Proprietary Trading Manual PDF

Preface
Welcome to Capital Traders Group, LLC
The CTG PTG Training Program is comprised of two segments: Theory and Practice. Major
theory topics will be presented in lecture format that will include group exercises, quizzes and class
discussions. Practical instruction will focus on daily strategies and discipline and will be supervised
closely. From Day One we expect you to make money.
Do you have what it takes to be a prop trader? It requires both confidence and a willingness to
accept mistakes. Ask yourself: Do I always have to be right? If so, you will have to give that up.
Can I accept my mistakes, learn from them and keep coming back for more? If not, you will
have to learn how.
Prop trading involves high-risk speculation. It is speculative and risky and it will humble you; it
will shake the confidence you have in your abilities. Prop trading may prove to be one of the
hardest things you have ever undertaken.
You need to understand that everyone goes through a learning curve and starting out with the
attitude that you do not need training or that you know about trading already may mean you will
not be around long enough to get through that learning curve. This curve is steep and it varies
from person to person. There are typical reasons why people lose money and fail at prop trading and
you should be aware of them.
In the beginning, people lose money mostly because of keystroke errors; for example, they will use
a buy key when they really wanted to use a sell key, or they will fail to cut their losses because they
do not hit the right keys at the right time. Ultimately, people fail at prop trading because they lack
discipline.
The CTG PTG Training Course will develop the knowledge, psychology, and strategies necessary
to trade on electronic securities markets successfully and provide the opportunity for trainees to
become part of our elite team of traders.
From all CTG PTG Team, we wish you a very successful trading career with us!
CTG PTG - Trader Manual 1

2 CTG PTG - Trader Manual
Table of Contents
Preface .......................................................................................................................... 1
Table of Contents.......................................................................................................... 3
Chapter 1 .................................................................................................................... 10
Market and Exchanges .................................................................................................... 10
1.1 Exchanges ......................................................................................................... 10
1.2 Markets ............................................................................................................ 10
1.3 Primary and Secondary Market ............................................................................ 10
1.4 The NASDAQ .................................................................................................. 11
1.5 The NYSE ........................................................................................................ 11
1.6 The AMEX....................................................................................................... 12
1.7 The CME ......................................................................................................... 12
1.8 The LSE ........................................................................................................... 13
Chapter 2 .................................................................................................................... 14
Orders, Transactions and Positions ................................................................................... 14
2.1 Orders .............................................................................................................. 14
2.2 Transactions ...................................................................................................... 14
2.3 Limit Orders...................................................................................................... 15
2.4 Market Orders ................................................................................................... 15
2.5 Long Positions ................................................................................................... 15
2.6 Short Positions................................................................................................... 16
2.7 Inventory .......................................................................................................... 16
2.8 Unrealized Profit/Loss ......................................................................................... 17
2.9 Realized Profit/Loss ............................................................................................ 17
Chapter 3 .................................................................................................................... 18
Auction Market The Specialist ...................................................................................... 18
3.1 Auction Market ................................................................................................. 18
3.2 Characteristics of Auction Markets........................................................................ 18

3.3 The Specialist Book ............................................................................................ 18
3.4 The Specialist Responsibilities.............................................................................. 19
3.4.1. Specialist as Auctioneer.................................................................................... 19
3.4.2. Specialist as Agent ........................................................................................... 19
3.4.3. Specialist as Catalyst ........................................................................................ 19
3.4.4. Specialist as Principal ....................................................................................... 19
Chapter 4 .................................................................................................................... 20
Dealer Market Market Maker ........................................................................................ 20
4.1 Dealer Market ................................................................................................... 20
4.2 Market Makers .................................................................................................. 20
4.3 Market Makers VS Prop Traders .......................................................................... 20
4.4 Market Makers Restrictions ................................................................................. 21
4.5 Market Makers Responsibilities ............................................................................ 21
4.6 Market Markers Sources of Income ...................................................................... 21
Chapter 5 .................................................................................................................... 22
Electronic Communication Networks and Dark Pools ........................................................ 22
5.1 Electronic communication Networks .................................................................... 22
5.2 ECNs Features and Characteristics ........................................................................ 22
5.3 Dark Pools ........................................................................................................ 23
Chapter 6 .................................................................................................................... 24
Basic Software tools and trading concepts .......................................................................... 24
6.1 Level 2 a level beyond ...................................................................................... 24
6.2 Tape Reading .................................................................................................... 23
6.3 Trading Monitor and Position Summary ............................................................... 24
6.4 First in First out (FIFO) ....................................................................................... 25
6.5 Volume ............................................................................................................ 25
6.6 Liquidity ........................................................................................................... 25
6.7 Rip, Tank, Swipe .............................................................................................. 25
6.8 Volatility ........................................................................................................... 26
6.9 Gateways .......................................................................................................... 26

6.10 Execution System............................................................................................... 27
6.11 Books ............................................................................................................... 27
6.12 Retail Traders and Prop Trader ............................................................................ 27
6.13 Arbitrage........................................................................................................... 28
6.14 Lots, Round Lots, Odd Lots ................................................................................ 28
6.15 Cross Lock ........................................................................................................ 28
6.16 Rebates ............................................................................................................ 29
Chapter 7 .................................................................................................................... 30
Market Indicators Information Concepts ........................................................................ 30
7.1 Indexes and Averages .......................................................................................... 30
7.2 Dow Jones ........................................................................................................ 30
7.3 S&P 500 ........................................................................................................... 31
7.4 Futures ............................................................................................................. 31
7.5 S&P 500 Futures ................................................................................................ 32
7.6 Squawk Box ...................................................................................................... 32
7.7 General Market Information Concepts .................................................................. 34
7.7.1. News ............................................................................................................ 34
7.7.2. Correlation .................................................................................................... 35
7.7.3. Expectations .................................................................................................. 35
7.7.4. Fed Meeting .................................................................................................. 36
7.7.5. Stock Screeners .............................................................................................. 36
Chapter 8 .................................................................................................................... 37
Risk Management .......................................................................................................... 37
8.1 Risk ................................................................................................................. 37
8.2 Risk Management .............................................................................................. 37
8.3 Extended Hours Trading Risk Disclosure .............................................................. 38
8.3.1. Risk of Lower Liquidity: ................................................................................. 38
8.3.2. Risk of Higher Volatility: ................................................................................ 38
8.3.3. Risk of Changing Prices: ................................................................................. 38
8.3.4. Risk of Unlinked Markets: ............................................................................... 39

8.3.5. Risk of News Announcements: ........................................................................ 39
8.3.6. Risk of Wider Spreads: .................................................................................... 39
8.4 Max Loss, Max Shares and Buying Power .............................................................. 39
8.4.1. Max Loss ....................................................................................................... 39
8.4.2. Buying Power ................................................................................................ 40
8.4.3. Max Shares .................................................................................................... 40
Chapter 9 .................................................................................................................... 41
Rules and Compliance.................................................................................................... 41
9.1 Regulations ....................................................................................................... 41
9.2 The SEC........................................................................................................... 41
9.3 The FINRA ...................................................................................................... 41
9.4 Regulations at CTG PTG ................................................................................... 42
9.5 The main rules that traders will have to follow are: .................................................. 42
9.6 Broken Trades ................................................................................................... 42
Chapter 10 .................................................................................................................. 43
Trading Psychology........................................................................................................ 43
10.1 Mindset ............................................................................................................ 43
10.2 Focus ............................................................................................................... 43
10.3 Discipline.......................................................................................................... 43
10.4 Behaviors that leads to unsuccessful trading ............................................................ 44
10.5 Skills to be acquired ............................................................................................ 44
10.6 Goals ................................................................................................................ 45
10.7 Emotions experienced when starting trading .......................................................... 45
10.7.1. Anger............................................................................................................ 45
10.7.2. Frustration ..................................................................................................... 46
10.7.3. Anticipation ................................................................................................... 46
10.7.4. Incredulity/Amazement ................................................................................... 46
10.7.5. Elation .......................................................................................................... 46
10.8 Getting Started .................................................................................................. 46
10.8.1. Dos and Donts.............................................................................................. 46

10.8.2. Daily Prep ..................................................................................................... 47
10.8.3. Money Management ....................................................................................... 47
10.9 Psychological Hurdles ......................................................................................... 48
10.10 The 3P=EPIPHANY Approach ........................................................................ 48
10.10.1. Persistence ................................................................................................. 48
10.10.2. Preservation ............................................................................................... 49
10.10.3. Patience ..................................................................................................... 49
10.11 Battle Plans .................................................................................................... 49
10.12 General Trading Axioms.................................................................................. 51
10.13 Other Trading Psychology Concepts ................................................................. 51
10.13.1. Transparency: ............................................................................................. 51
10.13.2. Desires and Faith ......................................................................................... 52
10.13.3. Intuition, Experience, Feeling the Market ...................................................... 52
10.13.4. Instinctive people and Analysts ...................................................................... 52
10.13.5. Open Minded Traders are the best ................................................................. 53
10.13.6. Imitation.................................................................................................... 53
10.13.7. Experience, Learning Curves and constant learning: ......................................... 54
10.13.8. Crowd effect, Contrarian ............................................................................. 54
10.13.9. Personal Life and Self Evaluation ................................................................... 55
Chapter 11 .................................................................................................................. 56
Trading Strategies Concepts ............................................................................................ 56
11.1 As many strategies as traders ................................................................................. 56
11.2 Active Trading and Passive Trading ...................................................................... 56
11.3 Bid-Ask Size: .................................................................................................... 56
11.4 Hotkeys ............................................................................................................ 57
11.5 Inventory Management ....................................................................................... 57
11.6 Partial Fills & Odd Lots ....................................................................................... 57
11.7 Making Trades................................................................................................... 57
11.8 Tape reading and block trades: ............................................................................. 58
11.9 Round Numbers................................................................................................ 58

11.10 The level 1 spread ........................................................................................... 58
11.11 Multiple Orders, Multiple Fills ......................................................................... 58
11.12 Short Squeeze ................................................................................................ 59
11.13 The Axe ........................................................................................................ 59
11.14 Advanced order types: ..................................................................................... 59
11.14.1. Hidden Orders ........................................................................................... 59
11.14.2. Reserve Orders ........................................................................................... 60
11.14.3. Adding Liquidity only.................................................................................. 60
11.14.4. Test Orders ................................................................................................ 60
11.14.5. Following orders or Pegging Orders .............................................................. 60
11.14.6. Switching Orders ........................................................................................ 61
11.14.7. Bunched Orders.......................................................................................... 61
11.15 Relative Strength............................................................................................ 61
Chapter 12 .................................................................................................................. 63
Your First Battle ............................................................................................................ 63
12.1 Simulation ........................................................................................................ 63
12.2 Live Trading...................................................................................................... 63
Chapter 13 .................................................................................................................. 64
Applied Trading Strategies............................................................................................... 64
13.1 Scalping: The Rebate Game Market Maker Game ............................................... 64
13.1.1. Action........................................................................................................... 64
13.1.2. Strategy ......................................................................................................... 64
13.1.3. Averaging Down Once or Twice Maximum ................................................... 64
13.1.4. When to get out on the downside ..................................................................... 65
13.1.5. Warning: ....................................................................................................... 65
13.2 Momentum Trading ........................................................................................... 65
13.2.1. Action:.......................................................................................................... 65
13.2.2. When to get out on downside .......................................................................... 66
13.3 Opening Strategies ............................................................................................. 66
13.3.1. What is the Opening? ...................................................................................... 66

13.3.2. Notion of fair value at the open ........................................................................ 66
13.3.3. Envelope Strategy ........................................................................................... 67
13.3.4. Back Testing of envelope strategy ..................................................................... 67
13.3.5. Positive Trading Scenario ................................................................................ 67
13.3.6. Negative Trading Scenario ............................................................................... 68
13.3.7. Risk of this strategy ......................................................................................... 68
13.4 Dark Pools Strategies .......................................................................................... 68
13.4.1. What are dark pools, how they work?................................................................ 68
13.4.2. Dark pools features ......................................................................................... 68
13.4.3. Pegging Orders .............................................................................................. 69
13.4.4. Execution size features..................................................................................... 69
13.4.5. Linking and Scanners ...................................................................................... 69
13.4.6. Anti predatory trading algorithms ...................................................................... 69
13.4.7. Positive Trading Scenario ................................................................................ 69
13.4.8. Negative Trading Scenario ............................................................................... 70
13.4.9. How institutions defend themselves................................................................... 70
13.4.10. Good rules this strategy ................................................................................ 70
13.4.11. Risk of this strategy ..................................................................................... 71
Appendix A .............................................................................................................. 72
Intraday Trading Periods ................................................................................................. 72
Appendix B .............................................................................................................. 73
Office Rules .................................................................................................................. 73
Appendix C .............................................................................................................. 74
Suggested Reading List ................................................................................................... 74

Chapter 1
Market and Exchanges
1.1 Exchanges
An exchange is an organization, which allows transactions of financial products to occur in an

orderly manner and in a centralized location (physical or virtual). Stock exchanges are the most
widely known example. The New York Stock Exchange (NYSE) and the National Association of
Securities Dealer Automated Quotation (NASDAQ) are the two most important stock exchanges in
the United States.
For future exchanges, The Chicago Mercantile Exchange (CME) is the leading one. CTG PTG has
access to all previously mentioned exchanges but also has access to the London Stock Exchange
which is the most important stock exchange in Europe. Other Markets that will soon be available at
CTG PTG include Euronext and the Toronto Stock Exchange.
1.2 Markets
A market is the consolidation of exchanges or transactions in a specific financial product. For
example the US stock market is the consolidation of all the transactions happening in the stocks
exchanges in United States. Other popular markets are the futures market and the options market
which together can be called the derivatives market.
1.3 Primary and Secondary Market

The primary market is for new issues of securities, as
distinguished from the secondary market, where
previously issued securities are bought and sold. A
market is primary if the proceeds of the sales go to the
issuer of the securities sold.
There is no physical or virtual defined location for the

primary market. The transactions are rather happening
between Investment bankers and Institutional Investors.
Once all the transactions for an issue are completed on
the primary market, there is what we call an Initial Public Offering (IPO) and the stocks start
trading on the secondary market.
At CTG PTG we concentrate trading on the secondary market.

