077: Dennis Dick – How to be a Profitable Short-Term Trader in a High Frequency World

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Chat for more information. Tasty Trade Inc. is a registered broker dealer and member of FINRA, NFA, and SIPC. This is the first one. Podcast. How you doing guys? You're listening to episode 77 and I am your host, Aaron Firefield. As per usual, thank you for being here. Now what you're about to listen to is a really interesting conversation I had with Dennis Dick.

For a little context, Dennis first started out meddling with penny stocks before soon joining a well-established prop firm known as Bright Trading. This was in the late 90s. Now astute listeners may actually pick up on the fact that this was also where Jeff Davis from episode seventy got his start too. To this day, Dennis remains with the same firm, still as an active short-term equities trader, but also as their market structure analyst.

And if his voice sounds somewhat familiar, that's probably because he's the co-host of Benzinger's pre-market prep live morning show. Some of the key talking points that come up over the next sixty minutes here include scalping. Is it still a viable strategy? Surviving as a short term trader in a high frequency world, various order types and the pros and cons of those.

And the opportunities that can be found trading the open, because this is actually where Dennis makes roughly 50% of his money each day within the first five minutes. All right, traders, I hope you enjoy this episode. Here is my chat with Dennis Dick. pretty much things that we spoke about uh the other week. You know, how you came up as a trader, uh prop trading, how you trade today, particularly around the open and after hours.

Um, and also really keen to speak to you about some market structure topics as well, seeing as you're a market structure analyst. So, how does that sound? Yeah, sounds perfect. I tend to go on tangents, so I guess if you know if we go on a few tangents there those make it interesting as well. So

Yeah, no, that sounds good. That sounds good. So yeah, feel free to do that. I mean we're keen to hear what you've got to say. So let's just start it off. So the first question I'd like to ask you is how did you get started? Like what was it about trading that got you interested?

I was trading my parents' money in university. So my parents had a stockbroker, um, and I have was taking finance in university, so I started getting inter interested in the stock market and started playing the penny stocks. I think everybody starts with penny stocks. But

Um there was, you know, a couple of uh penny stocks, there were advisories, newsletters, email newsletters. And it was interesting to me. Like I'd uh you know, I'd see these uh newsletter come in my inbox and you know, I didn't know at the time, but it was basically just a pump and dump scam. But looking back on it in nineteen ninety seven, so I'm going back twenty years ago.

um you'd get these emails and they basically would be just trying to pump a stock and y you'd look at the stock and you'd you'd get the email the night before and you'd see it the next day and it would go up and you're like, holy cow, you know, this Newsletter is awesome. They're literally, you know Sending me information on a stock.

And it's going up the next day, but really it's just because they're sending it to thousands and thousands of people and it's actually pumping up the price of the stock, looking in hindsight. But that got me interested just in the markets, you know, just playing the penny stocks and seeing how everything moved. So um I was starting to trade my parents money and I was just trading basically during the internet bubble. So um they gave me a little bit of money to play with and just by sheer lot

Um, and just because of the environment we were in, it seemed like everything that I would buy wouldn't make money because it was in such a raging bull market. Like I can remember stocks, you know, that are probably long gone now, but like Excite at home and these other search engines that were trading publicly and, you know, these stocks would, you know, go up

tenfold in a year. Like the the tech bubble of the Nasdaq was really something. So that's kinda how, you know, what spurred my interest. And that was just trading retail then, obviously my parents' money.

And then I graduated from university and instead of getting a real job I had a friend who was trading at Bright Trading in in Detroit, Michigan. And I was Canadian, so there was gonna be a little bit of to do with visas to go across the border in that. But Um, you know, I worked that out and actually went over and met the office manager there. who, um, you know, coincidentally I've I've s I've been with, you know, for a long time now. I now do a radio show with them, Joel Alconan.

And uh I met him and there really wasn't much to it back then. This was nineteen ninety nine. There wasn't any licensing or anything that was necessary, so I went in and uh just interviewed with him and I saw the trading office. There was like maybe twelve or thirteen guys trading in there and I was like, This is fantastic. So you had to have twenty five thousand dollars to uh trade upright trading.

So you put that twenty five thousand dollar performance uh j that deposit into your account and then that was the money that your win your uh you know, losses or your your gains would c uh go to. So with that twenty five thousand, they would give you um access to the firm capital.

And that could be, you know, upwards to, you know, five hundred thousand to a million dollars. So you really, you know, got by, you know, if you were on a retail account, imagine trying to use twenty five thousand dollars to make a living would be impossible. But that twenty-five thousand dollars now that you have access to the firm's money can make you a lot of money. So um and obviously that capital

Um, you know, you can employ a lot of different strategies as opposed to, you know, buying one or two stocks. You can employ a plethora strategies when you've finally when you've got access to half a million bucks. So that's how I got started up right trading in nineteen ninety nine and it's now twenty sixteen, seventeen years later, and I'm still app rate trading. So

That's awesome. That's awesome. That's a really cool um way to kick this off. So I've gotta ask you, were you ever nervous trading your parents' money? Um yeah, for sure. Even back when I was retail, like um but but not so much like I think I wasn't nervous'cause In the beginning it just seemed like everything worked. And like I said, looking back in hindsight, it was just the market environment we were in.

The NASDAQ was going straight up, everything was going straight up. So you bought some little tech stock. And it just went up. So it seemed like, you know, I was very confident going in um because you really I I you know, didn't have a lot of losing trade. So but I can remember when I first started upright and I was trading with my parents twenty I actually borrowed the twenty five thousand dollars from my parents to start upright trading. And I can remember being nervous then.

So and starting up right and it was kind of completely different. I remember um I remember actually on my second day of trading.

Um and you're still you're trying to get used to the use to the interface. I trade on uh the it's Goldman Sachs Ready Plus platform and that's what we were trading on back then as well. And I remember you're just trying to get used to it and I accidentally what what you could do is if you click in the montage and you click on the offer, your order entry window automatically populates.

And it would populate with the size of you know of what you clicked on. So I accidentally clicked on a 2,000 share order and I accidentally bought. two thousand shares of Microsoft. I wanted to buy a hundred shares of Microsoft.

So now I'm thinking like whoa whoa whoa. I'm trying to buy a hundred shares of you know, a hundred dollar stock. I just bought two thousand shares and I can remember trembling at the mouse. I was literally shaking at the mouse. You know, I'm a twenty two year old kid here and I just you know, on my second day of trading I I've just thrown uh two hundred thousand dollars on Microsoft.

Which, you know, we were in the tech bubble. Microsoft really moved a lot back then. So that was a big position. And I quickly got out of it and I think I actually ended up scratching the trade. So no damage on that. But then I had to sit back and like, whoa. You know, sit back and really analyze and you know, make sure you learn how to use the configuration and everything of the platform before you just start clicking randomly. So

Uh very dangerous when you're you know on a prop account. If you're in a retail account, there's like a confirmation window, there's something different happening. So, you know, you make an accident, now you have a confirmation screen, it's like, oh no, I didn't want to do that. And you know, in uh in Goldman Sachs Very Plus, you click you own, so it's that quick.

So it's a little bit different, but that trade actually didn't end up breaking me. But I can remember my first week I made like a little bit of money just in you know by luck, and then I remember my second week. there and I just was losing on everything. I think I had the office record. I lost on 17 consecutive trades. And I'm like, how you know, if you think about it. Trading is really it's kinda like fifty fifty. I mean if you're buying it could go up or it can go down.

How do you statistically lose on seventeen trades in a row? You're doing something really bad. I'm like, holy cow, I'm really bad at this. So but it didn't deter me and I stuck with it and slowly started to learn, you know, the different systems and we were kind of playing market maker back then and learning how it goes and after six months I started to become profitable. So it was a little bit of a learning curve to it, but

I did gain the profitability. I never really lost that much money. The most I ever got down, I think, in my trading account was about thirty five hundred bucks on the twenty five grand. So I never really got down that much.

