The gap fading system that I was hoping to trade on US stocks has run into a bit of trouble. Actually alot of trouble. The problem is that it can't be traded, and here's why.
I believe the opening auction system works differently in the US compared to the ASX. In the local market, the most liquidity for the large cap stocks especially, always occurs at the open and at the close (usually higher at the close).
BHP or CBA, for example, each of which routinely turnover hundreds of millions of dollars per day , would do about $2-10million right on the open.
But over in the US, even some of the high turnover NYSE tickers like WYE and JNJ, you only get 100 shares going through on the open! And these guys turnover the same or more than BHP or CBA. What i noticed in the course of sales is, about 5-10 seconds after the open, the party finally gets started and you see the 10,000 share and 20,000 share parcels start going through. Which is useless for a system that is supposed to buy "the open" as you wouldn't be able to catch this liquidity using "limit-on-open" type orders.
The NASDAQ opening auction system must work differently to the NYSE because they seem to have much higher opening liquidity across the board (in the hundreds of thousands range, so still not the millions I was hoping for).
So its back to the drawing board for the short term system. It looks like I may need to turn to intraday timeframes if I want to maintain my 100% overnight cash position and still generate a super smooth equity curve.
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4 comments:
It's good you found the flaw before you tried to trade it.
I like the way the opening auction, and the closing auction works on the ASX. It's fascinating to watch, although I have to admit that I rarely get a chance to use it.
I have always been more comfortable with the Aussie market for share trading after reading about the way the US system works - not that I am an expert on it. I will be sticking to the Aussie market and sleeping at night rather than trading at night.
stevo
PS - I will be in Melbourne later this week (Thursday - Saturday) if you want to meet up.
Hi Stevo,
The proposed system was designed to be traded in such a way that I am able to enter all the orders before the market open. Like you - I do prefer to sleep at night!
IB has various different order types and what I would have done is submit the buy orders as a parent order and linked the exits which were child orders. So the exits only become active if the parent order is filled.
If I am to start trading smaller timeframes, I would be looking at using automated execution using Amibroker + IB. It would probably take me a while to get something like this going but I'm in no hurry.
Re: US markets, I was impressed by the range of stocks and their liquidity.
I will let you know about catching up in Melbourne.
Nizar.
Why can't you just enter MOO orders for the NYSE stocks before the open? Unless you are trading monster size you (enough to create a significant imbalance in the opening auction) there shouldn't be a problem.
Obviously won't work for NASDAQ because of the MM system.
Hi anon,
Market-on-open won't do the job, as I only want to buy IF the stock gaps down by a certain magnitude.
I think i still may be able to use limit-on-open orders as other traders have told me IBs SmartRouter will route my order to exchanges with the most liquidity.
I did try a LOO with AAPL a few weeks back with their papertrader and the order didn't execute at the opening so it cancelled itself. When I called for an explanation, they simply said that you can't expect the papertrader to be able to execute specific order types such as LOO flawlessly. The guy went on to say that he would fully expect the order to execute in realtime.
Another trader also told me that he also had many problems with order execution and fills with the papertrader but none at all when trading with the live account.
Maybe I'll just have to try with small position size and see how we go.
Can you briefly explain the MM system on the Nasdaq and how it works?
Nizar.
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