1.4 The NASDAQ
Established in 1971, the National Association of

Securities Dealers Automated Quotations System
(NASDAQ) is a dealer market and is the first and
worlds largest electronic stock market listing nearly
4000 companies. It is operated by the NASDAQ
Stock Market, Inc. More than 500 Market Makers
use their own capital to buy and sell NASDAQ
securities, and then redistribute the stock as
needed. The NASDAQ network also connects alternative trading systems like electronic
communications networks (ECNs), which enable investors to trade with each other. The
NASDAQ Stock Market is composed of two separate markets: The national market and the Small
Cap Market. The NASDAQ recently became a public trading on the NASDAQ under the symbol
NDAQ. More information can be found on the website at www.nasdaq.com.
1.5 The NYSE

Founded in 1792, The New York Stock
Exchange is the largest auction market place
in the world. It is located at 11 Wall Street in
New York City. The NYSE is often called
The Big Board or The Exchange. It is a
physical market using a specialist to match
orders. However, the exchange is becoming
more electronic with its acquisition of the
Archipelago Exchange (ARCA Exchange)
and more volume on the Intra-market
Trading System and different ECNs forming
the third market. Approximately 3000 companies worth nearly 18 Trillion dollars in global market
capitalization are listed on the exchange. Average Stock volume is more than 5 Billion shares.
Listing requirements on the exchange are very strict. Therefore most stocks traded are older
companies and blue ships. A lot of foreign companies are also listed on the NYSE as American
Depository Receipts or other form of entities (450 Non-US companies valued at nearly 5 Trillion
dollars). The exchange trades many other products like bonds, warrant, rights and ETFs. More
information can be found on the website at www.nyse.com.

1.6 The AMEX
The AMEX, which stands for the American
Stock Exchange, is a smaller market for
equities but it is the second-largest options
exchange in the World. The AMEX was
bought by the NYSE in January of 2008.
About 800 different stocks were trading on
the exchange and a lot of different ETFs,
since the AMEX is a pioneer in that field. A
lot of AMEX stocks are now traded
electronically on the NYSE through
Archipelago (ARCA Exchange) Exchange.
The AMEX was also an auction market
using a specialist. The Spiders (SPY) and Diamonds (DIA) which are ETFs respectively based on the
S&P500 and Dow Jones Indexes were two of the major ETS trading on the exchange. More
information can be found on the website at www.amex.com.
1.7 The CME

The Chicago Mercantile Exchange, which
recently acquired the CBOT and the
NYMEX, is the largest US derivatives
exchange in the world. It was founded in
1898 as the Chicago Butter and Egg Board,
evolving into the CME by 1919.
The exchange is a major marketplace for

trading futures and options on agriculture
products, currencies, indices, and interest
rates. The exchange went public in
December of 2002 and is currently traded on the NASDAQ under the symbol CME
The most popular contract traded on the CME and also the most active future contract in the world
is the S&P 500 big futures (SP) contract. It represents 250 times the index. CTG PTG accesses the
CME through its electronic exchange called GLOBEX which is the first electronic trading network
for futures and options. GLOBEX trades many futures contract with a smaller value often called the
minis. The ES traded on GLOBEX is a very active contract and represents 50 times the S&P 500. It
is also used at CTG PTG as a global market indicator. More information can be found on the
websites at www.cme.com.

1.8 The LSE
The London Stock Exchange formed in 1760 as
a club at Jonathans Coffee House by 150
brokers thrown out of the Royal Exchange for
rowdiness. The Stock Exchange name was
adopted in 1773 and it became a regulated
exchange in 1801. Following deregulation in
1986, The LSE, also called the Big Bang,
introduced computerized trading via the Stock
Exchange Automatic Quotation (SEAQ) and
SEAQ International Systems that display share
price information in brokers offices throughout
the United Kingdom. The LSE became a
public limited company in 2000, with its shares
listed the following year. In 1997, the exchange introduced the Stock Exchange Electronic Trading
Service (SETS). The LSE was recently added to CTG PTG Arsenal. More information can be
found on the website at www.londonstockexchange.com.

Chapter 2
Orders, Transactions and Positions
2.1 Orders
An order is a request or advertisement with the intention to buy or sell a specific financial product.
An order identifies the terms relative to price, quantity and conditions in which it needs to be
matched. An order is said to be open or pending until it is matched with an opposite order. An
open order can normally be cancelled by the sender. For example, if you sent a request to buy 1000
shares of MSFT at 24.50 this is considered to be a buy order on MSFT. A buy order is called a bid
and a sell order is called an offer. The best bid and offer on a stock from all participants is called the
NBBO (highest bid and lowest offer).
There are five conditions a trade needs to think about when sending an order and they are: side (is it
a buy or a sell), size (the amount of shares), route (is is a NYSE or NASDAQ stock), ticker (the
stocks symbol) and condition (is it a fill or cancel order)
2.2 Transactions
An order becomes a transaction when it matches with
another order that can fulfill its conditions (a sell order
matching a buy order). In this case we say that the
order has been filled or executed. Therefore a
transaction, which is also called a trade, always has a
buy side and a sell side. From the previous example if
somebody else sends an order to sell 1000 MSFT at
24.50 then a transaction is recorded and both orders
are filled. If the sell order would only be for 500 shares then the buy order of 1000 shares would be
partially filled and 500 shares would still be open (standing as a pending order).
By convention we say that a trader is buying when he buys from the offer (also referred as taking the
offer); and biding when he place a buy order below the best offer. In the same manner, we say that
he is selling if he places a sell order at the bid price (also referred as hitting the bid); and offering if he
is offering above the best bid.

2.3 Limit Orders
A limit order is an order to buy/sell at a specific price or lower/higher. Execution can happen at the
price specified or at a better price (rarely). Price improvements happen more on the NYSE at the
open or the close because the specialist is going to find a price that can match the most orders Limit
orders are standing in the market if they are not executed. They will be only filled if a match with
another order can be made. Limit orders are the most popular order at CTG PTG because they
limit the risk of errors.
2.4 Market Orders

A market order is an order to buy or sell a security at the best price available. Market buy orders are
filled against available limit order in the market. Market orders can be very dangerous for many
reasons. One big concern is that you have no control over what price you get. In some case
dishonest Market Makers and dealers could cancel and move their limit orders if they see a big order
coming in.
Also there is a big difference between buying/selling 1000 shares and 10000 shares but sometimes it
is easy to mistakenly enter an extra 0. Those are called keystroke errors and they happen all the time
in the market. Recently, in December 2005, a Japanese Trader lost hundreds of millions of dollars
because of a keystroke error!! Traders using market orders are impatient and normally it does not
pay to be impatient with the market. We strongly discourage the use of market orders at CTG PTG
since there are less risky ways to get quick executions with special limit orders.
2.5 Long Positions

When you are buying stocks we say in the trading jargon that you are getting long. If you own
stocks, you are said to be long that stock. For example if you send a buy order on 1000 Shares of
MSFT and get filled, you are now long 1000 share (assuming you had no previous trades/transaction
in MSFT).

2.6 Short Positions
It is possible when you trade to sell stocks that
you dont own. We call that shorting. You
are borrowing the stock with the intention to
sell it on the market and buy it later at a lower
price (obviously if the stock goes up you will
be paying a higher price to buy it back and
therefore lose money on the operation).
When you sell stocks that you dont own you

have a negative position in that stock and you
are said to be short. For example if you send a
short order of 1000 Shares of MSFT and get
filled, you are now short 1000 share (assuming you had no previous trades/transaction in MSFT).
You now have -1000 shares in your possession.
Short selling in an important tool, which allow traders to take advantage of a declining stock/future
price (sell high, buy low). Without this position, traders would not be able to make money 50% of
the time. Since stock prices fluctuate every day, if a trader can only go long, he or she will miss out
on at least half of the opportunities to make money each day.
Most of the investing public does not know about short selling. This results in a long bias towards
investments. Trading firms have more knowledge than the general public in this area. Finally, there
are specific rules that apply to short selling securities that we will discuss later in the course.
2.7 Inventory
Throughout the day your inventory/position will constantly change. It varies from a positive
amount of shares that you own to a negative amount of shares that you are short of. When you have
no inventory or no position we say in the trading jargon that you are flat. Therefore if you had no
execution on a stock you are said to be flat.
The concept of Long/Short and Flat is fundamental to trading. A great deal of the training course
will be based on this concept which will be covered in details as the training progresses.

2.8 Unrealized Profit/Loss
Every time the NBBO of a stock is moving and you have a position in it, you are incurring an
unrealized profit or loss. We call it unrealized because you havent closed your position yet.
However the unrealized profit is a realistic view of how much you would make if you would be
close your positions and go flat.
2.9 Realized Profit/Loss

Every time that a transaction is made in the opposite side of your current position (selling when you
are long or buying when you are short) you are realizing a profit or a loss. For example if you are
long 100 shares at 11.23 and you sell 100 shares at 11.24 you are incurring a 1 dollar profit. This is
called realized profit. Realized profits and losses are accumulating all day.

Chapter 3
Auction Market The Specialist
3.1 Auction Market

An auction market is run by a specialist who is god of his/her particular stock(s). The NYSE and
AMEX are examples of auction markets. The specialist knows everything there is to know about
the stock(s) he or she trades. A specialists primary job is to match up buy and sell orders.
3.2 Characteristics of Auction Markets

A specialist has the authority to halt
trading on his stock should
conditions warrant such action
Orders are matched up in what is

known as the specialist book
If there are no matching orders in the

book, the specialist may buy or sell
stocks at his/her discretion; however,
if an order comes in at the market price, the specialist must fill the order from the
inventory of the financial institution that employs him
The market will award a stock to a financial institution; the financial institution will
hire a person to be the specialist for that stock
There is only one specialist per stock but a specialist can have more than one stock
now it is computerized (Electronic Order Processing)
3.3 The Specialist Book

This book which refreshes every second displays all the limit orders (bids and offers)
market orders and stop orders are not displayed.
This allows you to see all bids and offers placed by all participants.
Order filling is not necessarily first come, first served, but with new regulations and
electronic order processing, favoritism happens much less frequently than it did
years ago.

3.4 The Specialist Responsibilities
3.4.1. Specialist as Auctioneer

The specialist continually shows the best bids and offers throughout the trading day. These
quotes are displayed electronically and anyone can access them. The specialist maintains
order in the crowd and interacts with agents representing customers.
3.4.2. Specialist as Agent

A specialist is the agent for all SuperDOT (electronically routed) orders. A floor
broker may also choose to leave an order with a specialist to represent it until it can
be executed at a specified price. This frees brokers up to concentrate on other
orders that require their immediate attention. As agent, a specialist assumes the same
responsibilities as a broker.
3.4.3. Specialist as Catalyst

Unique to the agency-auction is the specialist as a conduit of order flow. The specialist
knows who has been interested in a stock, and keeps track of all known interest. As all
buyers and sellers aren't always represented in the crowd at the same time, the specialist can
call in all interested parties to let them know what has become available in the market. By
giving updates to a previously interested party, a specialist helps trades occur where they
otherwise might not happen.
3.4.4. Specialist as Principal

Specialists, in order to fulfil their role, agree
to several obligations. The first is to place and
execute all customer orders ahead of their
own. At the NYSE, three out of four
transactions take place between customers,
without the capital participation of the
specialist. In the balance of transactions, a
specialist participates as principal by providing capital and, thereby, adding liquidity to the
market. While they do not supply all the liquidity for the market, or determine the ultimate
price of a stock, they use their capital to bridge temporary gaps in supply and demand and
help reduce price volatility by cushioning price movement.

Chapter 4
Dealer Market Market Maker
4.1 Dealer Market

A dealer market is one where many participants are competing against each other by posting
different bids and offer. The NASDAQ is the most important dealer market in the world where
orders are filled through market makers and ECNs. Any Over The Counter market or fully
electronic market is also a dealer market. Unlike an auction market, where there is only one
specialist per stock, there are many market makers per stock in a dealer market.
4.2 Market Makers

A market maker is an individual trader
employed by a financial institution to manage
the companys inventory of a particular
security. They maintain their inventory and
use it to make money for the company by
buying and selling on the market.
A market makers primary responsibility is to

provide liquidity to the market to literally
make the market they are there to provide a
flowing market while following the rules as set out by the FINRA and SEC.
4.3 Market Makers VS Prop Traders

The difference between MMs and traders at CTG PTG is that market makers have more money
and more experience. The MMs that are the most powerful on a particular security are common
referred to as the AXEs. They have the same goal as prop traders to make money trading full time.
However Market Makers restrictions and responsibilities that prop traders don`t have.

4.4 Market Makers Restrictions
1. They must fill orders (bids, offers, buys, and sells) on a first come, first serve basis.
2. They cannot fill orders pre or post market hours.
3. They cannot back away from a level 1 price. (requires more detail)
4. They cannot buy through an advertised price
5. They must appear on both sides of the level 2 between 930am and 4pm.
4.5 Market Makers Responsibilities

1. Buy and sell what the public wants (This refers to retail clients average investing
customer)
2. Fill institutional orders (Mutual funds, pension funds, etc)
3. Trade the house account when they are not doing 1 or 2
4.6 Market Markers Sources of Income

1. They earn the least from retail clients the commissions are small and so are the
orders
2. The company earns the most in commissions from the institutions they pay a
premium for a top trader to execute their orders
3. The market maker the person makes the most from earning money on the
house account
Without prioritization of responsibilities, retail clients would be ignored and institutional orders
would be executed when convenient.

