Prop Trading

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World Trade Securities

A Theory Course for the

New Proprietary Trader
 Welcome
Proprietary or Prop Trading at WorldTrade
Securities is about honing the skills
necessary to make money in the stock
market. It is about learning how to think in
a totally different way. Individuals will
come to comprehend stock movements in a
completely new way. Over the course of the
next several months, you will be pushed to
your mental and emotional limits as you
learn to trade one of the highly lucrative
stock exchanges.
Prop and DAET trading is not a new
phenomenon. Its theoretical origins stretch
back to the Bucket Shops of the 1920s.
Prop and DAET trading is, however, always
on the cutting edge with its connection to
the fluid NASDAQ market (and other
markets) and, therefore, its subsequent need
for constant revision and updates in
methodology.
From today on you will learn:
 Basic Market Theory and Relevant Exchange Details (
First afternoon session)
 Market Trading Rules and Regulations
 Execution Systems
 Understanding what effects Security Prices
 Trader Psychology and its importance
 Practicum with live trading and daily lessons
 Familiarization with keyboard execution
 Introduction to Tools (Charts, Futures, Squawk Box)
 Supervised exercises and drills
 Development of co-ordination and skills
 Strategies and Discipline
 Hone decision making and execution abilities
 Customized performance and disciplinary parameters to
maximize performance
Once you have successfully passed all the necessary
milestones, you can look forward to one of the most
lucrative career opportunities available to you. We
wish you much success in your upcoming trading
endeavors.
Trade Well.
 An amazing and a Special Opportunity – the unknown is YOU!

The risk is your time - it will take time. Embrace this opportunity! You are very fortunate to
be sitting here!

Do you have what it takes to be a trader?

Ask yourself: do I always have to be right? If so, you’ll have to give that up.
Can I accept my mistakes, learn from them and keep coming back for more? If not, you’ll have to learn
how.

Prop Trading is speculative - it will humble you; it will shake all the confidence you have in your
abilities. Prop/Day trading will 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 don’t need training or that you know it already may mean you won’t be around long enough to
get through that learning curve. This curve is steep and it varies from person to person, and everyone
loses money in the beginning. There are typical reasons why people lose money and fail at day
trading and you should be aware of them before you enter this business.

*In the beginning, people lose money at day trading because of keystroke errors; for example, they’ll use
a buy key when they really wanted to use a sell key: or people will fail to cut their losses because
they don’t hit the right keys at the right time.

*Ultimately, people who fail at trading, fail because they lack discipline. They succeed because they are
disciplined and consistent!

“Bulls make money, Bears male money, Pigs get slaughtered!”

Jim Kramer
 Suggested Reading List

Electronic Day Trading Made Easy: Become a Successful Trader

Misha T. Sarkovich

Electronic Day Trading Made Easy offers readers step-by-step tools to begin trading safely and effectively.
The supply and demand law, the trading alerts, execution systems etc.

Electronic Day Trading 101: How to Day Trade like a Pro

Sunny Harris

Sunny Harris gives you the goods on trading hardware and software, choosing an online broker or ECN
and opening a trading account. She also tells you what you need to know about personalizing your
own trading system, trading both from home and from a salon, doing a fundamental or technical
analysis and researching stocks online.

Trading To Win: The Psychology of Mastering the Markets

Ari Kiev

A combined effort by both a trader and a psychiatrist, Trading to Win: The Psychology of Mastering the
Markets features real-life case studies. The book offers a step-by-step, goal-oriented approach to
trading that emphasizes ways to keep emotions in check, conquer self-doubt and focus on the
winning strategy.
 Training Course Outline

The Swift Trade Securities Proprietary Training Course is comprised of two basic
segments: Theory and Practice.

Major theory topics will be presented in lecture format that will class discussions.

Practical course instruction will focus on daily strategies and discipline and will be
supervised closely.

Graduation from the program is attained once you meet the criteria set out by the
Program Manager.
Head Traders will also work with the Student to help reach certain Milestones.
We ask you to be punctual and respectful of other Students & Traders.