And that was because I really followed, you know, Bray Trading's lessons. They're like trade with a hundred shares. You know, you trade with a hundred shares, you can s last a long time because a good day you might make two hundred bucks, a bad day you might lose two hundred bucks. But it's not like you're gonna blow your account out in one day. Mm-hmm. Okay, so I wanna dig into a few things you've said there a little bit more. So

Just backing up a little bit, what were some of the advantages you saw at the time by joining a prop firm? Like why did you decide to go into the prop industry instead of continuing to trade as a retail trader? Uh big advantages back then. The advantages aren't as much as they used to be now because it's you know we've had the internet, there's so much advancement with retail brokers that You'd probably can do a lot of stuff that we do now through a retail broker.

The biggest advantage back then was just the speed. So we had T one connection, which uh was everything back then. So um you're getting the information faster. You can send your orders directly into the system where you literally like in my sec like you know and obviously in your first six months of trading you're still learning, but in my you know first few years of trading, I was basically just trading the news.

And we were the fastest. So when news would break, like I can remember even um for instance, um, you know, if there's a Fed decision at two fifteen, they're always at two o'clock now Eastern, but they used to be at two fifteen back then. And they're raising interest rates. Well we'd have like spreadsheets.

to go to buy like all, you know, a whole pile of the S P components and they would sit there for a few seconds. Like it wasn't like high frequency trading is now where it's gone in milliseconds. Those opportunities were there for seconds and that was everything and we were fast. So you could, you know, literally pick off, you know, anybody who's sitting out there with a limit order. That's the they're kinda like a sitting duck.

And we're just picking those off. So and and basically making the money from because those orders that are sitting out there aren't priced for the new information that, hey, they just lowered interest rates, so everything's gonna go higher. So, you know, this so that was the number one advantage was the speed. The second advantage, which I talked briefly about at the beginning of the interview, is the capital.

So like I said, if you're trading retail and if you're a two to one margin or four to one margin intraday, it's hard to make a living with a twenty-five thousand dollar account. You know, if you e even say you had four to one margin, that's a hundred grand. Well you got to do ten percent on your money. You're only gonna make ten thousand dollars. You're not gonna live very well on ten grand.

So that's why, you know, that access to capital was key too. So and obviously the other big thing is at a retail broker you have a ticket charge. And the ticket charge is that seven ninety nine a trade or ten ninety nine a trade or five dollars a trade. No ticket charges upright. It's just flat out um it it's just flat out well, now it's profit sharing, but back then it was commission based, so we'd pay one cent a share. So

If I'm buying something and it was in fractions back then too. So if I'm buying a stock on the NYSC at twenty-five and a quarter and I sell it for twenty five and five sixteenths. I'm actually gonna make six and a quarter cents minus my two cents. I'm pocketing four and a quarter minus little SEC fees in there. I'm clearing four cents for sure.

So, you know, on a minimum tick, which was you know a sixteenth back then, I'm making money. You wouldn't be doing that at a retail broker. The ticket charges would kill you.

So that's the difference is that it's you know, there's no ticket charge at a prop firm. Mm-hmm. Mm-hmm. Okay. And I just want to pick up on some of the terminology you said um in your response there. Can you just expand on what you mean by picking off? Okay, so this um

If you have a limit order that is sitting out there, and this is going back to like if you you want to talk like it's like adverse selection risk is what it really is. So an adverse selection is just the risk that your order is going to not price in the information fast enough, then another trader might be able to take your orders. So for instance, let's just use the example that I cited earlier where you had the Fed decision.

So there will be orders sitting on the limit order book at uh at all at any given time. There's going to be bids and asks on uh there's gonna be buy orders out there and sell orders out there. So if The f if all of a sudden the S P futures drop ten points because of a Fed decision at two hundred fifteen, that's all of a sudden all those bid all those buy orders that are sitting on the limit order box.

are mispriced because they were out there before that information was there. Before that information of the in of the interest rate rise of the intr interest rate decision uh was publicly available. Once that information becomes publicly available, then what you have is and you'll see this in the high frequency trading world, that they'll come in and obviously take out whatever is down there. So if the SP futures fall ten points.

That means all your SP components for the most part, like obviously as a whole, are going to drop by that percentage. So it might be easier to say in percentage. Let's just say hypothetically for simplicity purposes, SP futures drop one percent.

The S P five hundred components as a whole have to drop one percent as well. It doesn't it didn't do that instantaneously though in nineteen ninety-nine. It took a few seconds for that to happen. So what we would do is if you know General Electric was bidding twenty five fifty

before this information came out, SP futures all of a sudden fall one percent. There's still a twenty five fifty bid sitting there. I'm going to hit that twenty-five fifty bid because it's mispriced now for the new information that was just given to the market. I'm gonna probably hit the twenty five forty five bit. Probably the twenty five forty bit as well if it's there.

And then, you know, watch, you know, as other traders come in and m and the arbitrage comes in and and reprices G, possibly down to twenty five, twenty-five, or you know, twenty five, thirty cents lower, or w or maybe approximately one percent lower because its beta is approximately one for that interest rate or that uh movement in the SP futures. So basically I was just playing the arbitrage of the S P components.

versus the actual uh trade tradable uh futures contract, which is the obviously the five hundred components combined. And now the difference is why you can't do that now. is high frequency traders are repricing that in milliseconds. So that's why speed is so important to high frequency traders because they're trying to beat the other high frequency traders.

So, you know, w really, you know, in the evolution of the markets, they're just doing exactly what we were doing manually in nineteen ninety nine or, you know, obviously on the floor uh before that as well. They were doing the same thing. It was just a lot slower. Now it's been set sp sped up and it's so quick. that all those, you know, microseconds matter.

Sure, sure. Yeah, and we'll pick back up on that um in a little bit as well. I'm keen to hear more um about your views on HFT and that sort of thing. I know you're um uh you you've commented on that regularly. So Um, just continuing with the with the prop firm, what were some of the things that they taught you um as you joined the firm and and Some of the things they taught you in in terms of like trading methods, did you just continue trading?

Um the way you had been trading when you were more a retail guy, or did they teach you some new ways of trading that you actually put into practice? I think both. I think I learned a lot on the job too and I kinda put my own spin on a lot of things. But bright trading is great and they're still great like that. They do conference calls every morning. Uh we used to do them every morning to talk with our traders.

and you know, discuss, you know, what's today's action, what are we seeing today. And they would do a regular uh you could go out to Las Vegas, regular trading workshops. Um now we have them online'cause it's just simpler, but back then people would actually fly in and you'd learn different strategies and some traders would sh share strategies, some wouldn't.

Um I've always been one that, you know, from from my own personal I would share any strategy that's capital intensive. If it wasn't capital intensive, I wouldn't probably share it. That even goes for the radio show that I do with Benzinga. I always share the capital intensive stuff because

If there's more you know, if I don't want all the action, there's more for everybody, you know, that that's fine. But you know, if I if I'm in some little strategy or some little small cap stock where everybody else is gonna matter, then that's a strategy I probably wouldn't share. So I think that's probably, you know, the traders upright probably follow that mentality a little bit where they might share some of the more capital intensive stuff.

and overall strategies. But Bright themselves was great. We had Don Bright who who passed away a couple of years ago, but he had a strategy called the opening uh OPG strategy, which was the opening only order strategy. And that's a strategy that I still employ today. And it was basically always uh if you just talk back to nineteen ninety nine, it was a strategy that tried to uh put you on the same side as the specialist, the guy on the floor.

They call those guys designated market makers now, but back then there was a specialist that was running each stock. And on the NYSC in nineteen ninety nine, eighty or ninety percent of your order flu flow uh went through that guy. So if you and you know, he's trading, but he's also trading his own account as well. So if you can trade on the same side as him, it's a definitive advantage.