Chapter 5
Electronic Communication Networks and Dark Pools
5.1 Electronic communication Networks

Electronic Communication Networks are electronic systems that display and matches securities buy
and sell orders placed on exchanges and over-the-counter by market makers and traders. The
highest bid and lowest offer is published on the NASDAQ (National Association of Securities
Dealers Automated Quotation) workstation and distributed through information vendors around
the world.
There has been a lot of consolidation recently in the sectors. NASDAQ which operated
Supermontage recently bought Instinet and Brut. The NYSE bought Archipelago. Another
example is when NITE, a very active market maker, bought Direct Edge. ECNs are making the
market more liquid and competitive.
At CTG PTG, traders have direct access to all major ECN quotes and they can also post bids and
offers on all those ECNs. They are NASDAQ, ARCA, BATS, EDGA, EDGX and TRAC.
5.2 ECNs Features and Characteristics

Quotes and Execution (when there is a match) are instantaneous
They allow to post bids and offers to advertise on Level II
Posting takes milliseconds to appear on the level 2
There is no charge for a trader to post a bid or offer, actually, the trader will get a
credit if the order is filled
Partial fills are a common occurrence with the more popular ECNs
Most ECNs have IOC (Immediate or Cancel) order types

5.3 Dark Pools
Dark pools are Alternative Trading Systems that are not publishing their order book publicly. Dark
pools are generally used by institutions to try reducing market impact when placing large orders.
Dark liquidity pools offer institutional investors many of the efficiencies associated with trading on
the exchanges public limit order books but without showing their hands to others. Dark liquidity
pools avoid this risk because neither the price nor the identity of the trading company is displayed.
Most dark pools also offer advanced algorithm trading to improve chances of executions of big
orders. Since there is no book the execution range is based on the NBBO to avoid prints outside of
the market
See the manual on ECNs and Dark Pools Routing Strategies

Chapter 6
Basic Software tools and trading concepts
6.1 Level 2 a level beyond

With the high number of Market Participants and all the different Exchanges and ECNs, Orders
must be organized in a way that allows easy access to information. Level 2 windows are used by all
active and serious market participants to access information about limit orders on specific stocks no
matter what exchange or ECNs they are trading on.
On the Level 2, all the market markers and ECNs limit orders, with the same price and the same
side (buy or sell), are called the players of the level, the players being market makers or ECNs and
the level being the specific price. On a stock the highest/lowest level bid/ask provided by one or
more ECN called the Level 1 Bid/Ask. The total number of shares on a specific level is called the
Size of that level.
The Level 2 is screen showing the Bid Levels on the left side and the Offer Levels on the right side.
Here is a picture of a Level 2 Screen:
Company name (Microsoft Corp).

Stock symbol {MSFT}.
An up arrow meaning the stock is on

an uptick
The change in price compared to the

previous closing price
L: the current intraday lowest trade

price.
H: the current intraday high bid

price.
Volume: the number of shares

traded since the beginning of the day
Starting from the top left, here is what

you see on the above Stock Window:

Columns, left to right:
Price
Number of shares
Market of Execution
Characteristics:
Each new trade in the market is appearing on top
Traders link it to their Level 2 window.
We can put more than one symbol
We can filter by size, by market, etc
The Time and Sales window (to the right) is very important when
you combine it with the level 2 screen. It gives you information about
the last trades that have been made in the stock.
The size and the market are very important because they give you
information about where you should place your order to get a better
execution. The color gives you information about which side the trades are made: green being the offer and
red being the bid. A white print is a trade between the bid and the offer, which is also called the mid-point.
All the information in the T&S window is often called the tape.
6.2 Tape Reading

Tape Reading refers to getting crucial information and reading between the lines
of the T&S window. Traders must adjust their orders in real time according to all
the trades in the time and sales. The rhythm at which trades are executed on a
specific ECN/exchange or where they are executed is also referred to as the order
flow. For example, a trader could say that there is a lot of order flow on ARCA or
a lot of order flow on the bid.

6.3 Trading Monitor and Position Summary
The trading monitor is a window that shows orders and executions. You can select all orders, open orders
only, executions or previous days executions. Each line details a different order. Sorting and Filtering can
be done when there are many of them.
The position summary window shows current positions in stocks. By default long positions are blue and
short positions are red and in between parentheses. There is an option to display only stocks with active
positions. Sorting and Filtering can also be done here.

6.4 First in First out (FIFO)
The concept of FIFO means that in a list, the first one to come is the first one to be served. ECNs work on
the FIFO principle. For example, if on NASDAQ there are 3 pending bids of 1000 shares at 25.10, NSDQ
will show 30 on the Level 2. If somebody sells 500 shares to NSDQ then the first order of 1000 that was
submitted will be partially filled and 500 shares will remain on top of the list. At that time the Level 2 will
show 25 on NSDQ.
A specific ECN is based on FIFO. However the whole Level 2 does not work like FIFO. For example if
you send an offer on NSDQ for 1000 shares of MSFT at 25.11, somebody else could send another offer at
25.11 after you on ARCA and if the next trade happens on ARCA he will sell before you! That concept is
very important when you come to decide which ECN to use based on how trades are made on a specific
stock.
6.5 Volume
The volume is the total number of shares executed on one stock since the beginning of the day. It is a good
indication of the level of activity when you compare it to previous day average volume on the same stock or
other stocks average volume. If you traded 50k volume on a stock that has 500k volume during the days you
did not trade 10% of the volume but only about 5% since one trade always has two sides.
6.6 Liquidity
Liquidity refers to the ability to buy or sell an asset quickly and in large volume without substantially
affecting the assets price. Shares in large blue-chip stocks like Citigroup or General Electric are liquid
because they are actively traded and there are always substantial buyers and sellers on the bid and offer.
The notion of adding liquidity therefore refers to adding pending orders to the market. Removing liquidity
refers to take it away from the market by removing limit orders. Market orders are always removing
liquidity. Limit orders are removing liquidity if the bid/offer price is equal or higher/lower than the current
offer/bid on the ECN they are submitted to.
While volume can be a good indication of liquidity, two stocks with the same volume can have a liquidity
that is completely different.
6.7 Rip, Tank, Swipe

A Swipe is the action of taking all the liquidity available on the bid or the offer in a single transaction. For
example if a stock has a bid of 25.10 and an offer of 25.11 and there are a total of 14200 shares for all
participants on the offer, A market maker could decide, the price being too low, to buy everything at 25.11

with a single order. Normally he will then place a buy order at 25.11 and the bid-ask will now be 25.11 to
25.12.
A Rip is a sudden increase in price on a particular stock. When that happens, all the trades are happening on
the offer (active buying on the stock) and market makers and ECNs are showing higher bid and offer for the
stock. More than one Swipe can happen on a rip. Rips usually happen when there is a unexpected good
news on the stock.
A tank is the opposite of a rip and it happens when the stock is going lower because almost every trade
happens at the bid and Market Makers and ECNs are lowering their bid and offer. More than one Swipe
can happen on a tank. Tanks usually happen when there is an unexpected bad news on the stock.
The main aspect of Rips and Tanks is that they happen so quickly that most traders have no time to react.
Losing 5 cents on a tank when you are long is different than losing slowly cent by cent when the stock is
going down.
6.8 Volatility
Volatility refers to how much movement there is in a stock. The
more volatile the stock the more it is going up and down. More
volatile stocks are this riskier it can be for traders but they can also
be good opportunities for profit. The volatility of the market is
also important. On slow moving days where the market is not
volatile, traders should not try to go for the long shot.
The VIX is the volatility index measuring the implied volatility

from all the options traded in Chicago. The level of the VIX will
tell you how much the market is volatile. Normally when the
market is going down and there is fear among participants the VIX is going up. VIX is going down when
the market is stable or going up slowly.
6.9 Gateways
A gateway is a trading route. Each individual ECN is a Gateway. NSDQ is a gateway and BATS is also a
gateway. When a connection to a specific gateway fails, no order can be sent or cancelled. Therefore the
risk controllers need to handle all the orders by phone. The gateway itself can also fail. In that case no trader
in the world can send or cancel orders.

6.10 Execution System
The execution system sends confirmation of pending, filled and cancelled orders to the market participants
for a specific ECN. The CTG PTG Execution System is sending back confirmations concerning all the
consolidated gateways to all the traders at CTG PTG and then, modifies each account properly.
6.11 Books
A book is the name used for the window containing orders information on a specific gateway. When you
have this information available, you say that you have the book. At CTG PTG we have access to the
NASDAQ book, the Arca Book, The Bats book, the EdgX Book, the EdgA Book and the New York
Book.
An ECN book is like a level 2 but shows the information for only one ECN. Therefore individual orders on
the same price level can be shown in detail instead of being combined. Such a feature is available for the
NASDAQ book if you subscribe to it online.
6.12 Retail Traders and Prop Trader

Nowadays most traders have the ability to access all ECNs and to
send order to each one of them. However, most traders are retail
trader. Retail traders are like the traders at CTG PTG except
that they trade from home with their own capital and a broker.
They normally pay high commission relative to the prop trading
world. Also, they normally dont receive rebates from ECNs
(more on that later). They therefore need a lot of capital and a lot of experience.
Proprietary traders use capital from a trading firm and they share the profits they make trading the market.
The Job of proprietary trader is to watch what is happening on different Level 2 and Time & Sales windows
for specific stocks and send orders that allow being long or short at a good price. It might seem like a simple
definition but recognizing opportunities and good prices are very complex. It will take some time to
develop that instinct to find those price points. You need to buy low and sell high. However, before you
can do that you need to know what is high and what is low! In some market conditions you might want to
buy high and sell higher.
Experience will teach proprietary traders when to send their order, at what price and on what gateway based
on the information available. There are many buyers and sellers on the market and they dont always see
each other. Proprietary traders buy from active sellers who dont have enough information and market
access tools to know that there are also active buyers in the market. Proprietary traders are making money
because they facilitate trading between uninformed traders. The profit they make is basically the average
difference between the bid and the offer.

6.13 Arbitrage
Arbitrage refers to instantaneous and risk free profit. It is basically like picking up money that you find on
the sidewalk. There are many types of arbitrage. Interexchange arbitrage happens when a stock is trading on
more than one exchange. There is a chance that a participant on one exchange bid higher than the ask price
on the other exchange. In this situation all you have to do is take the offer price on one exchange and sell at
the bid price on the other. This is called pure arbitrage. However unless you are able to send 2 orders at the
same time you always have the risk for the bid to be cancelled before you have time to get it.
Semi-arbitrage is more common and we take advantage of it almost every day at CTG PTG. This happens
when there are people selling on an exchange (not offering but selling at the bid) and other people are
buying on another exchange (taking the offer) while bid and offer are the same on both exchange. If there
are not too many orders on the level 1 bid and ask this is normally a quick way to make money by buying
from the sellers on exchange A and selling to the buyers on exchange B.
There are many other types of arbitrage like risk arbitrage, statistical arbitrage, index arbitrage, etc. More
information can be found on the internet and in Microstructure of the Financial Market by Larry Harris.
6.14 Lots, Round Lots, Odd Lots

Lots refer to a specific standardized number of shares. 100 shares is usually the smallest regular lot traded on
the different stock exchange. Round lots orders or trades refer to a quantity of shares in multiple of 100, for
example 1200 shares. Odd lots are the opposite, for example 1238 shares. The expression can also be used in
other circumstances, like buying in 1k 5k or 10k lots. It is illegal as a prop trader to enter a position with an
odd lot. However if you have been partially filled and have an odd lot position you can exit it legally.
6.15 Cross Lock

We say that the market is locked when the bid on one exchange or ECN is equal to the ask on another
ECN or exchange. That is to say that there is a limit order at the bid on a specific ECN or Market Maker
that has an equal price to a limit order on the offer.
Only some ECN allow locking the market. Locking the market is a common practice on small stocks on the
NASDAQ. It sometimes also happens on the NYSE. It used to be that when the market was locked you
could see it on the level 2. Nowadays the ECN that is creating the locked market is not allowed to display
the quote on the level 2. The only way to know that a market is locked is to send a small order in the
opposite side to the ECN we expect to be locking and get a fill.
Crossed markets happen when the bid price on one exchange or ECN is superior to the ask price on
another ECN or exchange. This is pure arbitrage and does not happen too often. It is also good to note that
it is rarely on big orders. Most ECN and dark pools prevent executions outside of the NBBO.

6.16 Rebates
Now that you know about ECNs, Level 2 and all the related concepts, the subject of rebates can be
discussed. Rebates are part of some type of profit sharing program with the ECNs.
They are an incentive to add liquidity to the market. To encourage people to add
liquidity, ECNs pay rebates to the market participants that are adding liquidity.
They pay around 2$ for each 1000 shares that add liquidity (rebates are different for
every ECN). Conversely, they are charging around 3$ to remove liquidity from the
market. Therefore when a trade happens, they get 3$ from the liquidity remover, pay
2$ to the liquidity adder, and keep 1$ for themselves. Rebates are more popular on the NASDAQ and they
are a lot lower on the NYSE.
Without rebates, the market would be a lot less liquid. Rebates are constantly changing and the managers
can provide a sheet to you with all the details. This is called the rebates Schedule. Now you probably know
why people are locking the market. This is because you can make money by buying and selling at the same
price if you add liquidity on both sides.
The more shares you trade and the more you will realize that this can add up pretty fast. For a good trader it
is not hard to make over 500 dollars in rebates every day. However, since you are playing with more shares
with a smaller profit margin your loss can be considerable when you are on the wrong side.
Rebate trading with slow moving stocks is a good way to learn how to trade when you first start. It lets you
make a lot of trades on different ECNs while you dont necessarily have to know all the time which way the
market is going. As you are gaining experience, after watching the level 2 for weeks you will start to get a
feel for the right side to play the stock. You will start to see patterns that you were not able to notice before.
A lot of trading strategies rely on rebates and we will elaborate on them later in the course.

Chapter 7
Market Indicators Information Concepts
7.1 Indexes and Averages

For day trading purposes we will refer to an average or an index as meaning the same thing. There are slight
technical differences between the two; however, they are not relevant to day trading. So, what is an
average? It is a group of stocks averaged out to help us get a general indication of market sentiment. There
are many different indexes/averages:
The most widely known ones are:

DJIA Dow Jones Industrial Average
S&P 500 Standard and Poors 500
NASDAQ Composite All the NASDAQ stocks
NASDAQ 100 NASDAQ top 100
Russell 2000 Small cap stocks
7.2 Dow Jones
It is an old established private company, which

provides many services to traders and the financial
community. They do market research; come up
with averages and other market indicators. The
reason the DJIA is so widely known and powerful
is because of the reputation and credentials of the
company. They are known for strong and reliable
analysis.
Anyone can come up with an index. However,

the reason we all look at the Dow is because they are well known and established. The Dow Jones is not just
NYSE stocks. MSFT and INTC are also in the average. Many traders make the mistake that DJIA is the
NYSE. It is not.