World Trade Securities reserves the right to remove participants from the program at
any time.
Let’s first define what we do…
 Proprietary trading is a term used to describe when the firm's traders actively trade
stocks, bonds, options, commodities, or other items with its own money as opposed to its
customers' money, so as to make a profit for itself.
 Individuals or firms trading equity (stock) markets as their principal capacity are called
stock traders. Stock traders usually try to profit from buying lower than they are selling
the stock, etc within daily short-term price volatility. Trades last anywhere from several
seconds to several minutes, even hours and days if authorized. The stock trader is a
professional market participant.
 There have always been professionals who made their living off of trading. It wasn't
until recently, however, that technology enabled individuals who weren't working for a
brokerage to directly access the markets.
 Proprietary or Prop Trading at World Trade is about honing the skills necessary to make
money in the stock market. It is about learning how to think in a totally different way.
Individuals will come to comprehend stock movements in a completely new way. Over
the course of the next several months, you will be pushed to your mental and emotional
limits as you learn to trade one of the highly lucrative stock exchanges.
What are Capital or Equity Markets?
 Capital markets bring together companies looking for money to expand with investors
who have money to invest. Companies need money to grow: to buy equipment, build
facilities, hire workers, and fund research and development. To finance their growth,
companies can raise money known as capital, by “going public.” This means the
companies are making their stock or shares available to the public.

 By doing so a company sells part ownership of its business to each investor, or

“shareholder.” This method of raising money is called “equity financing.” Investors
may be individuals (often called retail investors) or financial institutions such as banks
and firms dealing in mutual and pension funds (usually referred to as institutional
investors).
 What a Stock Market Does
 The stock market provides a mechanism where people who want to own shares of stock can buy
them from people who already own those shares. This mechanism not only matches buyer and
seller, but it also provides a way for the buyer and seller to agree mutually on the price. Note that
when you buy shares in a publicly traded company such as Microsoft, you are not buying the shares
from the company itself. You are buying the shares from another investor who already owned the
shares. This is what economists call a secondary market for shares.

 This is different from the primary market in which the company sold the shares directly to investors
in the first place. The initial public offering (IPO) occurs when the company first sells shares to the
public and arranges for the secondary trading of its shares.

 Financial markets perform a number of vital economic functions in our economy. First, the primary
market provides promising companies with the capital they need to invest in growing their
businesses. Second, financial markets provide investment opportunities to investors. Third, stock
prices provide important signals about where the most productive opportunities are. These signals
channel capital to the areas that investors think are most productive. Finally, the financial markets
provide important risk-management tools by letting investors diversify their investments and
transfer risk from those less able to tolerate risk to those who can better tolerate risk.
The History of Trading
 Yet, the biggest edge is knowledge – specifically knowledge gained through experience –
and when it comes to the markets – the only way to gain exp is to trade. The edge provided
by having learned firsthand how markets really behave – what works and what does not in
trading, and how to accept losses unemotionally and capture profits efficiently, cannot be
understated.
 There is no substitute for hands-on experience. Trading is not just about understanding
market concepts, it is about making decisions and acting on them – and the only way to get
better is through experience.
 Trading is not investing and it is not gambling. Trading is more active than investing, a
trader minimizes risk by taking advantage of shorter term price moves compared to a buy-
and-hold investing approach.
 Prop and DAET trading is not a new phenomenon. Its theoretical origins stretch back to
the Bucket Shops of the 1920s. Prop and DAET trading is, however, always on the cutting
edge with its connection to the fluid NASDAQ market (and other markets) and, therefore,
its subsequent need for constant revision and updates in methodology. Trading is not
investing and it is not gambling. Trading is more active than investing, a trader minimizes
risk by taking advantage of shorter term price moves compared to a buy-and-hold investing
approach.
 Traders vary significantly in their approach and strategies.
 “If you are not trading short term you are not trading to make the most money.”
YOU Access the Markets DIRECTLY through
WTS / Traders Advantage

NYSE

Amex

Nasdaq

LSE
And others to follow …
Execution and verification are immediate.
Understanding Market Structure
From a glance, the difference between the New York Stock Exchange (NYSE
( ) and Nasdaq may not be obvious.
The NYSE lists household names like Coca-Cola, Wal-Mart, Citicorp, and General Electric, whereas the Nasdaq
is home to many of the tech giants such as Microsoft, Cisco, Intel, Oracle and Sun Microsystems.
Besides the heavy tech weighting, the fundamental difference between the two exchanges is in the
way securities are traded.

