Saturday, November 22, 2014


I thought I'd document my thoughts on the differences(mainly) between Institutional Trading( and some Vanilla or Value Hedge Fund) 
verses  Day or Prop or even Fast money Hedge Fund trading-

I have 21+ years in the business starting as a market maker, firm capital position trading,institutional coverage , moving on to direct institutional trading and now proprietary.

I think there are some misunderstandings about how the 'Big Boys' enter and exit trades or very large positions and what they want to see occur out of the gate verses a DT.

For purposes of having to keep typing 'Institutions and constantly getting hit w/ spell check for missing a 't' or 'u' , we will use PM(portfolio managers) and DT(day traders) PT(prop traders) :

PM wants to Buy/Sell :

When entering into a new large position or adding to existing ones(in most cases* will explain*),
a PM 'actually wants the stock to start coming in so they can scale. The last thing they want to see happen is have the stock go right up as soon as they've entered the market and began buying thus forcing them to pay up or chase knowing they have likely bought only a small fraction of a large(likely 7 or multiple 7 figure order.)

   ie). PM has 2.4mm ABC to buy. ABC trades 500-1mm a day(less or more etc)
                ABC is 35.50-35.52.  Current Volume= 280k.
                 --Sends broker or enters market him/herself electronically..dark pool etc
   a) Broker may or may not stop the PM on 50k on the offer(more less or none at all)-
           Broker'shops' whole or part of order to their other 'trusted' customers. Suddenly the stock is          35.70-35.72 on little volume. Depending on agency,net or whatever the details of the order are,the broker may have to put that print to the tape.(Mind you,all this likely happend within minutes of broker receiving order.
           The Broker prints the 50k @ 35.52(sld" or however the rule/type of order it is) and the stock is now $36 bid.
   So what was accomplished ? The PM bought 50k @ 35.52 and only has 2.35mm left to buy and now stock has moved 1.5% against them. PM is LIVID at Broker.

  A Day Trader buys stock at 35.52 and is 36 bid almost immediately. WOOHOO!! And the heard of sheep commence buying and stock is 37- and 'There must be news !??' etc etc- Visions of  Happy Hour dancing in their heads !!

  > Now of course there could have been another PM 'Seller' on other side and the Broker's 'shop may have worked and the sides play nice,cross stock relatively in line give or take several 20 cent moves in which a DT is getting stopped out left and right by the volume algos-

The PM could have also entered the market via internal firm OMS or Dark Pools and either scenario may have or have not taken place regardless.

The point of this tidbit is that the Last thing a PM wants, when trying to find liquidity for a size order is Market Impact. Whereas the DT is hoping for Immediate Market Impact( in their favor of course)

This is not to bash Day or Prop Traders( being that I am one), it's to point out How PMs trade the bigger picture. 

Also it's not to say that's the only way  DT's  trade. Matter of fact, more and more DT'/PT's have very calculated and studied methodology loaded with creativity and solid thought out processes.
Very very difficult profession indeed. Huge failure rate, but i digress.

So  "Vol. I"  is to point out the difference of a DT wanting the trade to immediately go their way verses a PM in which case "going their way"  means buying a stock and having it continually, methodically going lower to improve their average knowing they have a lot more to buy(in most cases).
   We call that "AMMUNITION" . 
In most almost all cases DT/PTs don't have near the Ammo that a PM has.(Otherwise they wouldn't be considered a DT in most cases.)

>>>The same applies on the Selling side of a PM order or Shorting side of a DT order.
If a PM wants to Sell Large Position, last thing he wants to see is the stock immediately move lower, Unlike to DT taking on a new Short.

Vol. II to come.



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