There are 30 stocks in the Dow Jones Industrial Average. They pick leaders in each of the different sectors.
Example: who is the leader in soft drinks? Coca-Cola. And yes, they are in the Dow 30. Who is the leader
in fast food? McDonalds is also in the Dow. How about building and home renovations? Home Depot is
also in the Dow. Who is the leader in retail? Wal-Mart, which is also in the Dow.
7.3 S&P 500
S&P is another private company like Dow Jones, which does financial
research and creates indexes. S&P stands for Standard and Poors. The S&P
500 is the most widely watched index in the world. The 500 stocks that
S&P have selected to be in this index are also leaders in their fields. Once a
stock is in the S&P 500 they will stay there until they are no longer a
leader in the field (decided by the S&P).
Standard & Poors is widely recognized as a leading provider of indices. S&P indices are used by investors
around the globe for investment performance measurement and as the basis for a wide range of financial
instruments. The S&P 500 Index is strongly representative of the sentiment of the broad, or general, stock
market. Widely regarded as the standard for measuring large-cap US stock market performance, this popular
index includes a representative sample of leading companies in leading industries.
Important points about the S&P 500:

1. Most liquid instrument in the world after the US dollar
2. All fund managers are compared to the S&P 500
3. If you add a stock to the S&P 500 that stock goes through the roof. (Go and find out which
stocks have recently been added to the S&P 500, and how much the stock went up the day
they announced that they were going to be added to the index.) This is because many
index fund managers will have to buy the stock
4. Why are stocks dropped from the S&P 500? Usually because they were merged or bought
out by another company already in the index.
7.4 Futures
A futures contract is a trade made in the present, for an item that will be delivered at a later date. In other
words, two traders agree on a price, one of them agrees to buy, and one of them agrees to sell. The actual
item being traded does not change hands. It is agreed that the seller will provide the item, and the buyer will
take delivery of the item at a pre-set date in the future, for a price, which is agreed upon at the present time.
In simplest terms, futures are traded by agreeing on a price in the present, for an item that will not actually
be ready for delivery until a specified date in the future.

At the Chicago Mercantile Exchange, futures contracts are traded on the S&P 500 Index. This is all students
need to know, and arguably more than they need to know in order to use the S&P 500 Futures as a leading
indicator.
7.5 S&P 500 Futures
S&P 500 futures can be a powerful leading indicator for stock

traders. After the US Dollar, they are the most liquid trading
vehicles in the world and as such, they represent the sentiment
of the broadest array of market participants at any one given
time. By observing the price action of the S&P 500 futures,
traders will notice that more often than not, stock sectors and individual stocks will tend to follow the
movement of the futures. Perceptive traders will learn to recognize this correlation, and use it to successfully
anticipate price movements.
The symbol for the S&P 500 futures is SP XX (the first x being the letter representing the quarter in which
the futures expire and the second x being the last digit of the year in which the futures expire)
The letters H,M,U,Z represent the last month of the four quarters (March, June,
September, and December) respectively
The electronically traded S&P futures follow the same formula, ES XX
The electronically trade NASDAQ 100 futures use the symbol NQ XX
Futures expire on the third Friday of the last month of each quarter the third Friday of every third month
7.6 Squawk Box
Many trading offices around the world will use something called a
squawk box to acquire more knowledge about where buying and
selling pressures are coming from. The name refers back to classic
boxes which offices use to use attached to a telephone which had
microphones on the trading floor. An announcer would call out all
the major players on the floor and their actions. This was to remove some of the edge that the floor traders
had in reaction quickly to order flow when the back offices had to wait for quotes. This system was
extremely costly and not the most reliable. The squawk box went through many evolutions until it has
reached todays standard: Ben the Squawk.

So what is Ben the Squawk? The better question to ask is; who is Ben? Ben Lichtenstein is a Pit announcer
who announces from the S&P500 futures pit on the Chicago Mercantile Exchange. He calls out all the
major transaction and what he sees happening on the floor. Lets go through his calls and what they mean.
The first thing to understand is there are two types of pit traders.
Locals: Locals are either self-funded or have money from some unknown resource or investor somewhere
that funds them. They may represent someone else but it is not advertised.
Paper: Paper represents institutional traders such as those who are funded by big banks, pension funds or
other large financial institutions.
Now it is important to understand that locals and paper are working with each other most of the time. If
one major paper player buys, you can expect others to push with him. Locals also have no choice to gang up
against paper in the pits since they are financially limited. There is however, one exception to the rule.
When Ben says Ive got one of my top Teners stepping into the pit be very attentive.
A top Teners is one of the top 10 S&P500 futures traders in the world. These traders are experienced,
extremely aggressive and most importantly, extremely well funded. No matter what their strategy is, expect
the market to move in a direction. Certain traders place only one trade a day or none at all waiting for a top
Teners.
So now that we know the players in the pit, we have to learn the calls and what exactly Ben is saying. You
will consistently hear Ben say things like paper comes in and buys the halfs 200 times. This means an
institutional buyer came in and bought 200 contracts of the .50 price. Lets go through the list of pricing
calls. Ben calls out the ticks of the S&P futures. 4 ticks make a point. We are interested in hearing at
which tick the market is.
Evens: 950.00
Twenties and thirties: 950.25
Halfs: 950.50
Seventies or eighties: 950.75
At 1s: 951.00
Generally Ben will always be calling out the bid and offers. He will say something like 6 even bid at a
half. This could indicate a 956.00 bid and an offer at 956.50.
Lets continue with the calls.

Paper comes in and sells 500 evens, paper take them, more to sell, aggressive sellers This means
an institutional trader comes in and sells 500 contract at the evens and locals are trying to push back against
him. Problem is he is aggressive and wants to push the markets lower.
Locals are stuck they need to buy This means the locals are stuck in a short position and have to buy
the contracts to unravel their positions. Watch for a short squeeze.
Im seeing those low prints coming in right now This means a paper or local got stopped out of their
position and had to sell market. This can sometimes show a bounce coming in.
Goldman is looking Goldman looking OR Goldmans on the phone, looks like an order Watch
out for a large order to come in. Any time a large paper gets excited, it means a move. Anytime a trader gets
on the phone, this means an order is coming in from the back office.
Every trader uses the squawk in his or her own way. Certain traders find it clouds their judgment and others
cannot trade without it. The squawk box is extremely daunting at first and can be hard to understand but
with experience, Bens words become images and a clear and concise idea of what the traders in the pit are
doing becomes possible.
7.7 General Market Information Concepts
There is so much information when you trade the market that knowing which one to consider and how to
work with it is essential. In this section we will concentrate on information outside your Trading Software.
You can get information on Bloomberg, Yahoo Finance, The Squawk Box, and Trade the News.
7.7.1. News
Generally there are two type of news: news affecting the

market in general and news affecting you stock or its sector.
The first thing you need to know is that it is almost impossible
to be fast enough to make money by buying a stock
immediately after a good news release.
This can be largely explained by the concept of market

efficiency. There are at all times hundreds of traders watching
the same stocks and screening for news on it. As soon as there
is a news event they all react and the stock moves instantly.

Moreover the exact hour when news happens is most often known in advance because of SEC
regulation on Earning releases and Press Releases. We could even say that it would be more
advisable to sell on good news and buy on bad news since most people tend to overreact. Traders
with experience will be able to judge if most of the buying or selling on a news release has been
done. Therefore they will know if the move is over or if there will be more to come. Watching the
order flow on a news event is essential since the action is big and fast. Because of all those reasons it
is preferable not to trade stocks with news when you are still a trainee.
7.7.2. Correlation
Correlation is a statistical concept to evaluate the relation between two data series. Correlation
varies from -1 to +1. The more positive the correlation is the more the data is moving in tandem.
For example if ABC and CDE stock have a correlation of 1, that means that if ABC goes up 1%
CDE will also go up 1%. There are no stocks like that in the market. However there are
correlations of 60 or 70. Meaning 60% of the movement in one is explained by the movement in
the other one. There is also negative correlation for example, Oil price can be negatively correlated
with airlines stocks. The more you will watch the market and the more you will learn about
different correlation relations. You will also learn which stocks react first on good news for the
sector. These stocks are called the leaders of the sectors. The last ones to moves are called the lagers.
On average all stocks are normally correlated 0.6 with the market. That explains why they all move
in tandem. That 60% of all the stock movements is called the Systematic risk and cannot be reduced
by diversification alone. The remaining 40% has one part explained by the sector and the other by
the stock itself. That part is called non systematic risk. This notion is essential since it explains why
some stocks are going down even if they have good news. If the market is tanking dont expect
your stock to go up as much on good news as if the market was stable.
7.7.3. Expectations
The stock market is not based on current data but on

expectation about the future value. That is to say that most
current data is already included in the price of the stock. In
the trading jargon we say it is baked in the cake.
If market participants assume that Microsoft will have good

earning they will buy it in advance to profit from it and they
will therefore make the price go up. On the news the stock is

already at a high price and if the profit are very good but less than the people who bought it
expected then the stock will go down. That is why there is a popular adage on Wall Street that says:
Buy the Rumors, Sell on the Fact. If you dont understand the concept of expectation you will
be surprised by stocks and markets movements when there is a news announcement!
7.7.4. Fed Meeting
When the Federal Open Market Committee (FOMC) meets

to modify the interest rate in the US there is normally a lot of
activity and movements on the news. Since traders know in
advance at what time the news will be out they tend to be flat
before. On the news, they buy or sell according to what they
think the market will do. As a proprietary trader you should be very prudent and not carry big
positions before the announcement.
7.7.5. Stock Screeners
Stock screeners are software that allows you to find stocks based on different criteria. Yahoo Finance
and moneycentral.com have good Stock Screeners. When you are looking for stocks today trade
you should at first require the stock to have volume. 1 million is normally the minimal. Then you
should choose a range.
You can also search stocks per sector. The good traders will always find new stocks to trade. You
would be surprised how stocks can changed in a year as much in price, patterns and volume. The
stocks you are trading today might not be tradable in two weeks. Moreover when there is a lot of
money on a stock traders tend to all jump on it and therefore it becomes efficient and less money
can be made if you are slower.
Another good way to find stocks is to look at the most active list on the Yahoo Finance. While
those stocks are often stocks with news they are good to keep in mind as the interest and volume
might still be there for a week or two.

Chapter 8
Risk Management
8.1 Risk
Risk is a measurable possibility or probability of losing or not gaining value. Risk is differentiated from
uncertainty, which is not measurable. In trading there are many types of risk. Here is a list:
Risk of a movement of the market against your position

Risk of a news affecting your stock in the wrong direction
Risk of liquidity going away when you have many shares to trade to close your position
Risk of power loss
Risk of software failure
Risk of gateway failure
Risk of Network failure
Risk of hot keys errors
8.2 Risk Management
The goal of a proprietary trader is to reduce risk. This is called risk management. Here is a list essential to
good risk management:
Limit averaging down if the market is going against you. Never average down more than
once and do it on sharp moves and not on slow moves.
Try to trade more slowly when you are close to the Max Loss point since Max Loss will
keep you from trading and making money for the rest of the trading session.
Cut your loss at the market when you reach your Max Loss Limit or your
Use Time Stops for your trade. That is if you stock does not move and you are waiting for a
long time you should try to get out and trade stock on which you will make more trades
and money.
Use mental trailing stops: do not allow a big winning position to come back and become a
losing one.
Do not accumulate more share than the stock can handle.
Organized hotkeys properly and use only the num pad, the F keys, the Shift and the Ctrl.
Pay attention to the size of your average winning trade and make sure it is bigger then your
average losing trade. If your losers are too big that means you are using the wrong exit
strategy.

Look at your win loss ratio.
Make sure you read all the news on the stocks you trade before the market opens.
Watch the S&P 500 futures closely.
Reduce your trading size when you are on a bad streak.
Avoid trading too many stocks at the same time.
Avoid leaving your computer when you have positions or pending orders.
8.3 Extended Hours Trading Risk Disclosure
8.3.1. Risk of Lower Liquidity:
Liquidity refers to the ability of market participants to buy and sell securities. The more orders
there are available in a market, the greater the liquidity. Liquidity is significant because with it, it is
easier for traders to buy or sell securities, and as well, it is more likely for the trader in question to
pay or receive a competitive price for securities bought or sold. There will be lower liquidity in
extended hours trading as compared to regular market hours simply because the tremendous
amount of buying and selling done by the market makers and specialists is no longer part of the
equation. As a result, your order may only be partially executed, or not at all.
8.3.2. Risk of Higher Volatility:
Volatility refers to the changes in price that securities undergo during trading. In most cases the
higher the volatility of a security, the greater the price swings, the greater the potential for large
profits and large loss. There may be increased volatility in extended hours trading than after the
regular trading session has closed and as a result trader orders may only be partially executed, or not
at all. Furthermore, traders will often run the risk of receiving a price in extended hours trading
inferior to one likely to be obtained during regular market hours.
8.3.3. Risk of Changing Prices:
The price of securities traded in extended hours trading may not reflect the prices either at the end
of regular market hours, or upon the opening of the market the next morning. As a result, traders
receive an inferior (or admittedly a superior) price in extended hours trading than you would during
regular market hours.

8.3.4. Risk of Unlinked Markets:
Depending on the extended hours trading system or the time of day the prices displayed on an
extended hours trading system may not accurately reflect prices available worldwide. There may be
substantially different prices available on other concurrently operating extended hours trading
systems dealing in the same securities. So once again, the price the trader may receive for a
particular security may be inferior or, again superior, to a price available on another extended hours
trading system.
8.3.5. Risk of News Announcements:
Issuers normally make news announcements likely to affect the price of their security after regular
market hours have concluded. Important financial information is similarly announced outside of
regular market hours to foment stability of trading. In extended hours trading these announcements
occur thus during lower-volume trading when this is combined with the naturally higher volatility
it will likely cause an exaggerated and unsustainable effect on the price of that security.
8.3.6. Risk of Wider Spreads:
The spread refers to the difference in price between what you can buy a security for and what
you can sell it for. Lower liquidity and higher volatility in extended hours trading may result in
wider than normal spreads for a particular security.
8.4 Max Loss, Max Shares and Buying Power
8.4.1. Max Loss
CTG PTG is using a statistical system to come up with a maximum day trading loss for each trader.
Depending on your previous performance as a trader, you Max Loss will vary. The Max Loss is the
maximum amount you will be allowed to lose in a day before you have to stop trading. If your Max
Loss is 50$ Head Office will cover your positions if you are losing 45 (90% of your 50 Max Loss).
When you are in a situation where you are close to reach your Max Loss you will always be advised
before your positions are closed.