A physical Trading Floor vs A Virtual Trading Floor

NYSE, AMEX, LSE, CME Nasdaq, Option Markets
Partially Electronic Fully electronic

Order Flow
Customer (buy or Sell) > Broker > Customer (buy or Sell) > Broker >
Floor Runner > Specialist > Market Maker > Broker > Customer
Floor Runner > Broker > advised of fill
Customer advised of fill
Understanding Market Structure
NYSE / AMEX
The NYSE is an auction market that uses floor traders to make most of its trades – until recently.
NYSE membership is limited to 1,366 members, who collectively own the NYSE. In order to become a
member, one has to purchase a membership, called a “seat”, from another member who wants to sell.
Memberships have recently been selling in the neighborhood of $2 million.
Each stock on the NYSE has a specialist; this is a person who oversees and facilitates all of the trades for a particular
stock. If you wish to buy a stock that trades on the NYSE, your broker will either call your order to a
floor broker, or enter it into their system, called the DOT system, where the Specialist matches the order himself
if it is large, or electronically if it is small.
A securities exchange that facilitates trading through a blend of an automated electronic trading platform and a
traditional floor broker system. Hybrid markets give brokers a choice between participating in the exchange
through the traditional floor broker system, or the faster automated electronic exchange system. In
January 2007, the New York Stock Exchange (NYSE) became the prominent example of a hybrid market. The
NYSE, one of the world's oldest major exchanges, operated for years with its system of human brokers manually
making trades on the trading floor.
However, as of January 24, 2007, the NYSE moved to allow almost all of its listed stocks to become available for
electronic trading. These stocks can still be traded in the traditional method on the trading floor, but brokers also
have the option of trading them electronically.

The key advantage to electronic trades is speed - they take less than one second to execute, while the average
floor broker trade typically takes about nine seconds.
 NYSE / AMEX

 The Market as it has been for over a 100 years….

 A very unique exchange in it’s own right since there isn’t another purely SPECIALIST driven market in the
world.

 While it’s true that most of the markets in the world are still AUCTION markets without market makers, the
NYSE is the only market which still relies very heavily on individual specialists who control the stock, and
this is just now beginning to change with the new NYSE Hybrid Market.
 The Exchange has a capacity to trade up to 10 billion shares per day (the record was June 24 th, 2005 at 3.1 billion).
 Now, 100% of orders are electronically delivered directly to the trading posts, booths, or handheld computers on
the Floor in the following ways”
 As of January 24, 2007, all NYSE stocks can be traded via its electronic Hybrid Market (except for a small group
of very high priced stocks). Customers can now send orders for immediate electronic execution, or route orders to
the floor for trade in the auction market. In excess of 50% of all order flow is now delivered to the floor
electronically.
 NYSE / AMEX

 On the trading floor, the NYSE trades in a continuous auction format. Here, the human
interaction and expert judgment as to order execution differentiates the NYSE from fully
electronic markets. There is one specific location on the trading floor where each listed
stock trades. Exchange members interested in buying and selling a particular stock on
behalf of investors gather around the appropriate post where a specialist broker, who is
employed by a NYSE member firm (that is, he/she is not an employee of the New York
Stock Exchange), acts as an auctioneer in an open outcry auction market environment to
bring buyers and sellers together and to manage the actual auction. They do on occasion
(approximately 10% of the time) facilitate the trades by committing their own capital
and as a matter of course disseminate information to the crowd that helps to bring buyers
and sellers together. The frenzied commotion of men and women in colored smocks has
been captured in several movies, including Wall Street.
 Product
Liquidity Provided for NYSE-Listed Securities Enhancements

by Electronic Venues Away from the Floor

35%

30%
29.16%

25%

20%
19.11%

15%

10%

Electronic Volume
Internalized Volume
5%

0%
May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07

Data includes NASDAQ,ARCA, and other electronic venues.