And what Don Brady had figured out is, you know, when a stock is opening too high or too low, uh, relative to fair value or where, you know, the pricing should be, the specialist would often have to provide liquidity of that. So if a stock was opening too high, for instance, Specialists would provide liquidity to that by selling the stock short of the extra shares, or if the stock was opening too low, specialists might have to come in and provide liquidity by buying the shares.

Well, if you're you know, if if the specialist just by the guy on the floor who has the order book and all the information,'cause that wasn't public back then the order book, the specialist held that book on his own. Um, if he's buying the stock, you probably want to be buying the stock. So we traded a lot uh just trying to figure out which side the specialist was on.

That was even through my regular tape reading. I would be trying to figure out, okay, is a specialist long or short here? Because he's probably going to try his best to push the stock higher. He now they have rules. They can't just physically come in and start buying the stock up.

But they can buy stock from themselves and then naturally let the order flow take it higher. So in there's and the bottom line is there's a there was a big advantage back then to figuring out which side of the trade the specialist was on and trading along with it. And that's all short term trading. Like our trades were typically, you know, in minutes or even seconds. You know, we weren't in trades for hours. We were scalping.

Got it, got it. Okay. So one of the things you said a little bit earlier was that you were pretty much profitable, like consistently profitable within about six months, like within your first year of trading. I mean that pretty abnormal, you know, when um especially from my experience talking with traders that they actually become profitable within the first year. How do you think you were able to pick it up?

so quickly. I know you'd had a little bit of experience um, you know, on the retail side before coming into the prop firm, but even still it it seems as though you picked up trading uh fairly quickly compared to most. What do you think why do you think that was? Nineteen ninety nine. That's why it was. It was a lot easier back then because

The the evolution of the markets you just gotta think of, you know, what's happened. So they've it's come from the floor and it is in its infancy in nineteen ninety nine when I started. It's just getting started at the computers. So we, you know, are fast enough where we're sending orders of doing stuff like that. We have so many advantages over even the floor traders back then. Like really when I think about it. Bright trading and and firms like ours were your first high frequency trader.

We really were. You know, we were employing the same strategies that they employ today. They just do'em faster. So they did all this stuff on the floor beforehand. So it was just the evolution of taking these strategies from the floor and coming to the computer. And we were at the beginning of it.

So the reason you know that I was doing so well in nineteen ninety nine was because it was just a lot easier back then. We were quicker. We were the fastest traders. We were picking off the uninformed order flow that wasn't priced for all the correct information. Um and that's exactly what high frequency traders are doing today.

So, you know, it's just trade it's just changed a lot. You know, w in and coming back, you know, you could ask me this later, but I think uh, you know, a better question for me is probably why how am I still profitable today in this environment, you know, not trading any of the strategies that I used to trade.

Because um back then it was just it was kinda like shooting ducks in a barrel, to be honest. Um I I can remember, you know, there's traders in the office that wouldn't have a losing day the entire year. So and that was just simply just the information advantage. Uh trading on news and being quicker than the next guy. And I'm sure a lot of your high frequency traders you hear about stuff like this, how how Virtue or you know or different high frequency traders don't have any losing days.

And I get that. You know, I d they're not cheating. It's just this when you're trading and you have a statistical edge and let's say it's like fifty five percent or fifty three percent, um, if you employ that edge enough times during a day There's a very, very low probability that you're going to lose money on any given day.

So, you know, so that's why, you know, I think I was able to pick it up bad back then, is just it was a lot easier back then. Trading is a lot more difficult for a human being now because of all that high frequency competition. Right, right. So at what point Did Uh, how do I how do I say this? At what point did the high speed traders force you into trading higher time frames? Like you said that. Um you were trading sometimes your trades would be d over and done within a matter of seconds.

Um, you know, I know as time went by you sort of got forced out of that space and began trading, you know, minutes to sometimes hours as the years went by. What point did did that start to happen and how did you I guess notice that? It was after the financial crisis. So we're talking 2008, 2009. I would say in 2010 is when it really started to hit us.

So I'm you know, eleven years of, you know, basically probably being the fastest and and we had automation too. So like I said, you know, we were those initial high frequency traders. where we're trading automated, we're speed, but then you know, it's moved to co-location and it's just got sped up and kind of taken away.

from us, you know, and now there's off exchange trades, all kinds of other stuff, you know, where there's definitive a advantages over there. But it all really started, I would say, like some people say Reagan MS, you know, two thousand six, I think it was. But it was probably maybe that was the infancy of it, but really when it started we'd started to feel a pinch.

um where you know, okay, we gotta start adjusting some strategies is 2010. I w I used to run uh I used to run a manual trading system and I had a second account and my second account was fully automated. So I could totally you know, and this was probably two thousand four. So, you know, when I'm fully automated in two thousand four, I'm way ahead of the curve, you know, from where we were today. So and I can remember my automated account would make money every day.

You know, two thousand five, two thousand six, two thousand seven, two thousand two thousand eight it got interesting'cause of financial crisis. I wasn't running as as much automation in the financial crisis because it was it was it was a different environment. But in two thousand six, two thousand you know, two thousand five, two thousand six, those were st relatively stable years. Um, I was running different, you know, automated like market making type systems.

um, those systems would make money every day. And, you know, and now you know, that's kind of how I understand high frequency trading so well. You know, maybe not the minutiae of, you know, how the the speed all works, but

Um now I understand the strategies because it's it's my strategies. You know, they're using our s you know, our strategies, you know, and not that we created'em, but traders like us were using those same strategies, which were taken from the floor originally. It's all, you know, market making strategies there. So You know, in two thousands, you know.

six, two thousand seven, you know, and then you you're you're trying to run automation in two thousand nine, two thousand ten and it's not working as well. And that automated account I eventually closed, I think probably in two thousand ten, because I wasn't making money anymore. I wasn't fast enough to um you know, my my computer systems weren't fast enough to make money with it. But you know what? As a human being I still had a definitive advantage because I have, you know, any

automated computer system that's uh you know trading on a program, that has to be programmed in and figured out where a human being can, you know, change their thinking on the fly. The program can't think for itself, it's just going to do what it's made to do. So you know, I think that's why, you know, I'm still profitable today is because I'm always, you know, quickly adapting to the new environment. And I would say I actually use a lot less automation.

than I did ten years ago. And that's counterintuitive because a lot of people and a lot of traders say, Oh, you can't trade, you know, unless you're automated now. I would say you're late to the curve. Uh automation the the party was back into the early mid two thousands. For your your regular Joe. And you know, now I would say any automated systems that I run are very difficult because I'm competing against the sp the fastest firms in the world and you know only one firm can win the race.

So, you know, there's five, six firms dominating that space. There's a lot of other high frequency training firms. There's five or six probably dominating it.

So and I can't compete with those. And you know, they have, you know, not even speed. They have relationship trades where you know, where they got payment for order flow, they're sending, you know, f orders, you know, buying order flow from retail brokers so they can have the first chance to interact with those orders. There's a lot going on. So So, you know, I think I went on a pretty good tangent here, but back to your original question.

When my automated systems weren't working as well, probably in two thousand ten, two thousand eleven I realized, hey, I've got to do some adjustments here. And then, you know, my scalping strategies weren't working anymore because I can't get filled to my bids or offers.

because uh, you know, there's other traders that are m quote matching me and beating me to the price. So I adjusted and I went from a scalp you know, from being mainly a scalper to adjusting my time frame from seconds, probably up to minutes.

So I'm still not trading in hours, I'm still not trading in days, but I'm probably trading in you know minutes, maybe you know, up to a little bit longer than that. But you know, there's still a lot of a lot of uh advantages for a human trader, just not in the scalping.