8.4.2. Buying Power
As you start as a trainee you will be provided with a minimal Buying Power (BP). Buying Power is
the maximal dollar amount you can have for all the positions. You will not be able to buy more
than what your BP will allow you. This buying power will increase as your trading profit increases.
Buying Power Improvement is done by the manager on a case by case analysis of your situation. If
you feel your Buying Power is too low, you should discuss about it with him. You have to
understand that traders have a bigger BP because they are making more money on the market and
not the opposite. Giving a high BP to somebody with not enough experience could be very
dangerous.
8.4.3. Max Shares
Max Shares is the maximum number of shares you can send an order for. For example is your Max
shares is 300 you will never be able to send an order for 400 shares or more. You can post more
than one order for 300 shares and get filled on all of them if there is a swipe. However you will have
to get out of this position by more than one order. Traders that are using multiple orders to
intentionally get double and triple fills will be disciplined. Max share are there to protect you before
you get experimented enough to manage more shares. Max Shares is also modified on a case by case
basis.

Chapter 9
Rules and Compliance
9.1 Regulations
There are many regulations in the financial market to make it fair for public investors. With no regulation
the public would quickly lose confidence in the fairness of the market. In the U.S. there are two main
organizations that are responsible for regulating the stock market, The Securities and Exchange Commission
(SEC) and the The Financial Industry Regulatory Authority (FINRA).
9.2 The SEC
The SEC is a federal agency created by the Securities Exchange Act of 1934 to administer that act and the
Securities Act of 1933, formerly carried out by the Federal Trade Commission. The statutes administered by
the SEC are designed to promote full public disclosure and protect the investing public against malpractice
in the securities markets. Their mission is therefore to protect investors and maintain the integrity of the
securities markets. More information on the SEC can be found on their website at www.sec.gov.
9.3 The FINRA
The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organisation (SRO) under the
Securities Exchange Act of 1934, successor to the National Association of Securities Dealers, Inc. (NASD)
FINRA is responsible for regulatory oversight of all securities firms that do business with the public;
professional training, testing and licensing of registered persons; arbitration and mediation; market
regulation by contract for The NASDAQ Stock Market, Inc., the American Stock Exchange LLC, and the
International Securities Exchange, LLC; and industry utilities,
FINRA was formed by a consolidation of the enforcement arm of the New York Stock Exchange, NYSE
Regulation, Inc., and the NASD. The merger was approved by the United States Securities and Exchange
Commission (SEC) on July 26, 2007.
With respect to the regulatory agency merger, SEC Chairman Chris Cox said, "The consolidation of
NASD's and NYSE's member firm regulatory functions is an important step toward making our self-
regulatory system not only more efficient, but more effective in protecting investors. The Commission will
work closely with FINRA to eliminate unnecessarily duplicative regulation, including consolidating and
strengthening what until now have been two different member rulebooks and two different enforcement
systems

9.4 Regulations at CTG PTG
As a trader at CTG PTG you have to comply with all the Rules and Regulation of the SEC and FINRA.
Any trader refusing to trade according to the rules and regulations will be terminated immediately. CTG
PTG has terminated traders before. Compliance is a serious issue as it jeopardizes the reputation and
existence of the whole company! Traders with bad intention will always try to find ways not to follow the
rules and make money illegally. However there are many tools that the managers of CTG PTG are using to
find out about those traders. Head office will also look at the list of trades for any suspicious profit. The SEC
and FINRA are also constantly monitoring all the communications in all trading firms including CTG PTG.
9.5 The main rules that traders will have to follow are:
Do not engage in Wash Trading

Do not trade with other traders inside the firm intentionally
Do not short IPO in the first 30 days of trading
Do not manipulate the closing price
Do not trade personal account with another broker during working hours
Do not contact people to make trading recommendations
9.6 Broken Trades
Trades can be broken or cancelled if they were caused by a software mistake and if they are too much
away from the market. The FINRA makes decisions on NASDAQ and Market makers, and ECNs
have jurisdiction over trade breaks on trades made through their execution system.
You will sometimes see on the ticker trades that are obviously out of the market. Most of them are
cancelled. However Illegal trades cannot be broken because in general, one participant in the trade
entered into the trade in good faith and will not want it broken; as such, it would be unfair for the SEC
or the FINRA to break the trade. There are four main types of illegal trades:
1. Trading on insider information.

2. Not declaring a short sell. If a trader goes from a long position to a short position (accidentally or on
purpose) without being flat in between, the trader has not declared the short sell because CTG PTG
Trader placed the offers as normal offers and not short offers. There is now a mechanism in CTG
PTG Trader to avoid that to happen
3. Short selling an IPO within the first 30 days
4. Wash trading: Intentionally buying and selling within CTG PTG is not permitted it may happen
from time to time; however, intentional wash trading is illegal. In general, wash trading benefits
one trader at the expense of another

Chapter 10
Trading Psychology
10.1 Mindset
It is difficult for beginning traders to accept, but the tools that are
essential to successful Day trading do not necessarily come in the
form of strategies but from having the right mind set. Experience
offers substantial evidence of the importance of both focus and
discipline but many new traders still find it hard to accept.
Without focus and discipline, there is no point in learning

strategies. Traders must be aware that day trading involves short-
term, split-second decision making within a context that is often filled with contradictory information. So,
the two main psychological skills that a trader must have are: the ability to remain focused the ability to
remain disciplined.
10.2 Focus
Opportunities can present themselves at any time and a successful trader will be able to remain focused
throughout the trading day so they will be ready to take advantage of them. A focused trader can analyze
opportunities based on strategy & probability and then be able to execute the trade automatically due to well
practiced keystroke skills and focus.
10.3 Discipline
There is no secret or miracle method that works all the time. No matter how smart you are or how much
you know about the market, DISCIPLINE is the key to your SUCCESS. What do we mean by
DISCIPLINE?
1. Cutting losses every time a trade goes against you.

2. Admitting that your entry point was wrong and exiting the trade immediately
3. Scaling down when things are not going your way (Example: trading 1000 shares and
scaling down to 500 share lots).
4. Stop trading when you reach your Max Loss on the day
Cutting losses is basic discipline and the key to become a successful trader.

10.4 Behaviors that leads to unsuccessful trading
1. Refusing to define a loss.

2. Not liquidating a losing trade, even after you have acknowledged the trades potential is
greatly diminished.
3. Getting locked into a specific opinion or belief about market direction. From a
psychological perspective this is equivalent to trying to control the market with your
expectation of what it will do: Im right, the market is wrong.
4. Revenge-trading as if you were trying to get back at the market for what it took from you.
5. Not reversing your position even when you clearly sense a change in market direction.
6. Not following the rules of the trading system.
7. Planning for a move or feeling one building, but then finding yourself immobilized to hit
the bid or offer.
8. Not acting on your instincts or intuition.
9. Establishing a consistent pattern of trading success over a period of time, and then giving
your winnings back to the market in one or two trades and starting the cycle over again.
10.5 Skills to be acquired
1. Learning the dynamics of goal achievement so you can stay

positively focused on what you want not what you fear.
2. Learning how to recognize the skills you need to progress as a trader
and then stay focused on the development of those skills, instead of
the money, which is merely a by-product of your skills.
3. Learning how to adapt to respond to fundamental changes in
market conditions more readily.
4. Identifying the amount of risk you are comfortable with - your risk comfort level - and
then learn how to expand it in a way that is consistent with your ability to maintain an
objective perspective of market activity.
5. Learning how to execute your trades immediately upon your perception of an opportunity.
6. Learning how to let the market tell you how much is enough, instead of assessing the
potential from your personal value system of how much is enough.
7. Learning how to structure your beliefs to control your perception of market movement.
8. Learning how to achieve and maintain a state of objectivity.
9. Learning how to recognize true intuitive information and then learning how to act on it
consistently.

10.6 Goals
Traders who set goals will be more successful than those who
do not; and, traders who record their goals and refer to them
will be more successful than those who simply state goals. Start
a Day Trading journal to keep track of your goals, your
mistakes, your rules and your lessons.
Characteristics goals should have:
Goals need to be Specific so that they can be easy to describe and easy to Visualize
Goals need to be Set at a High Level but on also need to be Realistic so that they can be
Attainable
It is easier to make a Commitment when a goal is Written than when its only a thought.
There needs to be a Time Horizon for the goal to be reached and different Time Steps
with objectives
A Plan is required to know how we will reach each objective.
10.7 Emotions experienced when starting trading
10.7.1. Anger
the stock moves against you as soon as you buy it/short sell it
cant get into a position
cant get out of a position
hit a key and nothing happens
execution system (NSDQ,ARCA, etc.) goes down

10.7.2. Frustration
not getting hotkeys

hitting the wrong key
execution system goes down
buying or selling when you dont intend to
10.7.3. Anticipation
cant wait for a new trading day

dreaming about the Level 2 windows
waiting for a stock to reverse
making profit and wanting to make more
10.7.4. Incredulity/Amazement
when you make a mistake and make money

going from long to short and you make money
Watching a stock go up/down 1, 2, 5 or more points in a few seconds/minutes.
10.7.5. Elation
when you make your first real trade

when you make your first real winning trade
when you accurately predict a move in a stock and profit from it
when you see your balance at the end of a profitable day/week/month
when you see that you are doing much better in your second or third month
10.8 Getting Started
10.8.1. Dos and Donts
Do stay positive
Do stay inquisitive
Do learn from every trade
Do write a new rule in your journal every time you make an error
Do stop any pattern that hinders your trading
Dont beat yourself up theres always a great trade waiting

10.8.2. Daily Prep
Read your rules daily

Review your trading journal daily
Leave your emotional challenges at home
Let all your trades be either earning trades or learning trades (or both!)
Stay disciplined
Stay focused
10.8.3. Money Management
Control losses:
know what you are willing to risk and stick to it

never double up on losers
never take your loses home at the end of the day
Develop your own style:
keep a journal
print your blotter every day to analyze it every night
read everything
do pre and post trading day preparation
take responsibility for your own actions
accept failure
accept success
Follow the Market:
Focus on Level 2 pattern and order flow in the time and sales window
the trend is your friend
know the intraday trading cycles and your own trading cycle
Use indicators, indices, relative strength, squawk, etc.

10.9 Psychological Hurdles
not defining a loss before executing trades

not taking a loss or a profit when the market has reached your exit point (on either the upside
or the downside), you must take your profit or loss
getting locked into a belief going into hope mode
trading on inside information or taking a tip
kamikaze trading
euphoric trading
regret trading
revenge trading
being more concerned about being right than making money
trying to be perfect
losing confidence
not consistently applying your trading system
not being in the right state of mind know that you can control some things and that you
cannot control other thing, but stay positive
10.10 The 3P=EPIPHANY Approach
The 3Ps in the 3P=epiphany approach stands for: persistence, preservation and patience it represents both
the advantages and disadvantages of rigidity in proprietary trading.
10.10.1. Persistence
Persistence is being able to continue trading despite obstacles like frustration and low morale.
Students will often forget that trading involves each minute of each trading day if there is to be any
profit taking at all at the beginning and they will begin missing days or parts of trading days. Some
students will come in late each morning or leave at lunch. Some will leave before the market close.
Many traders forget that this process is a long one and that they should be prepared to remain
without profits for several months.
Often traders have not seriously considered the average period of time it takes to become profitable
and they will decide to quit. On the other hand many times students will not know when to quit
and will continue to throw good money after bad and dig themselves into a deeper intraday hole.
Experienced and successful traders have often said that while it is important to be persistent, it is
equally important not to be obstinate and to learn how to sit on ones hands or simply walk away.

10.10.2. Preservation
Preservation is the most basic defensive mindset and must be adhered to from the beginning if there
is to be any retention of experience and discovery of a trading style. No matter the amount of
wealth a trader has, it will be difficult for him to justify spending thousands of dollars a week on
trading. Traders who are serious about trading will have to adopt capital preservation as their
primary short-term goal. Again, though, a balance must be struck as over-preservation can lead to a
limiting of opportunities. Preservation is almost totally useless if it does not have a predetermined
acceptable, maximum loss.
10.10.3. Patience
Patience is essential for anyone hoping to become a successful proprietary trader. New students
often trade aggressively for the first day or two as they familiarize themselves with the trading
process. This is okay as it allows them to become acquainted with the different execution systems
and allows them to practice their keystroke speed. However, traders must develop patience
eventually and not jump into positions without reasons. Once patience is adopted the number of
trades may drop but the traders net profit will increase. As well, when traders become profitable
regularly their losses, while fewer, are often larger in size.
10.11 Battle Plans
Battle plans are tremendously useful to new traders who have not yet found a
trading style. They can adapt 3P=epiphany approach and quantify it to meet their
individual needs. A battle plan will provide a self-imposed guideline on a trader
who is too inexperienced to be able to read the concealed intricacy of sudden
market manipulation and movement. When traders first start live trading in the
practical class they should have some idea of what they are interested in trading.
At that point, however it is too early to implement a restrictive battle plan as that
would prevent them from exploring the market and finding securities that present learning opportunities.
Volatile stocks should be eliminated. The initial battle plan should then include:
Stocks not to play

Sector(s) to explore
Search Criteria for an ideal stock(s) to watch and trade for the course
Once appropriate stocks have been found, and classes usually tend to gravitate to one or two stocks, the next
step is to formulate an active battle plan to follow. Formulating the battle plan is only the first and easiest,

phase. The battle plan should include maximum losses per trade, maximum daily losses, trailing-stop losses,
objectives for the day and any other relevant, quantifiable goals.
To be a successful trader one must accept that the majority of trades executed will be losing trades. By
accepting this fact the trader will be better prepared to limit the negative impact of these trades will have on
both equity and ego. A trader should always try to maintain a sense of control and following their battle plan
will help them to achieve success.
The battle plan also helps on the micro level. A trader should get into a trade with a reasonable expectation
of a certain result. If they go long, it is in the assumption that the stock will be going up in price. They
should immediately offer it out at the level (a reasonable level) they think it will go to. They should also
have a maximum acceptable loss while they wait to see if the plan will come to profitable fruition, no more
than 0.02/share.
Students should also understand where buying and selling occurs in certain market conditions. Assume for a
moment that a trader has bought at the ask price and now intends to offer out the stock to sell also at the ask.
The minute that the stock begins to tank, the trader should recognize that the trade has gone against him
and he should attempt to sell at the bid in order to flatten out. The tendency for the inexperienced trader is
to chase the stock down by posting offers at each price level during the process. NO ONE WILL BUY A
STOCK AT THE ASK IF IT IS FALLING QUICKLY IN PRICE. The novice trader must remember
that in order to minimize losses he must cover bad trades immediately by forcing a sell (if he is long) or
forcing a buy (if he is short).
The tendency to chase stocks up at the bid and down at the ask is referred to as the spend a quarter to save
a nickel mindset. Novice traders, eager to save the spread by buying a stock at the bid, chase a stock up by
placing a bid, then canceling as the price moves up to the next level and finally by placing another one.
This process is repeated several times until, finally, the trader is filled. Why was this trader filled? The stock
quit moving and the more experienced traders, anxious to take their profits, sold to those unfortunate
enough to be at the bid. NO ONE WILL SELL A STOCK AT THE BID IF IT IS RISING QUICKLY
IN PRICE.
Experienced traders will often say that the first step in becoming constantly profitable that they ceased to be
shaken out of position by jiggles or sudden manipulation of price movements. When traders become
more experienced their plan will become less rigid and may only include the name of the stock, the relevant
research on it and a profit goal along with a maximum loss.
The battle plan must be tailored to the individual and it must have a point to it. It must come from the
trader. Traders who are forced to use a battle plan will most likely not be comfortable because they do not
believe it is necessary. One of CTG PTGs most successful traders once pointed out that people trade their
personalities, which is the only reason a students trading plan should be theirs, not somebody elses.