Data through May 2007.
Source: NASDAQ Market Center Trade Reporting, CTA Tape A Data
 Product
NYSE Share Volume in NYSE-Listed Securities Enhancements

85%

80%

75%
% NYSE of All Market Share Volume

70%

65%

60%

55%

50%
50.6%
May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07

Data through May 2007. Data represents percentage of total share volume reported to the consolidated tape.
Source: NASDAQ Market Center Trade Reporting, CTA Tape A Data
Understanding Market Structure
American Stock Exchange

 The American Stock Exchange (Amex) evolved out of the brokers who stood on the curb outside the New
York Stock Exchange to trade stocks that did not qualify for the NYSE. Indeed, even after the brokers
moved indoors in 1921, they were known as The New York Curb Exchange. As on the NYSE, trading on
the Amex is conducted through an advanced centralized specialist system, and memberships to trade are sold
as “seats.” Membership is limited to 807 regular members who transact business in equities and options, and
57 options principal members who execute transactions in options only. The Amex is the second-largest
options exchange in the U.S., after the Chicago Board Options Exchange. (The CBOE also trades a few
equity products.) The Amex pioneered exchange traded funds such as SPDRs (pronounced “spiders”) and
now does a substantial business in such funds, while continuing to operate a small equities business. In 1998,
the American Stock Exchange merged with the NASD, and continues to exist as an independent entity under
the NASD family of companies.
Understanding Market Structure
Regional Stock Exchanges

Years ago, stock exchanges naturally sprang up in many cities to accommodate the needs of
local investors. Even cities like Wheeling, WV and Spokane, WA at one time had their
own local stock exchanges. Advances in communication, such as the telegraph and
telephone, reduced the need for so many exchanges, and many of them merged with
other stock exchanges. However, a number of these so-called regional stock exchanges
still survive. Although some of these exchanges have a few exclusive “local” stocks,
these exchanges mostly compete in the business of trading the more active NYSE- and
Nasdaq-listed stocks. The regional exchanges resemble Nasdaq market makers more
than the NYSE floor. Although some of the regional exchanges still have physical
trading floors, for the most part, their specialists are acting as dealers, filling
electronically submitted orders from retail firms. The regional exchanges include the
Boston, Chicago, Cincinnati, Pacific, and Philadelphia exchanges. Interestingly enough,
the Cincinnati Stock Exchange is located in Chicago. In late 2001, the SEC approved
the launch of the Archipelago Exchange (ArcaEx), through the union of Archipelago
ECN and the Pacific Exchange, and a replacement for the Pacific Exchange, and a
replacement for the PCX’s current floorbased equities marketplace.
Understanding Market Structure
Nasdaq (an Electronic Exchange)

Nasdaq began trading in 1971 and introduced the national Market System, and by 1995, Nasdaq had
surpassed the New York Stock Exchange in reported trading volume.
The Nasdaq, an electronic exchange, is sometimes called "screen-based" because buyers and sellers are
connected only by computers over a telecommunications network.
Market makers, also known as dealers, carry their own inventory of stock. They stand ready to buy and
sell Nasdaq stocks, and they are required to post their bid and ask prices.
Although the NYSE has a far greater total market capitalization, Nasdaq has surpassed the NYSE in the
number of both listed companies and shares traded.
Here the Market Maker, competes for customer order flows by displaying buy and sell quotations for a
guaranteed number of shares. The difference between the price at which a market maker is willing to
buy a security and the price at which the firm is willing to sell it is called the market maker spread.
Because each market maker can either buy or sell a stock at any given time, the spread represents the
market maker's profit on each trade. Once an order is received, the market maker immediately sells
from its own inventory or seeks an offsetting order. The market makers play an important role in the
secondary market as catalysts, particularly for enhancing stock liquidity and, therefore, for
promoting long-term growth in the market.
Market makers must maintain continuous two-sided quotes ( bid and ask) within a predefined spread. A
market is created when the designated market maker quotes bids and offers over a period of time.
They ensure there is a buyer for every sell order and a seller for every buy order at any time
 Prop Trading Fees
Prop traders have fees too. Traders are paid on the true NET Profits after all fees. (Profit sharing starts at 35% and goes to
50% based on monthly performance. This scale is tiered and the higher percentages are paid upon the dollar values
above the given thresholds.)

These fees fit into two separate categories: Fixed and Variable.

Fixed Fees

The Markets charge monthly entitlement fees to the users of real time Market Data. WTS China covers that for
Its traders in China. Patrick will clarify this more.