Okay, so just to summarise what you've said there, essentially you're saying that scalping isn't a viable strategy any longer. Not for a human being, no. And and not even mostly most of your automated programs because like I said, I was running automated scalping strategies for five, six years from probably two thousand five. And I might begin the dates wrong, but you know, mid two thousands up till two thousand ten, two thousand eleven, my automated systems weren't making money anymore either.

So and it's just because You y market making is all about, you know, getting filled on the bid and filled on the offer. And when there's participants, you know, we can jump into some of this, but a lot of your order flow is now going off exchange. And you have, you know, th it's funny, everybody talks about the speed race.

But really, you know, it's about relationships as well. And you know, you have a retail broker that routes orders out to an off-exchange market maker, that off-exchange market maker has the first chance to interact with those orders. There's nobody competing with them. They those orders go through their platform first. So they're gonna have the chance to match my quote. So if I bid a stock at twenty four fifty.

Well, I it might trade at my price again and again and again, and I might not get filled because the order that's trying to interact with my 2450 bit. is being routed off exchange and executed directly against, you know, by another, you know, probably a high frequency off exchange market maker. So it's very, very difficult

for, you know, a human being and you know even an automated system, you know, to compete with that. So in a market making capacity or scalping capacity, it's nearly impossible to compete with those top tier firms. Mm-hmm. And just to be clear, when we're talking about scalping here, we're referring to equity markets, right? So futures and that sort of thing is a different story altogether, right?

It different markets and I'm an equities trader, so I'm not even gonna comment on, you know, how that's changed. I you know, I can imagine how it's changed in the futures markets as well. But you know, I'm always been an equities trader. I've dib I've I've dabbled into the futures markets there, but I never had any luck with it. I'm always been an equities trader for seventeen years and he kinda

Stick with what you know best. So the equities markets, there's a lot of market fragmentation. When I was starting, like I said, nineteen ninety nine, eighty or ninety percent of your order flow went through on the New York stocks, went through the New York Stock Exchange, went through the guy standing on the floor.

Now, you know, there's fifteen or twenty percent only going through that and there's eleven other venues where, you know, these trades can transact. So when I bid a stock, for instance, and and and this would be a good example, like a small cap stock, it doesn't apply as much on the real mega caps. But you think about a small cap stock, it's may maybe got a market a

2450 to 2475. If I wanted to tighten that market, go 2451, there's gonna be an automated program that automatically steps ahead of me at 2452. I go twenty-four fifty-three, they're gonna bid twenty-four fifty-four. Instantaneous. So they're trying, you know, to be, you know, uh it's all Q priority. They wanna be at the top of the order queue.

Um or they're just gonna match my quote and then, you know, uh so so a lot of times you'll see twenty four fifty, I'll bid, then five other exchanges will bid along with me. I'll cancel, they'll all exchange t they'll all cancel too. They all wanna lean on my quote.

And that's really what market making is. It's kind of leaning on the quote for protection. So I've been twenty four fifty, they're been twenty four fifty one, somebody comes in, sell it to them at twenty four fifty one. If the going gets tough, SP features start tanking, they hit me at twenty four fifty, lose a penny.

And if I'm talking too fast, just slow me down. No, no, it's excellent. It's excellent. But you can just see how everything has uh evolved and changed where, you know, okay, so that's called the algorithmic penny jumpers. Those are prevalent in the small cap. But then also, you know, to top it all off, a lot of your small caps, this is why the small caps base in the US is a complete mess. So I bid 2450.

Let's say nobody else bids ahead of me. I can bid there all day at twenty four fifty. Somebody comes in from a retail broker trying to hit me at twenty four fifty, so they're trying to trade against my order. Well, that that gets routed out to, you know, an off exchange market maker that then actually has the you know the the luxury of being able to match my quote.

So they're gonna trade and maybe give'em some small subpenny price improvement, just a fraction above me, but they're leaning on my quote for protection as well. So really in the small cash base and even in the in the in the big cas. For the most part, the quote now is just been, you know, you being used to l lean on by everybody else. Everybody that's gotten you know an advantage over you by speed or by relationship.

So really by me sitting out there with my twenty four fifty bed, trying to make a market, you know, taking the rest. So my twenty four fifty bed, I'm the first guy there. I'm the guy taking the rest. But I'm not getting the re reward of getting the execution. The only time I get filled is when the thing blows through when he has twenty four forty offer in my face.

So you know what I do? I say, No, I'm not gonna bid my twenty four fifty, not gonna give them my quote to lean on here because you know they're using it against me. So I'm not gonna bid at all.

So what I've done in my trading strategies and this is the number one thing I've done to survive in this world and you know this is you know it goes beyond a lot of traders even but You what I do is instead of providing liquidity, and that's why when you sit out there with your passive limit order, what you're really doing is providing liquidity, instead, I take liquidity.

So, you know, when the when the spread tightens, if I was trading some small cap, I would lift the offer or hit the bit, or maybe I'll go midpoint,'cause sometimes I get a fill. But for the most part, especially when I'm trading the mega cap I never sit my orders out there because they're gonna use those against you. I wanna just hit the bid or lift the offer. And that's why I now focus on the megacaps because most of those have one cent spread.

So I consider that like your high frequency trading toll, basically, because they monopolize scalping, they've monopolized the spread. They've brought it back, you know, from

It's kind of went full circle when I think about it. You know, on the floor they used to have, you know, the monopoly on the spread. Then you know, it went to the e traders that kind of took it away from'em. Now it's kind of went all full circle. It's when off exchange is doing some different things, but they monopolized the spread again.

So basically when I'm talking spread, I'm talking the difference between the bit and the ass, just in case we have some newer listeners there. But um you know, that used to be my payday. That's how I got paid was making the spread. Now, you know, I can't because I I can't compete with those systems. So they're forcing me to pay the spread. So if they're gonna force me to pay the spread, well I'm gonna trade the stocks with the tightest spread so I don't have to pay very much.

And that's you know, like your Bank Americas, like your Johnson and Johnson's, like your General Electric's, like your Procter and Gambles, those kind of stocks have a penny spread and I can get in and out of them with relative ease with some socks.

Okay, so I wanna pick up on on some things you're saying there. What sort of orders are you actually using in your trading today? Like what type of orders are you using? Okay, so I would say um marketable limit orders, but I'm not uh so the difference between a market order and a marketable limit order is it's your price is set. So for instance, let's say I'm trading General Electric and I want to buy GE.

It's twenty nine, or I'll just bring it up here right now, give you the current quote. So it closed at thirty twenty three. Let's say it's thirty twenty three to thirty twenty four. So if I'm going to go and GE, am I going to join the bit at 3023 and try to save the penny? I could do that, but what'll happen is I probably won't be filled until it's 3022 to 3023. So until the quote actually rolls through my bit.

That means, you know, that the bid has now become the offer. So I'm paying the spread anyway. So why not just lift the offer and make sure I get the trade? I always say don't miss a trade to save a penny. And that's really what you're doing. Now the likelihood you're probably gonna get failed, you're probably gonna get failed. But what if you don't? What if your bid was low of the day?

Now you you know that's a huge opportunity cost. So the opportunity cost is too great in this environment for me to miss a trade to try to save a penny. So if I want to get in that, it's thirty twenty three to thirty twenty four. I'm gonna use a limit order of 3024. I'm gonna send a buy order with a limit price of thirty twenty-four. Maybe if I'm really aggressive and I really wanna be in, I'll send a buy order with a limit price of thirty twenty-five.

And you know, I'm probably still gonna get to thirty twenty four because if the best offer is there, they've got to route me there anyway. So it depends how aggressive I want to be, but I'm basically using that price. The reason I don't send a flat out market order is because we're in a high frequency trading world where quotes can change very quickly, and that's like a writing a blank check. So if I just sent a market order to buy GE, maybe I could fill the thirty thirty.