10.12 General Trading Axioms
1. Trade stocks that have good volume and are liquid; you can get in and out quite easily. We suggest
1 million or more shares traded per day on average.
2. Take consistent small profits instead of waiting for that one big trade.
3. No overnight positions period.
4. Limit losses (trade with discipline).
5. Buy into strength and sell into strength by paying the ask price and offering at the ask.
6. Have more than one reason for getting into a position.
7. Do not trade stocks you are completely unfamiliar with.
8. Focus on entry and exit points. Do not focus on profit or loss.
9. Dont trade IPOs.
10. Dont trade in the first 10-20 minutes if you are inexperienced seek direction first.
11. Dont hope a stock will do something. Make decisions based on what the market is actually
doing.
12. Be very careful when averaging down.
13. Have rules and stick to them. Discipline, discipline, discipline.
10.13 Other Trading Psychology Concepts
10.13.1. Transparency:
Good traders are transparent people. They dont care about the opinions of other people if they
know they are doing the right thing. They are not ashamed of their results even if they are bad.
Hiding your mistakes is one way to say that you dont accept the full responsibility of them. It has
been observed that good traders are people who accept the blame when something happens. That
helps them to build a feeling of control.
Trading is a field where everybody knows exactly how you perform. CTG PTG encourages this
situation because we know that real winners are the one who like open competition and who dont
mind the results. People who like challenges and reach their goal are transparent. Moreover this
attitude helps cooperation with managers.

10.13.2. Desires and Faith
The desire to succeed is essential but it is not enough in itself. Only when you have the faith in
yourself you will become successful. Even If you have strong desires, if you dont firmly belief that
they will happen, they wont. If you have doubts in times of adversity you will abandon your goals
too early and your fear of failure will become a reality without faith. You may have been really
close to the goal. Nothing is impossible to the one who has faith. However faith is not easy to
acquire. We can give you the desire but we cannot give you faith. This part must come from you.
The trading level you will reach is proportional to the level of faith that you have. Faith is perhaps
one of the highest forms of belief a person can possess it is a conviction. The reality is that it is
hard to find people with faith because they are already successful somewhere else. The personality
that makes good traders is the same personality that makes athletes, pop stars and successful business
man.
10.13.3. Intuition, Experience, Feeling the Market
Intuition is sometimes conceived by people like it is

coming from nowhere. In fact intuition builds with
experience. As a new trader, you wont have a lot of
intuition when you start trading. As you watch the
market everyday some patterns will creep into your
subconscious. When the signs of those patterns are
repeated, your subconscious will send a message to you
conscious to warn you that something is about to
happen. At the beginning you will feel strange and wont be able to act on this message. As you
receive more of them you will start to act on it and make money. Eventually the goal is to extend
that process until you feel the market like you feel your heartbeat when you just finished exercising.
That is what we call feeling the market. Then you can say you have the market in your veins. You
become one with the market
10.13.4. Instinctive people and Analysts
People who rely more on their instinct and intuition and less on their conscious analysis make the
best traders. The reason is because the market is normally very fast and you dont have time for
conscious analysis. By the time your analysis is done the opportunity disappeared. That does not
mean that there are no opportunities that can be analyzed, but most of the time the market is too

fast for analysis. Moreover, people who analyze too much like to be more than 55% sure of their
decision. In reality that is all that you need to be successful. Analysts will look for the 75% to 80%
sure trade that happen only 2 or 3 times a day and they will miss all the other opportunities (55%,
60% and 65%).
10.13.5. Open Minded Traders are the best
People who are open-minded make the best trader for many reasons. First they tend to consider
more options and if the best decisions are uncommon they have a better chance to discover it.
Second they will not be obstinate if one solution does not work.
Finally they will tend to be more creative and will find opportunities that nobody would have
thought about. There is one big problem. Rare are the people who will admit that they are not
open minded. That character is most of the time recognized by people around you. Moreover,
when you tell somebody that he is not open minded he becomes normally very susceptible.
10.13.6. Imitation
Imitation is one of the secrets of successful people. To be successful you simply need to imitate
successful people. However, most people like to do things their own way because they get all the
merit for it. They think success is more rewarding if they rely only on themselves.
You probably see the relation with transparency here. Transparent people would not mind
imitating others to get successful. There is also a relation with jealousy and admiration. Jealousy is
bad. Jealous people dont imitate success. They deny it. People with admiration are the one who
progress by imitating a model.
The reality is that if you rely only on yourself for success you may still get successful but it will take
you much more time. And in the end you might be frustrated to realize that you are using the same
recipe that you would have used if you would have been imitating somebody else. There are many
examples of successful traders at CTG PTG. There are also many books that have been written
about successful trader. Find a role model in trading and imitate his success!

10.13.7. Experience, Learning Curves and constant learning:
Experience comes with time and you have to respect this fact of life.
There is little doubt that you will get better at trading as time goes. You
will learn from your mistakes and you will see patterns that you did not
see before. Dont fall in the trap of thinking yourself as an experienced
trader when you are not one. Also keep in mind that you will keep
learning. If you are overconfident about your experience you will
considerably slowdown you learning process.
You will refuse some ideas because you think you already know about it.
Always be like a child who is curious and wants to learn about everything there is to know!
10.13.8. Crowd effect, Contrarian
People normally like to be comforted by the opinion of others. In life if most people agree with
you, you think you are heading the right way. The problem with that philosophy on the market is
that most of the time when everybody is bullish the market is about to take a dive and when
everybody is bearish the market is due for a rebound. Traders will have to learn to have their own
opinions to be successful. They may even need to be contrarian.
Most of the time the majority is wrong but the order flow cannot be wrong. This is because if 9
people are wrong and sell a stock the 1 guy who is buying is right. However this guy is big because
his volume is 9 times bigger than the average. This concept explains why it is bullish/bearish when
many active traders are selling/buying and the stock is not moving. The concept of active/passive
will be explained later in the course.
It may be hard to believe but two traders one long and one short at the same time can both make
money. The solution is in the time frame of your trade and in selection of the right gateway.

10.13.9. Personal Life and Self Evaluation
Life is life and trading is trading. Dont mix them together. If you are really tired or are dealing
personal problems and cannot forget about your problems, your trading will be deeply affected. Try
to have your mind empty before you start your trading day. Meditation is a very good way to do
that. Self evaluating your condition is always very helpful. Before you start a new trading day you
should rate how you feel about your life and how fit you are mentally to trade. In the event that
you cannot forget about your concerns in your personal life, that you are sick or tired, it may be a
good idea to reduce your trading size and event stop trading if it does not go well.
Trading can also affect your life. Dont let a bad streak of trading days interfere with your social life
or else your friends and family will have to suffer from your up and down like the up and downs of
the market.

Chapter 11
Trading Strategies Concepts
11.1 As many strategies as traders
There is not just one way to make money in the market. You will find one strategy you like. However, the
best style is a mix of many trading styles. It also needs to be a strategy that works in both an up and down
market. Observe other traders and you will notice that even if good traders are always have the same
profitable positions, they have different way to get filled on their order and they manage them differently.
11.2 Active Trading and Passive Trading
Passive Traders add liquidity and Active Traders take it away from the market. There are times to be active
and time to be passives. If a stock is trending and moving fast you might not be able to get it as a passive
trader. If a stock is trading in a tight range with a lot of levels on both sides it probably does not make sense
to try to trade this stock actively.
You should instead place limit orders on the right gateway and try to make the spread. Choosing between
Active Trading and Passive Trading is easier when you know the stock and when you have experience.
However there is one rule of thumb. As a proprietary trader at CTG PTG at least 70% of your trades should
add liquidity. The vast majority of the volume at CTG PTG is Passive. The best Passive traders are trading 8
stocks and more at the same time and have buy and sell orders on each one of them. This improves their
chance of getting filled. Once they are getting shares they are doing what we call working the order. Passive
trading requires more patience while active trading requires more reflexes.
11.3 Bid-Ask Size:
You should always look at the Bid-Ask size before considering sending an order. You should also ask
yourself all the size is real or if there is hidden size (more on that latter). You should normally be trying to
get long if the biggest side is the bid and short if the biggest side is the offer. However if you are the last in
line and do not use proper order routing you might be the last one to get fill and by then the size is not big
anymore.

11.4 Hotkeys
Traders are using keyboard shortcuts to trade more effectively.

At CTG PTG we use mostly F1 to F12 keys with combinations
of SHIFT and CTRL. It is very important to configure them in
an efficient manner. Also Traders should always use the numeric
keyboard for numbers because it is a lot faster than using the numbers on the regular keys. The fastest trader
with the best setup of keys will have a definite edge.
11.5 Inventory Management
Trading a stock is all a lot about managing your positions. Even if a stock is a good buy you dont have
infinite buying power and you need to buy an amount that both you and the market can handle. A rule of
thumb is that you should never have more long/short shares than the level 1 bid/offer can take. This way, if
there is an abrupt shift in the market you can get out flat at the market.
Another concept is to try to take advantage of both sides of the market. That is to say your inventory needs
to be fluctuating from long to short. To reduce your risk you should have both long and short stocks in
your overall day trading inventory. With experience you will be able to handle a bigger inventory and you
will therefore make more money.
11.6 Partial Fills & Odd Lots
If your order is filled partially and slowly this is normally a sign that you are on the right side of the market
since small orders are normally coming from small uninformed traders. However if this happens in a cycle
you should be concerned and evaluate if you are getting filled buy on bunched order (more on that later).
The same thing is true if your orders are filled with odd lots since they are mainly from small pockets of
traders that are most of the time on the wrong side of the market.
11.7 Making Trades
You are getting information about the market every time you make a trade. The more trades you make, the
more you know about the stock. It should not be hard to make more than 200 trades per day after a couple
of weeks. After a month or two you should already reach 300 trades per day. The best traders at CTG PTG
are making over 600 trades per day!

11.8 Tape reading and block trades:
Watch the tape and try to look for block trades (more than 5k share). Bigger lots normally represent bigger
players who are normally better traders. Are big trades happening on the offer or on the bid? Are they
happening with market makers, ECNs, specialists or dark pools? Try to notice what happens on the stock
you trade after those block trades. You will notice patterns and will be able to profit from it in the future.
11.9 Round Numbers
Stocks tend to have difficulty to go through round numbers. A good strategy to use is to avoid going long at
7 8 and 9 digits and short at 1 2 and 3. The worst digit to be long at is 99 while 01 is where a good trader
does not want to be short. This is especially true when there is a large amount of orders at the round
number.
11.10 The level 1 spread
Look for level 1 spread greater than 1 cent on active stocks. They normally offer the opportunity of getting
a fill in the middle. If the stock is liquid and that there is a midpoint pegging order that is buying or selling
you could make an easy profit.
11.11 Multiple Orders, Multiple Fills
Traders can post their orders on more than one ECN in a duplicate format. This is useful when all ECNs are
getting filled as you get a piece off all the action. However you need to be very prudent as if there is a Swipe
of the level you are on, you will be ending up with more shares than you originally wanted. We call that
multiple fills, Double Fills for two orders, Triple fill for 3 orders, etc. The trading software of CTG PTG
allow you to set OCO (one cancel the other) orders.
This allows traders to have many orders canceling when another one is getting filled. Smart traders are able
to judge how many orders to put to get a good fill. Normally you would not want to put 3 orders to buy
when you would not want to be long in case of a swipe.