Variable Fees
These fees are also called pass-through fees. Charged by ECN’s and Markey Gateways.
They are charged to WTS or any other Brokerage by ECNs, the NASDAQ, SEC, and NASD; and, as the term implies,
are passed on to the user who incurred the fee. Further discussed in table that follows.

SEC Fees
-charged to enable the SEC (Securities and Exchange Commission) to operate.
-charged on the sale side of every trade
This fee is the SEC levy and is $15 per million. It is calculated as:
# of Shares x Price of Shares x $0.0000468

NASD Fees
-charged to enable the NASD (NASDAQ’s Regulatory Body) to operate as well. Even trades on the Listed Markets are charged when a Broker /
Dealer is a member of the NASD.
This sell side only fee is charged as:
# of Shares on the Sell Side only x $0.00005
 Execution Systems, their Fees and Descriptions
 Please note the combined pass-through fee schedule below. These fees are passed onto the user/trader and are pure from the
source (ENS’s, the Specialist Broker of a Listed Market, the SEC and NASD). For others see sheet.

Also make note of the

billable fees for all Nasdaq Listed ETFs
listed issues (as of (NYSE and AMEX,
August 1st, 2003) excluding ETFs)

Nasaq Add $0.00200 $0.00200 $0.00200

Remove $0.00300 $0.00300 $0.00300

Aca/NYSE Add $0.00200 $0.00200 $0.00200

Remove $0.00300 $0.00300 $0.00300

Direct Edge Add $0.00200 $0.00200 $0.00200

A/X Remove $0.00300 $0.00300 $0.00300

Trac Add $0.00225 $0.00225 N/A

Remove $0.00290 $0.00290 N/A

Brut Add $0.00250 N/A N/A

Remove $0.00270 N/A N/A

Bloomberg Add $0.00170 N/A N/A

Remove $0.00200 N/A N/A

CrossFinder
Remove $0.00250 $0.00250 $0.00250
Basic Market Terminology

 NYSE
 NASDAQ
 NASD
 Bid
 Offer/Ask
 Short
 Long
 Flat
 …continued

 Market cap
 Small cap
 Large cap
 Market vs. Limit orders
 Quote Level 1
 Inside price
 Market price
 Bull Markets versus Bear Markets
 Crossed & locked markets
 …continued
 Electronic Communication Network (ECN)
 Execution Systems
 The Spread
 Price Levels
 Intraday range
 Rip
 Tank
 Tick
 Uptick
 Downtick
 Auction versus Dealer Markets
Auction Markets

An auction market is run by a Specialist. The Specialist is employed to keep an orderly flow to the market.
They are highly knowledgeable about the stock(s) that they trade. In simplest terms, the Specialist
matches up buy and sell orders as they enter what is called “The Specialist’s Book.” If there is no
matching orders the Specialist may opt to buy/sell a quantity of stock.

REMEMBER: The Specialist’s primary responsibility is to keep an orderly market.

 DEALER MARKETS

In a dealer market all buy & sell orders are filled through a Market Maker’s inventory.
A Market Maker is a trader employed by a securities firm to manage their inventory of a particular stock(s).
A Market Maker will buy stock from anyone placing a sell order and put the stock in their inventory.
A Market Maker will sell stock from their inventory to anyone placing a buy order.
When a Market Maker is not filling orders they are free to trade their own account. When they are trading their own account, they are free to buy
and sell as they see fit as long as it does not violate the wishes of their company. This is how they adjust their inventory.

REMEMBER: A Market Maker is an individual working for a firm. They are hired because of their expertise in both the market and a particular
sector or stock.
 WTS’s ACCESS TO DEALER MARKETS

Unlike an online brokerage, which is just an electronic order routing

system, wts uses an electronic order execution system.
This system bypasses any broker and goes immediately to the Market
Maker or ECN to be executed immediately.
Execution and verification are immediate. This is the primary
advantage of Direct Access Electronic Trading.
Electronic Communication Networks (ECN’s)

 What is an ECN?

 A place in Cyberspace where buyers & sellers meet to buy and sell shares of equities – on
either the AMEX, NYSE or NASDAQ
 Different market places can have more or less ECN’s than other centers.
 Pricing structures vary from markets and the different liquidity venues.

