

The phenomenon of trading in fractions of a cent will anger you deeply.
For example, you may be waiting to get rid of a stock with a one cent profit.
Let’s say you bought at $8.01 and are planning to sell at $8.02, but in your