And maybe something happens in that time frame that from when I click the button till you know my order actually gets to the exchange. you know, that I don't want to happen. Maybe I don't want to own that at thirty thirty. So that's why I never use market orders. I didn't use market orders back in nineteen ninety nine. I don't use them today. Bright Tradings taught me it's like writing a blank check. I always want to put a price on my order.

So that's what I'm using as a marketable limit order. So instead of joining the bid with a passive limit order, a marketable limit order is an order that's the uh so my uh the a marketable order is any order that's actually trying to lift the offer. So if if uh if if the offer price is thirty twenty four and I send a buy price at thirty twenty four, that is a marketable limit order. I'm trying to lift the offer.

Okay, so I'm I'm not quite sure that I understand the difference between a marketable limit order and a normal standard limit order. A normal standard well and it and it is just a limit order, it's just a type of limit order. So a normal limit order Yeah. So a 3023 if I if the if the uh I'll just give you another example. So same thing. 3023 to 3024 is a Merck in General Electric.

If I put a limit order to buy it at thirty twenty three, that is a standing limit order. That's a normal limit order. Both are limit order. But because I'm not going to get executed immediately.

That is why it's not marketable. So I'm gonna sit and join the bid because the bid is thirty twenty-three. Um, you know, and if I'm on whatever exchange I am, I'm gonna behind price time priority. So there's ten thousand shares been at thirty twenty-three, I'm gonna behind behind those ten thousand shares. So

That's why, you know, I'm actually, you know, putting myself kinda to the back of the order queue. And like I said, in a high frequency trading world, they basically monopolize the top of the order queue. So my order's always going to be at the back of the queue anyways. So

Uh the basically the difference though between the limit and the marketable limit is when I'm sending a marketable order, it's for immediate execution. I'm trying to actually take the offer. It's offered a 3024, I'm trying to gr grab the 3024 offer, lift it. Okay. Do you follow me? Yeah, yeah. Right. So is a marketable limit order, is that something that's available through most uh retail trading

Platforms. It's just a regular limit order. So you would just say, you know, I'm calling it a marketable order because that's what's actually called when you try to lift it, but you can just say for simplicity purposes, it's a limit order. I'm putting a limit on my price. So you know, it's called you know technical definition because

The offer is thirty twenty four and I'm putting a bid at thirty twenty four. I'm trying to lift the offer. That's why it's called a marketable order. That's just technical jargon though. It's just a regular limit order where I'm trying to lift the offer. Makes sense. Makes sense. Okay. So

One of the things I want to um dig into a little bit more and ask you about is What is it about trading the open that really appeals to you? Um like where do you see your edge coming from during the first few minutes of the session? Why why do you like trading the open? I love the open and I will tell you that I probably make at least 50% of my money in the first five minutes of the day. Why is that? The open is the price discovery phase of the markets. I love price discovery.

And you know why else? Because your high frequency traders hate price discovery because they you know, besides the ones that are actually trying to move the prices, your passive market making high frequency trading systems are hands off at the open because there's a lot of risk.

And imagine you being a high frequency trader and you have um your your profit margin is fractions of a cent, like a half a cent. All of a sudden you, you know, buy a stock like Microsoft and it falls twenty cents on you.

Well, you're in big trouble. If your average, you know, profit margin is only half a cent, you can't be taking risk on that's, you know, where the stock moves twenty, thirty cents and the opening bar. The opening bar meaning the first minute or you know, depending on what, you know, chart you're using, but You can't be taking on that risk. So the high frequency traders are kind of hands off. I always want to be trading, you know, when they're not around because they're competitions.

There's not that much competition at the open. You know, there's and there's a a lot of price dislocations as well. Because you have institutions that are coming in. There's orders, you know, that have been sent from the night before, even from re little retail traders. They all pull them together. And the other thing about the open that I like, especially on the New York Stock Exchange stocks.

is that's the one time of day where the designated market maker, the specialist that I was talking about before, Uh and they call'em designated market makers now. That's where they actually are putting together that opening print. They have some automated help with it, but there is actually still a human element of involvement. with that opening print. So a lot what I talked about and Don Bray taught us

back you know in nineteen ninety nine still applies. You can try to get on the same side as maybe that guy on the floor, and there might be an advantage to doing that. But basically uh the open, there's going to be the biggest chance. And if you look at any chart, intraday chart, A lot of times that opening bar, you see the biggest v most volatility.

that's what I like. You know, that's where the most action is and that's where the most uh chance uh of uh you know making a decent profit. Like if I train G E during the middle of the day from like noon The thing moves to you know if the SP futures aren't bouncing around, they're just staying still, geez trading in a one cent range. Well, as a scalper that's great, but if you're not a scalper that's not very good. You can't kinda make money on a one cent range.

I was sorry I was saying earlier, you know, the high frequency traders are making that one cent, you're paying that one cent. So if it's only moving a penny, you know, back and forth between thirty twenty three and thirty twenty four, there's no money for me to be made. But at the open, there's a lot of movement. Even on a stock like GE, there might be a ten, fifteen, twenty cent run.

And you know, and then it goes into different types of trading. Like I prepare for the open three hours before it actually opens. So my trading day doesn't start at nine thirty. My trading day starts at six thirty in the morning and my trading a day actually starts the night before. So if I look even for my notes here, my notes for tomorrow. So I've been watching the after hours action to know what to trade tomorrow because I'm watching what the news is, what stocks are moving.

So I've g gathering a lot of information. I'm trying to inform myself. I wanna be an informed trader on that open. And you know, once I have that information, I can, you know, try to put a projection on where I feel that stock should open, where fair value.

where I've deem the fair value of that stock. If the stock opens way above the fair value, I'll short it. If it opens way below the fair value, I'll buy it. And I'll do that on a number of stocks. You know, sometimes I send fifteen, two hundred you know, orders there at the open.

So and you know I I use a little bit of automation to help me do that because it's tedious to do it manually, but some of my best ones are manual. And you know, I'm sending all these orders in there trying to, you know, get these opening print. And the opening I I use mostly OPG orders. And what an OPG order is

It's an opening order that says to give me the opening print or immediately cancel the order. So that I'm not sitting out there like a sitting duck. You know, if I have, you know, a limit order out there and I forget it out there, market tanks, I'm gonna get picked off and lose some money. So the OPG order is nice. It just gives you the opening print or it automatically cancels that. So GE, hypothetical example, GE is trading at thirty twenty three, close at thirty twenty three.

SP futures are opening up one percent tomorrow. GE's beta is approximately one. So it moves approximately with the market. So if that's the case, 30 cents would be about 1% move. So I would say maybe the fair value of General Electric is$30.53. I might put an order to buy GE below that fair value, say I'm gonna buy a thirty forty.

I want to put an order to sell short G, maybe at 3065, both OPG orders. If it opens at 3070, I'm going to get 3070 short. If it opens at 3060, I'm not going to get filled. The order's going to automatically cancel. So it all just depends on you know how I price those opening orders. But you know, if a stock opens too high or too low, a lot of times it will draw back into where that fair value is. That's a simplistic example.

Now there's a whole bunch of stuff that complicates that where trades can get crowded and other fun things can happen, but that's the basic strategy around the open is projecting where the fair value of the stock is and selling it short if it opens too high or buying it if it opens too low.

Okay. And did I hear you correctly when you said you might place between fifty to two hundred orders, like two hundred trades? On the open. Uh orders. So not necessarily getting fills on those. I'm placing orders where, you know, they're gonna either they're gonna fill or they're gonna cancel. So when I'm placing an order, a lot of stocks will open right around, you know, where their fair value is. So I'm not gonna get filled on those orders.

Um but I would say, you know, back, you know, uh you know, going a few years ago, I'd probably easily pl place three to four hundred orders prior to the open, opening only orders, and maybe get filled on twenty stocks, twenty, thirty stocks.