 Their Business Model

 They usually pay when a participant provides liquidity and charge when a participant removes
liquidity.
 The general 2/3 model covers the understanding of most expected rates.

WTS utilizes most ECN’s and negotiates the best possible rates for our traders. Our large
volumes allow us to achieve the very best fee structures possible .
Trading Software
We utilize 2 separate software platforms: ProsperPro (execution software) and E-Signal Professional (charting software).
All software is operated on P4’s from Dell. These computers are directly connected to the markets and Internet access from these trading
stations is strictly prohibited. (Internet stations are separately provided.)

ProsperPro – Execution Software for WTS Prop Traders

Here are the main windows and their functions:
Stock Window

Starting from the top left, line by line, here is what you see on the above Stock Window:
· Company name on top bar (INTEL CORP).
· Stock symbol {INTC}.
· Last: the price of the last transaction.
· Change: the difference between the current bid price and the previous day’s closing price.
· High: the current intraday high bid price.
 Q: this letter denotes whether the stock is on the National Market (Q), the Small Cap Market (S) or the New York
Stock Exchange (N).
 D: this letter signifies whether the current bid is an Uptick (U) or a downtick (D).
 B: the buy default share amount.
 Close: the previous day’s closing price.
 Volume: the number of shares traded.
 Low: the current intraday low bid price.
 10x44: the largest bid share lot by largest ask share lot at Price Level 1.
 S: the sell default share amount.

Quote Level 1 is shown here as 20.52 and 20.53. Quote Level 1 is also called the inside quote or the current market price.
This indicates the highest bid price (21.52) and the lowest offer price (21.53).

Level II reports a list of buyers and sellers on the National Quotation System. This data is reported in two columns. The
left side lists those who are bidding to buy the stock with the highest bid on top and the lowest on the bottom. The
right side lists those who are offering to sell the stock with the lowest offer at the top and the highest offer at the
bottom. These two sides display five columns:

1) Tick (up arrow, down arrow or side arrow) indicates whether that individual has increased the price, decreased the
price or refreshed the bid or offer at the same price.
2) Type indicates whether the buyer or seller is a market maker, an ECN (l) or ISB (J).
3) Market Maker or ECN symbol
4) Price
5) Share size (in 100s).
 Blotter

Above is a view of the Open Positions tab in the Blotter. Starting from the top left, here is what you
see:

•Symbol: shows stocks in which the trader has open positions.

•Side: Long, Short.
•Shares
•Per Share
•P/L: real time profit/loss
Summary tab:

•Trades Today: number of keystrokes (not round trip trades).

•Shares Today: number of shares traded.
•Buying Power: total buying power
•Profit and Loss: Gross Realized, Unrealized and SEC Fee
•Exposure: Long, Short and Current.
Trade List tab:
•Symbol
•Side: Buy, Sell
•State: Fill, Partial Fill
•Price: Price per share
•Shares
•Gateway: Order Execution
•Gross PL: Gross Profit/Loss from execution
•Time
 Order Entry Window

The Order Entry Window displays a trader’s pending orders and activity log, and displays
all transactions (including cancels, timeouts, and rejections).
 Time And Sales Window

Columns, left to right:

Time of sale
Bid/Offer: A = Offer (Ask), B = Bid, blank = transaction
Price
Number of shares
Market of Execution: Q = NASDAQ, S = NASDAQ Small Cap,
N = NYSE, A = AMEX, M = MWSE
E-Signal Charting Software
Here is a basic chart. It has the stock (SUNW) displayed with a 1 minute timeframe.

The top left of the chart indicates:

1) the type of chart (intraday, daily, monthly, etc.)
2) the stocks, indices or indicators that are graphed
3) the price component(s) being graphed (open, high, close, bar, etc.).
The vertical axis indicates price. The horizontal axis indicates time.
The bottom portion of the chart denotes volume. Volume is one of various studies available on E-Signal
Charting software.
Charts have many various uses and applications for traders. These include:
•Identifying a general trend during the day
•Comparing stocks to general indicators, i.e. S&P Futures
•Predicting pivot points based on previous lows, relative volume, candle size, etc.
•Identifying which stocks are moving and which are ranging
•Identifying the time of when stocks and futures move and if they are closely related.
Trade Execution – the vital aspect of trading

The fill is what counts – not the wish!