11.12 Short Squeeze
Normally short positions are taken for a short period of time as

the tendency is for stocks to go up in the long term. Therefore
traders with a short position are potential buyers of the stock.
When there are too many people short in a stock the pressure to
the upside when they cover will make them loose on their short
position and will also force other traders that are short to cover.
This is called a short squeeze. The more people are short, the
more potential buyers and the more this risk to happen.
11.13 The Axe
Try to find the market maker that is the most active on the stock you
trade. If that market maker is buying go long, if he is selling go short.
The axe is nowadays harder to spot since market makers are now
using ECNs. However you can still figure it out if you observe
carefully the level 2. Never pick a fight with the axe: YOU WILL
LOSE. These are extremely powerful and experienced traders,
taking opposing sides to them will rarely work so instead, push with them. Many Axes trade such large
blocks they must move share prices substantially to make a profit. By playing the midpoint of the axe, many
traders can make good profits.
11.14 Advanced order types:
You want to know what other traders are doing but you dont want them to know what you are doing.
Advance orders are useful to hide your real intentions. When you will start trading on a bigger scale you will
start using those orders more often.
11.14.1. Hidden Orders
They are invisible orders. For example you can use hidden island orders. If somebody sends an order on the
opposite side you will be executed and you will also get the rebates. However if somebody send a visible
order on the same side and price than you he will get in front of you in execution priority. Hidden NSDQ
are also useful when you are shaving on stocks lower than 1$. You can keep the priority even if you are

invisible if your price is 0.1 cent higher than the visible order. This trading style used to be very popular but
there are now trading robots that are automatically shaving and it is really hard to get ahead. Also dont
forget that stocks under 1 dollar have a different rebate schedule. If you want to start using hidden order talk
to the manager about your strategy to make sure that it is reliable.
11.14.2. Reserve Orders
They are orders that are showing fewer shares that they really are. For example ARCA could be showing
100 shares on the LEVEL 2 while if you send a sell order for 500 shares at the market on ARCA it will be
fully executed and ARCA will still be showing 100 shares. Reserve orders are also called Iceberg orders by
many exchanges for an obvious reason. You should use reserve orders if you want to get fill on a large
number of shares without showing your real interest. If you are long on a stock that has a reserve order on
the offer you should try to get out by offering. In fact since traders using reserve orders are sophisticated you
should be trading on the same side than them.
11.14.3. Adding Liquidity only
They are orders that will not be executed if they have to remove liquidity. They are useful to avoid paying
the charges by mistake on BATS. Do not use post order by default cause you wont be able to get out if you
have to be fast.
11.14.4. Test Orders
They are orders sent to know how the market is taking them. For example you can send a small locking
order on MLNM to see if there is a Buyer/Seller on the dark pool. You can also send them on NSDQ or
ARCA to see if other ECNs to see if there are other traders that are following you (Pegging Orders). Test
orders are also very useful on the NYSE to see what side the specialist is filling faster. Normally orders a
getting filled faster if they are on the wrong side of the market.
11.14.5. Following orders or Pegging Orders
They are robot orders that are automatically following the best bid/offer on a stock to be first in line. Those
orders are easy to get advantage of if you are experimented. On average try to be long if orders are following
on the bid and short if orders are following on the offer.

11.14.6. Switching Orders
They are orders switching from the bid to the offer and vice versa. If you see 1000 P printing on the Time
& Sales and you see an extra 1000 shares on ARCA immediately after you should notice that there are some
scalpers on the stock. When there are too many scalpers, Market Makers will try to shake them by swiping
the side they seem to prefer on 2 or 3 levels.
11.14.7. Bunched Orders
They are trades that happen consecutively as a pattern on the ticker tape. For example 500 shares on ARCA
at the offer every 30 seconds. This normally means somebody is trying to buy a big number of shares
without the block trade being seen on the tape (50k share in 50 minutes). This is normally bullish and a big
opportunity if there are prints on the bid at the same time. If you are able to get long at the bid you know
this is only a question of time before you can get out on ARCA at the offer.
11.15 Relative Strength
Relative strength is one of the most important principles a trader can use to trade successfully. By comparing
stocks to others in its sectors, or its sector to the market as a whole, a trader will have a frame of reference
from which to anticipate movements in the stocks price. By knowing the relationship between the stock
and the market, a trader can predetermine what his reaction will be to each of the three potential market
movements (up, down and no change).
There are several indicators a trader can use to determine a stocks strength relative to its sector. A trader
interested in trading XLNX for example, a semi-conductor company, he could watch INTC, a sector
leader in the semi-conductor group. Typically, the larger companies of each sector will move before the tier
two stocks within the same group. Traders, then, can use INTC as a leading indicator for XLNX. Sector
indices also act as leading indicators for stocks within the sector. Using the same example, traders trading
XLNX could watch the Philadelphia Semi-conductor Index ($SOX.X) as a leading indicator. In this case it
may be possible to have the index leading the sector leader, which could in turn be leading the stock in
question.
When comparing a stock or a sector to the market as a whole a trader will typically rely on the S&P Futures
as a market indicator. There is a great deal of liquidity within the S&P Futures and this attracts traders and
volume which allows the S&P Futures to, usually, reflects the mood of the market before other indicators
including sector indexes.

No matter what a trader is comparing, a stock to a sector leader, a sector leader to the market, it is the net
change as a percentage that he will be interested in. This percentage change will allow the trader to establish
the relative part of the relative strength equation.
Once the trader has determined whether the market is strong, based on percentage change, he must
determine how a specific sector is performing relative to the markets strength. After identifying a strong
sector on a strong market day the trader must identify the strongest stocks within this sector.
A trader who has taken the time to determine at stocks relative strength before playing it will be better off
than the trader who simply jumped into the play without this information.
It is recommended that traders not play stocks within the first ten to twenty minutes of the trading day. This
is to avoid getting involved in a trade before the market has decided which way the stock is going to go. It is
probable that stocks that gap up at the open will pull back. This occurs because market makers will attempt
to pull back stocks that they were forced to assume a short position in while covering the demands of the
public in order to cover them. If a trader jumps in prematurely he could find himself caught up in this
movement.
Relative strength as a trading mind set will see an astute trader identifying a stocks movement relative to the
entire market. Ideally a trader will play a strong stock long on a strong day and weak stock short on a weak
market day. If XYZA is ripping each time that the leading indicators begin moving upwards then the stock
is obviously a candidate for the long play. If the same stock tanks each time that the leading indicator takes a
bearish posture than it becomes an ideal short candidate on weak market days.
Relative strength can be played a number of ways. Often traders can watch stocks that are down only a small
percentage while the market is down a substantial amount. The patient trader will wait for a reversal in the
markets direction and long the stock in question as soon as the leading indicators begin to rally. This is
technically strategy, known as a reversal, and is covered in more detail elsewhere. Typically these stocks sit
flat all day as the market declines and moves higher in short, rapid movements at each rally.
Again, relative strength is a mindset that every successful trader employs whether he realizes it or not.
Always know the strength of a stock relative to the market before trading it.

Chapter 12
Your First Battle
12.1 Simulation
The simulation trading part lasts 3-5 days from 9:00 4:30 p.m. E.T. During this segment you will get
hands on experience with CTG Trader Pro, the execution software. You will be able to customize the
Level II windows, time of sales, Trading Monitor and Position Summary windows. You will also customize
your charts with the futures and appropriate stocks. Once your first day passes, you will be allowed to tailor
your screen setup to your exact requirements and a multitude of other settings to your own personal
cocktail. The data is in real time and the executions actually go to a simulator. The goal of training on
simulation mode is not to make thousands of dollars, but rather to learn all the keys and to execute as many
orders as possible with every execution system. The traders that can execute faster than others will definitely
have an edge. Being able to get in front of orders quickly will ensure you a faster and better fills. During this
segment, you will identify 2 - 3 stocks that you will follow and trade on a daily basis.
Money made or lost is not an issue. The main goal is to get you comfortable with the system.
Be attentive and ask questions. Others experience will help you greatly.
Keep keystroke mistakes to a minimum. With real money these mistakes can be extremely costly.
12.2 Live Trading
Once you have mastered the keys and have identified 1 or 2 stocks to trade, you will then begin live trading
at the 100 shares level.
When you are profitable and confident, your Max Shares will be increased to 300. You may be at that level
after 1 week (depending on your progression) and then move to 500 1000 shares level. We expect you to
meet strict criteria before you increase your share level. Your buying power (BP) will also be increased
accordingly.
You will also print your daily blotters (trades) on a daily basis, and before the beginning of the next trading
day we will meet and analyze the trades. You will highlight your best and worst trades and fill a small
summary card for your trading day and explain why and what happened.

Chapter 13
Applied Trading Strategies
13.1 Scalping: The Rebate Game Market Maker Game

Trading this style requires a patient, focused and versatile trader. The goal of this style is to make profitable
trades and to receive rebates from the different ECNs such as NASDAQ, ARCA, BATS, EDGX and EDA
13.1.1. Action
Look and observe 5 to 10 slow moving stocks stocks with prices ranging from $1 to $10. The intra-day
ranges of these stocks will vary from $.10 to $.30 depending on the stock, news and market condition.
Mergers can be good candidates also for this type of trading
Traders will look for thick stocks e.g. stocks with lots of depth at every price level. You will place bids and
offers at the 1st or 2nd price level. Traders will choose from the list of stocks given to them that meet certain
criteria for ideal bid & offer stocks:
1. Depth at every price level, lots of M.M. & ECNs.
2. Small intra-day range ($.10 to $.30)
3. At least 1 million shares traded daily.
4. $.01 between price levels.
13.1.2. Strategy
The objective is to BID/OFFER on ECNs according to the execution happening in the stock. Use the
ECN on which you have the best change to get executed. For the side use the one that has the biggest size
but you still have to get a chance to get an execution. Make sure the other side is not too big and that there
are some executions on it. Make sure that the stock is in a range and not tanking or ripping. As soon as you
get filled, OFFER/BID half or the entire amount IN ORDER NOT TO SHOW SELLING PRESSURE.
13.1.3. Averaging Down Once or Twice Maximum

Example: You bought 1000 shares at 2.62 and stock drops to 2.60, bid another 1000 shares at 2.60 to get an
average price of 2.61. Offer immediately 2000 shares at 2.61. You will not make a profit on the trade but
you will get the rebates and if the stock moves up and you are the last in line, you might be able to cancel
your offer and make a profit by reoffering at 2.62.

13.1.4. When to get out on the downside
Use your experience and judgment to decide if you should wait 2, 3 cents down or flat trade the stock.
Your biggest winners should be at least as big as your biggest loser. You should not take a lot of 3 cents loss
when you are only taking 1 cent profits. As you become more experienced your winning trades should be
twice as much as your losing trades.
13.1.5. Warning:
This group of stocks doesnt move much during the day. Some stocks will stay at the same price level for a
long time without any execution before moving 1 or 2 cents up or down quickly. When there is major
news on the stock, especially on mergers they can easily rip or tank by 20 cents or more.
13.2 Momentum Trading

Trading this style requires a focused, versatile and disciplined trader. The objective of this trading style is to
make profitable trades and to take advantage of the credits. Mastering buy and sell hot keys is imperative to
be successful as a momentum trader.
13.2.1. Action:
You will trade only one stock all day long. The stock price should be above 5 dollars but less than 20. The
stock should also have a daily volume of 3 million shares. You will trade mainly for profits. Because of the
nature, volume and movements of these stocks, you will have to be an active trader, which means taking the
bid or offer (SM/FOK) more often than bidding and offering. As a momentum trader you should find stocks
that move in tandem with the market
Traders will choose a stock from the list of stocks given to them. They are in the NASDAQ 100 and move
in the direction of the market most of the time. You will put up a Stock Watch window with the S/P
Futures / NASDAQ Futures, the COMPX, the sector index and some stocks. Before trading you need to
determine the relative strength of your stock versus the sector, the NASDAQ 100 and the futures. Is the
stock you are trading stronger or weaker than the overall market and sector?
A successful momentum trader takes time to observe the movements, patterns and volatility of the stock
they are trading. As guidance, you will look at the NASDAQ futures, a chart of the stock and listen to the
squawk box. The intra-day ranges of these stocks can be 0.25 to $1.00 depending on market conditions.
Try to get long when the overall trend of the market/sector is up and that the stock is slow to react. Use the
strategies explained earlier about relative strength.

13.2.2. When to get out on downside
Use your judgment and experience to decide whether you should wait $.03 or flat trade the stock. In
some cases 3 cents might not be enough to survive the whipsaws. That is the reason why this style is
more risky. Look at offer side piling up, futures and time of sales to gage whether or not you should stay
in the trade or exit. When the stock is going your way, try to let run your profit.
13.3 Opening Strategies
13.3.1. What is the Opening?

We know that the stock market opens at 9:30. But, how is the
opening price determined? Why is it sometimes so different
than the previous closing price? How can we buy or sell at the
opening price? Those are questions we will answer.
First, the opening process is different depending on what

exchange a stock is traded. Generally the opening price you
will see in yahoo finance or in the newspaper is defined by the
first trade at or after 9:30. This can create some distortions on the NYSE since the real opening price is
considered to be the NYSE opening cross operated by the specialist which is sometimes a bit delayed,
especially on the days when there is considerable news. On those days the opening price you see in yahoo
finance might well be the first print on an ECN or ATS which you cannot participate in with a NYSE
opening order.
There are opening orders for 3 destinations: NYSE, NASDAQ and ARCA. In all cases there is only one
matching price for all orders that are matched: the price where the maximum number of shares can be
matched. Therefore, the opening is a great opportunity for price improvement on small orders. For
example, even if you bid an OPG order at 13.00 you can get executed at a much better price which could
be at 12.65 if there is a very big selling imbalance at the open.
The Website of ARCA, NASDAQ and NYSE are a good resource to learn the different characteristics of
each respective opening process
13.3.2. Notion of fair value at the open

Fair value is the expected value of a stock assuming there is no considerable news or change in supply and
demand. Normally, if the stock market is opening at the same price where it closed the previous day; a
given stock, without specific news or news on its sectors, should also open around the same price where it
closed. Now where should a stock price open when there is a premarket move of the whole market? This
depends mostly of the volatility of the stock. Stocks that have the same volatility than the market should

open up or down by about the same in percentage. If a stock is twice as volatile as the market the percentage
change from open to previous close should be twice the change on the market. Beta is often used as a good
evaluator of the volatility of a stock.
But how do we know what will be the percentage change of the index at the open? Well the futures are
giving us a big hint on that. One of the best ways to do that is also to look at the change on the SPY and
DIA directly since the futures are not carrying dividend and there might be a change caused only by many
ex-dividend stocks.
13.3.3. Envelope Strategy

To take advantage of a few inefficiencies at the open when the opening price is far away from fair value
astute traders are sending a basket of opening order bidding below and offering above fair value. They will
normally do this using a fix percentage difference from the fair value. There are some strict rules to this
strategy. Traders will not have stocks that have news in their baskets. They will normally quickly get out of
the stock they got executed after the open. If not they will hedge their positions to avoid the impact of
market movements. Envelope can be made on NYSE stocks, NASDAQ stocks and Arca stocks. All NYSE
stocks will use NYSE opening orders and NASDAQ stocks will use NASDAQ or ARCA opening orders.
One problem with the envelope strategy is that you have to manually calculate and adjust the price every
day. This can be done in excel and then copied in a basket in CTG Trader PRO
13.3.4. Back Testing of envelope strategy

It is possible to determine if an envelope strategy for a stock is successful by
looking at the history of opening price compared to fair value. It is easier to do
that on NASDAQ stocks than on NYSE stocks for the reasons we discussed
before. The best way to get data to back test is to export it from yahoo finance
and put it in excel.
13.3.5. Positive Trading Scenario

Lets assume the SPY closed at 90.00. The next day before the open the SPY is trading at around 91.25.
ABC stock closed at 20.00. We also assume that the stock has the same volatility than the market or a beta of
1. The stock also has no news and no news on its sector. The fair value of the stock should be around
20.28. With a 1% envelope, a trader should put a bid at 20.08 and an offer at 20.48. If the opening price is
lower than 20.08 or higher than 20.48 the trader will participate at this price. Lets assume the trader put
those bids and offer in place. At the open the stock prints 19.97. One minute following the open the stock
is at fair value and the trader makes a profit of 31 cents per share.