And then I would trade out of those positions. All in the opening print. First minute. I got 25 positions. Okay, let's go. You know, let's, you know, and and sometimes, you know, something funny happens like on an option expiration. I could fill in like 75 orders. So now I've got like seventy five positions.

Okay, now this is fun. You know, when I get filled on that many positions, I don't even care about the individual positions. All I care about is my net market exposure. So what I would then look is okay, I'm I'm long a million dollars worth of stock.

I need to hedge myself here because I'm trying to extract the alpha from the missed price opening. If the SP futures tank on me and I'm along a million dollars worth of stock, the alpha's gone. So what I want to do is sell short an equivalent amount of spots.

to uh the beta of my portfolio. So, you know, a lot of the there's a lot of figuring that goes on in this, but you know, a lot of math behind it all. But basically, you know, simplici and from a simplistic, you know, if I give you simplicity here, um if I'm long a million dollars worth of stock, I'm gonna sell short a million dollars worth of spot. And now I'm hedged. Now I'm market neutral.

Now I can let my arbitrage portfolio, because I probably bought a whole bunch of stocks that opened too low relative to where the futures were, now I can let the natural arbitrage bring it in and slowly work out of those positions.

But you know, if I'm long one or two or three positions, I'll just trade out of them and not even hedge it. But if I get long twenty, thirty, forty different positions, or um two um uh unbalanced, like if I'm long twenty stocks and short twenty stocks, that's a natural hedge in itself. But if I'm long twenty stocks and short none.

That's where I've got a lot of market exposure. And I like to trade market neutral, where I'm always eliminating the market risk, because market you know tanks here in the next two seconds. I'm not positioned for that. So that's the whole key with um almost all of my strategies is trading market neutral.

And that sounds crazy to a lot of people because they think the market's got to move to make money, but I'm trying to extract that inefficiency of where a stock is open too high or too low. So that's the alpha that I'm extracting. from the market is that inefficiency of the opening print. And the opening print is often inefficient. I mean one institution that says, Hey, I want to buy this stock and they put in a buy order to buy five hundred thousand shares.

might press the stock up way too high. Or one institution might you know say, I want to sell 500,000 shares in the open. That might push the stock way too low. I'll provide liquidity to those orders. And then, you know, um and that's the alpha that I'm extracting is, you know, I'm I'm providing a service really to that institutional order.

by providing liquidity to it so that, you know, their order isn't going to, you know, it's there's gonna be less price impact with the order. And there's I'm not the only trader doing this. There's all you know, all the other prop firms are doing this too. So, you know, as a whole, those or those stock you know isn't gonna open nearly as low as it would without those liquidity providers.

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So you said that you use some sort of automation to enter those orders, enter into those positions um sometimes. D if you if you're filled on, you know, what could be up to maybe seventy different trades, do you also use some automation to help you exit those positions? Or is that all done by hand? We have proprietary uh software that will do that. I don't. I've always been a fan of

Uh like when I and I don't use that as much automation like I said as nearly as I used to. So you go back two thousand five, two thousand six, I used a lot of automation. I kind of, you know, pick and choose my spots now more from a manual perspective. So where I was sending, you know, hundreds on hundreds of orders before, a lot of times I might only be sending thirty or forty or fifty orders before, and I can easily place those manual.

So your original question though, I I went on the tangent. I forgot your original question there, Ann. Do you use any automation to exit out of if you get filled on say seventy positions or something like that? No, I would just go and do exactly what I did, hedge it. If you had the automated software and I'm sure you know if there's high frequency traders running these similar strategies.

They might just automate out and maybe they don't hedge it. Um, you know, maybe they can just easily quickly trade out of those positions because they can sense heavenly orders. The computer systems can do that. But, you know, I I don't like doing that. I like to work out of'em'cause I always feel like I can work the trade better. You know, like I'm figuring

I I used to figure, you know, like I made you know I made m hundreds and thousands of trades. Like I mean you know and then you know, sometimes, you know, some days I would make a thousand trades. So, you know, I I I've got a lot of trading experience, so I feel like I can, you know, work out of those trades better just because of my own seventeen years of experience.

So that's why I do the hedging technique where I kinda automate in to get those. You know, if I need to, you know, get a lot of orders out there, I will use some automation to do it. And then I would hedge myself by just, you know selling short or buying the spy, whatever equivalent to give myself dollar neutral. And then I can slowly manually work out of those positions over the course of the next half an hour.

So yeah, so I don't have to be out immediately. The hedge allows me not to have to automate a Right, right. And is that where the remaining fifty percent of your money might come in from during the rest of the day, um, while exiting out of those positions? You said that Somewhat. Yeah, and if I talked about my trading day, so obviously, you know, I said my trading day starts very early, and I'll trade pre market too. So I think something's mispriced pre market, I'll buy.

You know, if I think something's mispriced, you know, uh I'll short it too. It depends, you know, if I if it's not where my fair value is calculated out, I'm not scared to trade in the pre market or after hours, you know, if I think something's mispriced.

But um I would say like I said the majority of my money's probably made in the first five to ten minutes. You know, not majority, but fifty percent at least. And then, you know, maybe some throughout the day. But I'll tell you in the at least in the US markets, I know uh, you know, uh it's you know, the world markets are all different. Between eleven and two, I don't even trade at all.

Eleven PM, two P.M. I call it toxic. Those are your toxic hours. Where all you got is high frequency traders trading with other high frequency traders and for the most part the all the inefficiencies that you know I'm interested in don't exist.

They've been, you know, the the high frequency trailers are all over any fit any efficiency that's happening those hours. So between eleven and two or even I would say even I've extended that. Between ten thirty and two thirty, ten thirty a.m. two thirty p.m. I usually take an extended lunch. I'll go do some other stuff.

you know, maybe, you know, go out for you know with a friend or you know, d or or do an interview or something, you know, you're gonna do something different. So, um eleven you know, from eleven to two, middle of the training day. There's just not enough inefficiencies for me to uh extract to be bothered with. So that's kind of my time off in the middle of the day.

Okay, so you come back in at the close, do you take in the case? Yeah, it's two thirty, two thirty, three o'clock. Come back in, get ready for the close. New information is happening. You know, I've got, you know, there's the at two o'clock you have uh free market closing imbalances that start coming out. And that's you know a whole other topic we could talk about is the imbalance information. And this information

You know, is now if if you're a retail trader, it's amazing, you know, the information that's out there. You can subscribe to this different information out there. Most retail traders don't know it exists. But it's actually all, you know, everything that was available to us in nineteen ninety nine as a prof firm is pretty much available to the retail guy today. You just gotta know where to look for.

But you know, there's uh closing imbalances, which are your institutional orders that are getting logged in and they're showing you, you know, like today for instance was a great day for closing imbalance. It was the end of the month and those often a a big day for the close. So the best days for the for the close and for the open for that matter are end of month.

end of the quarter, on any rebalancing day where you know indexes are rebalancing, and on the third Friday, the options expiration. Those are the big days for the openings and the closing. Those are the best days. And today um this was one of the best closes I've seen in a long time where you actually had um a lot of stocks uh

trading with um some serious buy imbalances and sell imbalances. One of the imbalances, so you have institutions that are sending orders that say uh they're they're limit on close orders. that say buy me GE or market on closed orders even, where buy me a hundred thousand shares of GE at the closing price. And then you have another institution that says sell me one hundred thousand shares of G at the closing price. They're netto.

But if you had an institution that said buy 100,000 shares of GE at the closing price and another that said sell 50,000 shares at the closing price, there would be a net buy-imbalance of 50,000 shares. That information is publicly available and gets, you know, publicly advertised to everyone at 345. But there's services that actually offer that information ahead of time as well. As early as two o'clock that information starts coming up.