Software mastery and understanding
Quality market entry increases the probability of success
and can even mitigate losses
Understand quality entries and how to use software to
reduce risk/stress
Avoid the ‘negative’ edge resulting from poor execution
Keystrokes – Want a price?

Keystroke errors will cost traders more capital in the beginning of their careers than misinterpreting the market. Each
day, students will lose capital from accidentally pressing a button, pressing the wrong buttons, or even pressing the
correct buttons more than they should have.

A trader must be willing to exit any trade that was initiated in this manner immediately. To manage a position without a
plan will be difficult and may lead to large losses. The trader who is willing to exit these accidental positions without
thinking will lose less capital than the trader who hesitates.

The most common mistake made by new traders is unintentionally buying or selling stock. This mistake is often a result
of watching one stock window while having a second stock window active. For example, if a trader wants to buy GE but
his GM stock window is active, then he will accidentally buy GM instead of GE. That’s why initially, the trader will only
have 1 stock window open.

The second most common keystroke error results in the trader getting multiple fills. Inexperienced traders often complain
of getting more stock then they wanted or selling more than they had. There are a number of possible scenarios in which
this could happen but all can be classified as one type of trading error: keystrokes. The trading terminal will not send an
order that it has not been given. If a trader has purchased/sold more than they wanted it is because the trader has sent
more orders than she intended. The trading terminals at Swift Trade have been setup to help reduce these types of trading
errors by slowing the key speed, however, these errors
See below the Standard Key Stroke Layout as per template and Keystroke Software Test – we will use the
NASDAQ Template for all MM Execises
NASDAQ – OTC Market
Keyboard
Keys Keystroke Name Description

This allows you to sell stock by offering it out via the Brut ECN.
F1 BRUT OFFER The offer is placed on the ASK side of Level II. If filled, you
make the spread (if not crossed).
This allows you to sell stock by offering it out via the Nasdaq.
F2 Nasdaq OFFER The offer is placed on the ASK side of Level II. If filled, you
make the spread (if not crossed).
This allows you to sell stock by offering it out via the Arca
ECN. The offer is placed on the ASK side of Level II. If filled,
F3 ARCA = OFFER you make all or part of the spread (if not crossed).
Sends a Nasdaq sell order to the current bid/National inside
price.
F4 Nasdaq SELL
Sends an ARCA Sell Order to the National Quote/Inside Bid.

F5 ARCA SELL
This allows you to sell stock by offering it out via the Direct
Edge A ECN. The offer is placed on the ASK side of Level II.
F6 Idirect Edge A OFFER
This allows you to buy stock by bidding for it via the Direct
F7 Direct Edge A BID Edge A ECN. The bid is placed on the BID side of Level II. I

Sends an ARCA Buy Order to the National Quote/Inside Offer.

F8 ARCA BUY

Sends a Nasdaq buy order to the current offer/National inside

F9 Nasdaq BUY price.

This allows you to buy stock by bidding for it via the Arca ECN.
F10 ARCA = BID The bid is placed on the BID side of Level II. If filled, you make
all or part of the spread (if not crossed).
This allows you to buy stock by bidding for it via the Nasdaq.
F11 NASDAQ BID The bid is placed on the BID side of Level Ii.

This allows you to buy stock by bidding for it via the Arca ECN.
The bid is placed on the BID side of Level II. If filled, you make
F12 BRUT BID all or part of the spread (if not crossed).
 AMEX / NYSE – Listed Markets
Sends an order to the Specialist Book - Offer side.
Beware – to Cancels can be very slow! You are providing liquidity for
F1 LISTED OFFER the Specialist.
(to the Specialist) Allows you to make the spread.

Sends an Nasdaq Sell Order to the Inside Bid. Will match against
F2 NASDAQ ELL / FOK an y NQ Bid if at the Inside Price. Additional price variance is
suggested.

This allows you to sell stock by offering it out via the Direct Edge A
F3 Direct Edg eA OFFER ECN. The offer is placed on the ASK side of Level II. If filled, you
make the spread (if not crossed).

