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September 30, 2001

Trading Strategies for Direct Access Trading Making the Most Out of Your Capital

By Gregory Bresiger

Also in this article

  • Trading Strategies for Direct Access Trading Making the Most Out of Your Capital
  • Page 2

by Robert Sales

(McGraw Hill, New York, 180 pages) $24.95

reviewed by Gregory Bresiger

Professional traders beware: Is someone eating your lunch? Is someone going

to eat your lunch?

These are the implied questions of this interesting book (which was written and published before some of the appeal of day trading waned along with the stock market). The book discusses the techniques used by semi-professionals' who are trading for their own accounts, bypassing the great trading firms.

So why should professional traders bother with this book?

How one survives in a more crowded business place is the biggest issue for many professionals in the Information Age, a time when entry into all kinds of business has been facilitated by the computer. Trading is no different. With ravenous investors looking to gobble up what used to be much bigger spreads, professionals should know who and what are these semi-professionals,' those who trade for themselves and are not associated with any big firms.

There is an old answer to the question of how one survives in a revolutionary time that still makes sense today: One studies what the other guy is doing. Whatever one's business, it's a good idea to know who is trying to eat your lunch. This book discusses in detail some of the new competitors of professional traders as well as their strategies. That's one good reason for at least looking at this book, which is authored by the editor of Electronic Trading Week.

Given the suspicions of regulators and some individual investors that Wall Street too often short changes the retail investor, professional traders should be preparing for many more kinds of traders in the coming years. In fact right now, notes the author on the first page of the book, there is a lot of competition: "full-time day traders who trade on behalf of their own accounts are currently responsible for between 17 and 18 percent of the combined daily volume of the Nasdaq and the New York Stock Exchange."

These semi-professionals - or direct access traders as the author calls them - are already a force that just threatens to become bigger and bigger. Using a Bear Stearns study as a source, Sales says that, "semi-professionals trading with their own capital make an average of 875,000 trades a day - or roughly 47 percent of all Internet stock trades - even though they comprise less than one percent of the total 12.5 million U.S. online stock trading accounts" (page 2).

Rise of ECNs

Fueling the rise of the direct access trader, Sales notes, is the emergence of the ECN, which "typically supply faster executions than market makers" (page 6). Citing a study by Celent Communications, Sales says that ECNs will execute about half of Nasdaq's total volume some two years from today. ECNs threaten to eat bigger lunches because they tend to provide greater liquidity and post better bids on Nasdaq Level II - the updating quote screen that shows all the top bids and offers for a stock - than many Nasdaq market makers.