So if you know there's a lot of buyers on the close, it could potentially push the price of the stock higher. If you know there's a lot of sellers on the close, it could potentially push the price of the stock lower. Why is that? Because traders are going to buy ahead of it or sell ahead of it.

So if you know there's a huge buy-in balance, and for instance today is a great example. It don't always work like this, but it worked well today. Um in Berkshire Hathaway, uh, which is BRK.b, there was a uh like a 700,000 share selling balance at the close. And if you bring up the chart of that, it actually shows going from 142.50 in the last minute, that thing falls two points in the last minute.

That is just pure order flow based. There's no, you know, people and you'll have news media calling up and saying, what happened in Berkshire Hathaway? You know, there was that we saw it fall. You know, did Warren Buffett get sick? What happened there? Well it it was nothing to do with anything fundamental with the company. It was all to do with order flow. And there was just a huge seller, there's a huge bunch of uh institutional sellers at the cloak.

And that drove the price down two points. That was a huge move for Berkshire Hathaway. That's a nice arbitrage opportunity because S P futures didn't tank that much, but Berkshire did. So if you see after hours it's already started to bounce back. But That is the you know, the advantage of, you know, having that order flow information is that you see those closing imbalances.

And you know, you can actually, you know, trade on that information. It's publicly available. So there's huge sellers going to be on the closing print. It could drive down the closing print. N back in the day that was, you know, a slam dunk. Now it's not that easy. I would say ninety percent of the time those orders will pair off or you know, they just uh and pair off I mean that another institution would come in and say, buy the seven hundred thousand shares.

Um or you know, that it just won't move the stock that much. Just so happens at the end of the month sometimes the liquidity isn't there and it really was able to drive that price down. If I look at Microsoft, for instance, same thing, went going the opposite way. If you look at Microsoft, huge green candle end of the day, gapped up fifty cents on the closing print. This is Microsoft, one of the biggest companies in the world. It gapped up 1% on the closing print because of a huge buy imbalance.

That is a tradable event. That is something that I'm, you know, all about, extracting the alpha from that event. And you know, that it's just an inefficiency. There, you know, should it trade up fifty cents at the close? No, it shouldn't. It's just trading up because there was a huge buyer at the close pushing the price out. So what I would do is probably sell that stock short and then try to cover it the next day.

Okay, so I guess we should probably point out that we're recording this interview uh the evening, obviously after the close on the thirty first of may twenty sixteen. If anyone wants to look that up on the chart. Um and also want to ask you, where can, you know, your everyday trader get access to this information that you're talking about? Like what are some of the services that are available?

I believe some of your retail brokers offer it. I think Interactive Brokers has. And like I'm on a prop firm, so um, you know, I'm getting this information through my proprietary direct feed. Um so I'm not trading retail, so I can't speak exactly for each retail trader. But I know like Mr. Topstep, you'll probably like the shout out there if he's gonna listen to it. But you know, he's got an early feed, great, you know, uh Danny O'Reilly there, great guy at Mr. Topstep.

He offers it. Rosenblatt Securities offers another one. So, you know, there's another one um you know a place we can get that information and it's not expensive. I mean, and that's the one thing about me. And you know, I think it keeps me profitable too, is you'll have a trader and they're not they're scared to spend money. You gotta spend money to make money. And I probably drop a thousand dollars a month in information.

And and you've got it you can't be scared. You can't be saying, whoa, I gotta you know make twelve thousand dollars a year to break even. We can't be scared about that. You need that information to make money. And you I just think you know, if you're paying a hundred bucks a month for an early imbalance feed and you get one trade off that it pays for itself. So, you know, I've got, you know, the uh I I've got, you know, different, you know

Some of this stuff comes to me uh through the platform itself, through the Goldman Sachs platform. But You know, I've also got different scanners and filtering systems that are looking for opportunities. I'm running a Neo Vest scanner, I'm running MAD scan, I'm running my own proprietary scanners that I've built myself like

And I'm not a programmer but I that I've had built for me by other programmers. So I'm scanning the market looking for information and opportunities to trade. So I'm not just sitting here, um, you know, I make money off of information. I would say, you know, if I'm really analyzing myself.

I'm more of like uh making money on mo almost all my strategies, I would say from information arbitrage. Like looking, you know, at the information um and then extracting, you know, alpha from that information. All all publicly available. Yeah, yeah, right. So just um just a couple last questions before we before we close this out. Um seeing as you're a market structure guy and the the term high frequency trading has been sort of flying around this interview a little bit.

One of the things you said to me before we hit the record button was that a lot of people try to blanket HFT as either good or bad. Um, but you sort of have the opinion that that's not really the case, that there's, you know, some HFT which is positive uh a positive impact for the market and then there's some which is perhaps predatory. Could you just tell us a little bit about where you stand on the the sort of the controversial HFT debate?

Yeah, that's exactly it. You've got to look at the strategies. So there's going to be and just like in the pit in the bad day, there was always, you know, you know, bad, you know, traders. But the the pit the the nice thing about the pit, if you go back in like the nineties The pit would self-police itself. There's somebody, you know, doing some, you know, like fool you know, trying to fool you or doing some different stuff.

Yeah, they're they're gonna you know the the pit isn't gonna allow that. The traders can see, you know, who's doing this. They're not gonna trade with that guy anymore, or they're gonna take him out back and beat him up. You know, th it's it's a lot different. Where now you have so much anonymo you know, everything's anonymous. You don't know

these players, you just see their orders out there. But you know, a lot of, you know, different strategies there that are trying to, you know, trick other traders and, you know and so that's why you've got to look and really break up, you know, what is, you know um the strategy and is that, you know, good or bad for the market. So I wouldn't say you can't say, oh, high frequency traders good for the market, high frequency trading is bad for the market.

You gotta say what what's the strategy and is that good for the market or bad for the market? And you know, a lot of the high frequency trading, market making, you know, is definitely beneficial to the market, you know, these one cent, you know, spreads and stuff. You know, th you can argue, you know, and this it gets a little bit, you know, going maybe beyond some of the listeners, but um I've argued in the past that maybe we're too reliant on high frequency train liquidity.

Where now I would say the majority of your liquidity, so your bids and offers that are out there in the book, that it will absorb, you know, a sudden, you know, price impact or you know event are are high frequency trades. So where before if you look at the floor you had a lot of different types of traders providing liquidity to the market. Even, you know, me myself, I said I used to be a high uh liquidity provider. I'm not anymore.

I'm a liquidity taker. So now you're probably very reliant on high frequency chairs for liquidity. And that's one concern for me is there's no affirmative obligations, so they can just cancel quotes and you can left with a vacuum. It's often what you see during these flash crash events, simply just not enough liquidity in the book to absorb the excess supply that's coming into the market. So, you know, that's you know but you know if you're going back to your original question.

Is high frequency trading good or bad for the market? A lot of it's beneficial. The market making aspect is for sure. The stuff where, you know, you get into um is the more predatory uh market making that I don't like, which I talked about the penny jumping earlier or the off exchange stuff where you have an off exchange market maker leaning on somebody else's quote for protection. I think that just discourages the original liquidity in the first place.

I think that's something where, you know, it's probably not h as helpful as, you know um uh if that market maker was actually quoting in the lit market. So basically what I'm talking off exchange market making is they don't actually have to provide any bids or offers. They can simply uh match the the bids and offers that are out there.

So they're not taking on nearly as much risk. And that's where, you know, I do have a little bit of an issue with that type of market making as well. Um so I'm not sure that that benefits as much as if those participants were quoting in the lit market, uh the public exchange. Uh but you know, when you look into other things like layering and layering is a strategy where you put fake orders out there, maybe some sizeable orders trying to, you know, say, Okay, well you see some size, then you know

other systems might actually sell the stock, thinking, you know, well, there's some big sellers in the market, we'd sell the stock and, you know, there was a fake order. So, you know, you've heard a lot about layering in the past and something like that. can be automated very easily and probably you know, very harmful to the market because it's trying to trick other traders into, you know, buying or selling off of information that isn't real.