13.3.6. Negative Trading Scenario
In the same example the trader could have received a fill a 19.97. However, he realized a news
announcement was released at the open and the stock plummet immediately to 19.50 after the open.
13.3.7. Risk of this strategy

The main risk of this strategy resides in the overexposure in the
event where there is a big market move in the first minutes of
trading and the traders does not have time to offset his positions.
This is more likely to happen on a day with a big gap on the
overall market. Another risk is the risk of making a mistake in the
calculation of the price. Since, traders are sending many orders the
risk of making a small mistake that would propagate to the whole
basket is very important. Another risk is linked to the illiquidity of the most performing stocks for this
strategy.
13.4 Dark Pools Strategies
13.4.1. What are dark pools, how they work?

Dark pools are Alternative Trading Systems do not publish their order book in the Level 2 window. Dark
pools are generally used by institutions to try reducing market impact when placing large orders. Dark
liquidity pools offer institutional investors many of the efficiencies associated with trading on the exchanges
public limit order books but without showing their hands to others. Dark liquidity pools avoid this risk
because neither the price nor the identity of the trading company is displayed. Most dark pools also offer
advanced algorithm trading to improve chances of executions of big orders. Since there is no book the
execution range is based on the NBBO to avoid prints outside of the market
13.4.2. Dark pools features

From pegging orders to VWAP adjusted orders Dark pools are offering very sophisticated ways for
institutions to send their orders. Lets review the main features:

13.4.3. Pegging Orders
Pegging orders are orders that are following the NBBO when its moving. For example an order to buy
could be linked to the NBBO bid price. Orders can be pegged to the bid or the offer but they can also add
an increment to it. For example, there could be pegged orders at bid + 1 cent or ask -1 cent. Orders can also
be pegged to the midpoint of the NBBO or to the last price. Generally, pegged orders have a pegging range
or a pegging limit, they stop pegging once the price reaches a certain level.
13.4.4. Execution size features

Institutions can set their orders to different setting for the size of their executions. There can be a minimum
or a maximum per tick, a percentage of the displayed size or a minimum first execution. For example, there
is an order for 50 thousand shares but if it is crossed with a small order it wont execute.
13.4.5. Linking and Scanners

Many dark pools offer the possibility of linking orders to other dark pools. After scanning their own pool, if
they dont find liquidity for an order, they will scan the book of other dark pools by sending one order on
one dark pool after another.
13.4.6. Anti predatory trading algorithms

Predatory trading is a style of trading that tries to take advantage of big institutions orders on illiquid stocks
by forcing them to get in or out at a bad price. A predatory trader will send a test order to the dark pool to
see if there is a big institutional order standing in the dark pool.
Dark pools designed features to prevent the predatory traders to discover hidden liquidity too easily. Some
of those features includes: the possibility of orders to flash in the book at random cycle time; the possibility
of splitting the orders in parts over a specific period of time; and the possibility to not execute orders against
an IOC.
13.4.7. Positive Trading Scenario

Stock ABC is trading at 23.19 and looking at the time and sales window you see a lot of D prints hitting the
bid. You get out of your 100 shares position at 19, and then you resend a bid on the dark pool at 19. Once
again you get a fill instantly. At this point you have to see how many shares are on the bid and if the stock is
shortable. If the stock is shortable and there is an amount that is not too high on the bid (its a question of
judgment and experience here) you can hit the whole level and lower the offer to 19. Then you need to test
if the dark pool is still crossing the market and selling at 18. Lets assume there were 1000 shares at 19. Now
you are short at 19 and send a bid for 100 shares at 18. If you get filled you also take the 18 level. Assuming

there is 500 shares at 18 you are now short 1300 shares. Once again you test the lower level and you get a
fill. You hit 17 for 800 shares and test positively 16 for 100. You take 16 for 600 shares and test 15
positively. You are now short 2500 shares at an average price of 17.68. you decide that this is enough and
bid the whole lot at 15 and get filled. You made a profit of about 67$ without the fees.
13.4.8. Negative Trading Scenario

Stock EFG is trading at 34.22 and you see a lot of D prints hitting the bid in the time and sales window.
You send an order on the dark pool and get filled immediately. You get out of your 100 shares at 22 and
retest the dark pool for 100 shares on the bid and get a fill. You hit the bid for 1200 shares, retest the bid at
21 and once again you get a fill. You take 900 shares at 21 and test 20 for 100. But now you order is not
filled. You are now short 1900 shares and there are no more sellers on the dark pool. You look at the levels
on the offer and its awful. There are only 800 shares total displayed shares until 30. You get out at an
average of 31 for a loss of 200 dollars.
13.4.9. How institutions defend themselves

Institutions know that predatory traders are taking advantage of them. But the price is still lower than it
would be if they would have to display their big orders to the public market. They try to use advanced order
types like minimal first execution size to avoid being fooled by basic predatory trading. Once in a while they
will even post a bid when in fact they want to sell to trap the predatory traders. Once they know the trader
as a considerable opposite position they will cancel their dark pool order and post on the other side.
13.4.10. Good rules this strategy

Avoid illiquid Stocks and high priced stocks
Avoid trying to go through a reserve order
Avoid accumulating too many shares until the order on the dark pool as proven its size
Avoid trying to push a stock in the same direction it just made with a big move in the last minute you are
probably late to the party
Avoid buying or selling too many shares at round numbers to push the stock
Avoid taking too many shares if you cant push the stock, its better to get out at a small loss when the
institution is still there
Always evaluate the size of the opposite level before getting in a considerable position

13.4.11. Risk of this strategy
The main risk of this strategy comes from the fact that you only rely on the belief that there is a big order in
the dark pool. You are therefore exposed to considerable liquidity risk if you find out the liquidity in the
dark pool is much smaller then what you expected. The biggest profits, but also the biggest lost, are made
on very illiquid stock with this strategy. Another risk of this strategy is the inability for you to evaluate the
reward to risk ratio before hand in most cases. This comes from the fact that most illiquid stocks have
reserve or hidden orders in their books.

Appendix A
Intraday Trading Periods
Before 9:30 am: Pre-market
Very illiquid market, you should not trade unless you have a lot of experience. No trainees are allowed
to trade Pre-Market. Traders are also preparing their OPG baskets, checking news and will send their
orders at 9:27.
9:30 am: Market Open
9:30 am 9:45 am: Opening Session
The market moves very fast. Trainees should only observe the level 2 and time and sales windows as it
is really hard to trade.
9:45 am - 11:15 am: Morning Session
Normal Trading
11:15 am - 2:15 pm: Lunch
Slow Trading
2:15 pm 3:45 pm: Afternoon Session
Normal Trading
3:45 pm - 4:00 pm: Closing Session
At 3:40 closing imbalances will be released to the public and traders who are planning to submit a
market on close order should be looking at getting into a position.
Some very big moves can happen at the close and it is advisable to reduce your position. However as
you get more experienced this is the time of the day to make the most money
4:00 pm: Market Close
By this time all your position should be flat and you should not have any pending. Do not wait to be
fills and receive rebates at the close!!! Start thinking about getting out of all your positions and cancel
all your pending orders at least 5 minutes before the close.
After 4:00 pm: Post-market
If you have positions at this time you will have to explain yourself. Any open orders following the
close will result in some form of disciplinary action.

Appendix B
Office Rules
Keep your trading station clean and dont let food or any garbage sit around. Also clean the
kitchen after you make a snack. Wash your hand after using the bathroom
Respect other people in the office
Avoid conversations with risk managers
Do not criticize the work of risk managers when they are getting you out of your positions
Do not criticize the software or CTG PTG
Use appropriate language, avoid vulgarity.
Do not use your cell phone or any messaging service in the office unless you have special
permission.
Ask us in advance if you want to have people coming to the office to meet you
Ask the manager if you intend to trade a new stock that nobody has heard about
If the office is offering food please share an equal part with everybody
Please try to be patient if there is a problem with the software.
No positions or pending orders after 4PM! We are day traders!!
Do not average down more than twice and cut you loss at reasonable amount
Tell the manager if you are in a position with a considerable loss
Report any illegal trade to the manager
Do not disturb other traders. Do not shout or coarse language
Arrive at least 45 minutes before the market open
Do not leave the office before the market closes without letting us know
Call the office if you dont plan to come to the office for various reasons
Talk to the managers in private about any personal issue with them or other traders
No fraternization in the office.
If something or somebody offended you please tell the manager
Please tell us about any you would like to have in this list

Appendix C
Suggested Reading List
Daytrading into the Millennium: Michael P. Turner
The 21 Irrefutable Truths of Trading: John H. Hayden
Trading and Exchanges - Market Microstructure for Practitioners: Larry Harris
Probably the most in-depth book about the trading industry. A real bible for the financial market
professional.
The Electronic Day Trader Successful Strategies for On-line Trading Marc Friedfertig
Managing members of Broadway Trading took an inside view of the stock markets, both NYSE and
NASDAQ. They walk you through the entire online trading process and introduce you to cutting-
edge trading technologies and investment strategies in todays exciting virtual trading markets.
A Beginners Guide to Day Trading Online Toni Turner, Oliver Velez
Award-winning journalist Toni Turner teaches you how to safely and successfully day trade in the stock
market. Straight forward, accessible, interactive and easy to follow, A Beginners Guide to Day Trading
Online provides clear instructions and tips, explains day traders unique psychological characteristics,
provides a basic technical market analysis, outlines market fundamentals, reveals professional traders
strategies and skills and describes what to look for in an online broker.
How to Get Started in Electronic Day Trading David S. Nassar
Introduces the reader to the inside rules and methods of Direct Access Trading. This comprehensive
guide can help you to create an account, get direct access to NYSE's SuperDot, NASDAQ's SelectNet
and SOES and ECNs.
The Market Wizards and The New Market Wizards Jack Schwager
Trading To Win: The Psychology of Mastering the Markets Ari Kiev
Strategies for the Online Day Trader-Advanced Trading Techniques for Online Profits:
Fernando Gonzalez and William Rhee
Reminiscences of a Stock Operator: Edwin Lefevre
Getting Started in Technical Analysis: Jack Schwager

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Preface

Welcome to Capital Traders Group, LLC

CTG PTG - Trader Manual 1

Market and Exchanges .................................................................................................... 10

1.1 Exchanges ......................................................................................................... 10

1.2 Markets ............................................................................................................ 10

1.3 Primary and Secondary Market ............................................................................ 10

1.4 The NASDAQ .................................................................................................. 11

1.5 The NYSE ........................................................................................................ 11

1.6 The AMEX....................................................................................................... 12

1.7 The CME ......................................................................................................... 12

1.8 The LSE ........................................................................................................... 13

Orders, Transactions and Positions ................................................................................... 14

2.1 Orders .............................................................................................................. 14

2.2 Transactions ...................................................................................................... 14

2.3 Limit Orders...................................................................................................... 15

2.4 Market Orders ................................................................................................... 15

2.5 Long Positions ................................................................................................... 15

2.6 Short Positions................................................................................................... 16

2.7 Inventory .......................................................................................................... 16

2.8 Unrealized Profit/Loss ......................................................................................... 17

2.9 Realized Profit/Loss ............................................................................................ 17

Auction Market The Specialist ...................................................................................... 18

3.1 Auction Market ................................................................................................. 18

3.2 Characteristics of Auction Markets........................................................................ 18

CTG PTG - Trader Manual 3

3.4 The Specialist Responsibilities.............................................................................. 19

3.4.1. Specialist as Auctioneer.................................................................................... 19

3.4.2. Specialist as Agent ........................................................................................... 19

3.4.3. Specialist as Catalyst ........................................................................................ 19

3.4.4. Specialist as Principal ....................................................................................... 19

Dealer Market Market Maker ........................................................................................ 20

4.1 Dealer Market ................................................................................................... 20

4.2 Market Makers .................................................................................................. 20

4.3 Market Makers VS Prop Traders .......................................................................... 20

4.4 Market Makers Restrictions ................................................................................. 21

4.5 Market Makers Responsibilities ............................................................................ 21

4.6 Market Markers Sources of Income ...................................................................... 21

Electronic Communication Networks and Dark Pools ........................................................ 22

5.1 Electronic communication Networks .................................................................... 22

5.2 ECNs Features and Characteristics ........................................................................ 22

5.3 Dark Pools ........................................................................................................ 23

Basic Software tools and trading concepts .......................................................................... 24

6.1 Level 2 a level beyond ...................................................................................... 24

6.2 Tape Reading .................................................................................................... 23

6.3 Trading Monitor and Position Summary ............................................................... 24

6.4 First in First out (FIFO) ....................................................................................... 25

6.5 Volume ............................................................................................................ 25

6.6 Liquidity ........................................................................................................... 25

6.7 Rip, Tank, Swipe .............................................................................................. 25

6.8 Volatility ........................................................................................................... 26

6.9 Gateways .......................................................................................................... 26

4 CTG PTG - Trader Manual

6.11 Books ............................................................................................................... 27

6.12 Retail Traders and Prop Trader ............................................................................ 27

6.14 Lots, Round Lots, Odd Lots ................................................................................ 28

6.15 Cross Lock ........................................................................................................ 28

6.16 Rebates ............................................................................................................ 29

Market Indicators Information Concepts ........................................................................ 30

7.1 Indexes and Averages .......................................................................................... 30

7.2 Dow Jones ........................................................................................................ 30

7.3 S&P 500 ........................................................................................................... 31

7.4 Futures ............................................................................................................. 31