So, you know, that's another ex example of maybe an a strategy that's probably not not beneficial for the market. So But like I said, a lot of the strategies in themselves, the arbitrage is there. It makes the market more efficient. So, you know, for the most part, your high frequency traders employing arbitrage, it just simply makes the price more efficient. It gets to where it is fast.

So that's probably beneficial. A lot of the market making is beneficial besides some of the off-exchange market making or some of this algorithmic penny jumping in the small cap. But for the most part, a lot of the high frequency trading, you know, strategies, there's probably a lot of really good firms out there doing a lot of good, but they need to crack down on the stuff that's more predatory. Okay. Okay. Awesome answer, Dennis. Thank you very much. Um

One last question. Um, is there any advice you'd like to leave with uh anyone listening who might still be learning the ropes today? Yeah, and obviously, you know, I've traded for a lot of years now, you know, I I helped educate the traders up right trading the new ones, so Um it's those adjustments that you need to make. So you know, for you know, if you're trading in a high frequency trading world, which we are, we can't control the environment that we trade in, so we have to adjust to it.

The adjustments that I've made to stay profitable. Um, and I think, you know, whenever I see other traders that are struggling, when they start to employ some of these adjustments. Actually a lot of these traders actually start to turn it around. So number one thing, which I talked about before, is I'm a liquidity taker. I don't provide liquidity. I don't sit my bids out there hoping that the price comes to me.

because it often will come to your price, you'll miss your fill and it'll uh it'll quickly go the other way, especially in a small cap stock. It's very dangerous to just have sitting limit orders out there. I say when you have a sitting limit, you're a sitting duck. You're a sitting duck to get picked off by a more informed trader. So I take liquidity as opposed to providing liquidity.

Scalping is no longer a viable strategy. If you're jumping in, trying to make a penny or two on a trade, you're going to just commission yourself to death for one thing. The second thing you're gonna do is you're just not gonna be able to compete with those high frequency traders that are co-located or that have a speed advantage for you or a relationship advantage.

And you're not going to be able to be profitable that with that strategy. So scalping, no longer a viable strategy, not even for some of your automation. So you can say I'll get automated, I'll scalp. Um, like I said, I ran this automated scalping system for a lot of years and it's not profitable anymore either. So I'd say scalping, leave it up to the high frequency traders.

So lengthen your time horizon. Don't think about your trade in seconds or milliseconds. Think about it in minutes are okay. Hours are even better. If you're trading in swing trading environment, days to weeks, there's nobody. There's no competition in there. So because that's, you know, uh going on, you know, looking at trends and looking at a lot of different things and we didn't even touch on the technical analysis but

you know, that's something I employ on my swing trades as well. And there's a lot to that. So, you know, reading a chart from you know an intraday perspective and understanding no different levels and you know where stocks, you know, s tend to have support or resistance or where they're trending. That's all viable. Just not having that short time frame. That's what'll kill you. Um

Another thing is you know, don't show your hand. So if you're sitting there and when the way you're trading and you're putting your bit out there and then you're canceling and you're putting another bit out and you're canceling.

Uh there's be high frequency trading systems, predatory ones, that are gonna log that and they're gonna say, Hey, we got a fresh one. This guy really wants to buy the stock right now and they might try to buy it ahead of you and make you pay the most price. So that's why I'm a big fan of just lifting the offer or hitting the bid as quickly as you can.

If you're putting a lot of, you know, passive eliminators and trying to work the order, they might figure out what you're doing and you know that's gonna be used to your disadvantage. Um and then the the other thing is, you know, just remember that obviously you you have a big advantage as a human being is that you can change your thinking on a dime. Any automated computer system there has to be programmed in and you know they can't adjust on the fly like that.

So that's the biggest advantage of being a human is that you can quickly adjust you know, your thinking or your strategy. for the current environment. And you know, strategies change and you know different types of trades work in different types of trading environments. So you have to understand the environment that you're in.

When you have five year bull run, you know, it's a the the shorts are gonna be tougher. When you're in a a market that's, you know, for the last year just kind of oscillating, well range bound trading's gonna work better now. So, you know, that's an advantage, you know, and even looking at different time frames. You know, maybe you know, the last day or two we're trending down. Well, you know, I can adjust my strategies on the fly where somebody running a automated system can't adjust as easily.

Great, great. Awesome advice there, Dennis. And where can listeners go to find out more about you? Yeah, so um I do a radio show every morning for Benzinga. It's called uh Benzinga's pre market prep show. Um and you can just Google pre-market prep and you'll find us. We're on every morning from eight A.M. Eastern till nine thirty Eastern. I'm on from eight

Oh five till eight fifty five and then I have to go prepare for my open. So I always get off thirty-five minutes before the open so I can get all these opening orders out there. Because uh one thing I've learned is

It when you're doing a radio show and you're trading that doesn't work very well. So, you know, trying to trade and do a live radio show, don't do that. So Aaron, when you're when you're interviewing traders or doing a live radio show And you're trying to trade at the same time, that's a recipe for disaster'cause trading takes full concentration, so

So yeah, so from eight oh five to eight fifty five I don't do a lot of trading. I do the Benzinga radio show. And I'm on there with Joel Al Conan, who was my mentor, who I started with back in nineteen ninety nine. And we've got the Benzinga news team who is great. Uh Benzinga's great, Jason Rasnick behind it. Um and you know, we've got quite a few listeners. So we've got a lot of we've got a active chat room there where you can come in and chat with us, you ask us questions.

Um and you know, we talk all this stuff. You know, we talk about we basically go through, you know, what's moving here today, what we see. I try to identify the sectors that I think are gonna be strong.

sectors that are gonna be weak. We're all trying to prepare our traders for the market open. So I'm giving you that information that I'm using in my own trading and trying to uh, you know, help you guys out with your trading as well. Again sharing all the capital intensive stuff because Like I said, you know, if it's something really small, I'm not gonna, you know, just you know, hand that out because then you know I might I'm just

you know, taking money from my own pot. But you know, if something's capital intensive where, you know, there's you know, millions of dollars, you know, um of of th that's a huge trade where there's millions of dollars available and I'm not gonna take it all. I can share that stuff, you know, and I don't mind trying to help traders. I've been in it for t you know, seventeen years here now, so I like to help traders and I like to see traders turn around and succeed.

Absolutely. So what's the where's the best place to find that out? Are we best just Google it or is there a URL you want to give out? Yeah, they I wish they got a better URL. They haven't uh so Uh if I just gave the URL on the pre-market prep show, it's uh pre market P-R-E M A R K E T dot benzinga.com. Um and then so you can go there or you just Google pre-market, uh Benzingo, pre-market prep.

Pre market Dennis Dick if you want. You'll find us. So Cool, cool. Well I'll put a link to that. Yeah, I'll put a link to that in the show notes anyway. So um that's easy for listeners to find. And you're also on Twitter as well. Do you want to give out your handle? Yeah, triple D trader, so T R I P L E, the letter D trader, T R A D E R.

So triple D trader and yeah, I tweet and I was tweeting a lot about the imbalances here today. I wanted the tweets a little bit at the open, a little bit at the close. I don't tweet that much during the day. I probably tweet th you know three or four times a day. I'm not a huge tweeter.

But I try to like when I tweet something, I try to make it relevant or you know, something important. So like I'll tweet like when the S and P additions or deletions or something come on. Something that's gonna be potentially market moving, I try to tweet it out. Sure, sure. Okay. No sounds good.

Alright, Dennis, well thank you very much for coming on the podcast, man. I really appreciate it and you've given us a lot to think about. Um so yeah, let's uh definitely stay in touch. Okay, thanks Aaron. You reach if you'd leave a rating.