Sends a Sell Order to the Specialist Book/Inside Bid. Will need to

LISTED SELL ORDER wait for Specialist to fill this order.
F4 (to the Specialist)

This allows you to sell stock by offering it out via the Nasdaq ECN.
The offer is placed on the ASK side of Level II. If filled, you make all
F5 Nasdaq OFFER or part of the spread (if not crossed).

This allows you to sell stock by offering it out via the Arca ECN. The
offer is placed on the ASK side of Level II. If filled, you make all or
F6 ARCA = OFFER part of the spread (if not crossed).

This allows you to buy stock by bidding for it via the Arca ECN.
F7 ARCA = BID The bid is placed on the BID side of Level II. If filled, you make
all or part of the spread (if not crossed).

Allows you to enter a bid on Nasdaq on the bid side at any price
F8 provided you do not lock up the market.
Nasdaq BID

Sends a Buy Order to the Specialist Book/Inside Bid. Will need to

F9 LISTED BUY ORDER wait for Specialist to fill this order.
(to the Specialist)

This allows you to buy stock by bidding for it via the Direct Edge A
F10 Direct Edge A BID ECN. The bid is placed on the BID side of Level II. If filled, you
make all or part of the spread (if not crossed).

Sends an Island Buy Order to the Inside Offer. Will match against an
F11 Nasdaq BUY / FOK Island Offer if at the Inside Price. Additional price variance is
suggested.

Sends an order to the Specialist Book - Bid side.

Beware – to Cancels can be very slow! You are providing liquidity for
F12 LISTED BID the Specialist.
(to the Specialist) Allows you to make the spread.
CANCELLING ORDERS:

What you may cancel:

- Listed Keys or ECN orders either at the offer or bid or before they get processed (if you are quick
enough)

How you may cancel:

1. ESC Key: Hit the ESC key of the stock window you are currently in.

2. Click on the order (WHITE X in RED marked order) you wish to cancel in the Pending Orders section
of the Order Entry Window or Level II window.

3. Make sure the relevant stock window is active and then hold down the SHIFT key and press ESC. This
will wipe out ALL pending orders for that stock.

4. Click on the ORDER ENTRY window and hold down the SHIFT key and press ESC. This will wipe
out ALL pending orders for ALL stocks on your terminal. It must be confirmed by pressing OK on a
dialogue prompt window.

Other Relevant Keystrokes:

1. DOWN ARROW will flip back and forth between stocks on a Stock Window.
2. Arrow Keys to adjust price in Bid Offer Window

Many others – see Software Manual.

Definitions & Other Relevant Information (Part II)

 Charting (line, bar, candlestick)

 Technical Analysis
 Fundamental Analysis
 Lagging Indicator
 Leading Indicator
 Zero Sum Game
 Industry groups, market leaders, sectors & official sector
indices
 Volume
NYSE / AMEX / NASDAQ Regular Trading Session Schedule

From 9:30 am to 4:00 pm Eastern time – in China 9:30PM to 4:00 AM.

Please note: Closing price information reported externally by NASDAQ to market data vendors and the media is
based on the price at 4:01 PM EST when the market officially closes, and is not affected by other sessions.

Intraday Trading Periods

Before 9:30 am: Pre Market
9:30 am - 11:30 am: Market Open & Morning Session
11:30 am - 2:00 pm: Lunch – quiet time …good to take a break
2:00 pm - 4:00 pm: Afternoon Session
4:00 pm: Market Close
After 4:00 pm: Post Market Trading

NASDAQ Holiday Trading Schedule – all American Holidays

For further information: http://www.nasdaq.com/about/schedule.stm

Short Selling
Short Selling and Short Offering is, in essence the same basic move.

You are selling a stock without owning it, attempting, thereby, to profit from a down-move in the stock
(or any other tradable). Finally - a way to make money when the value of an issue goes decreases.
The stock must be borrow-able or margin-able.

The Markets, such as Nasdaq and NYSE / AMEX, define the conditions under which you can legally
short-sell a stock differently. You must either have an UPTICK or you must have a BULLET. Identify –
in your own words below what a bullet is.

Short Selling involves shorting the stock and selling it to the Bid. This is only allowed on an Up-tick
(increase in Bid – NASDAQ; increase in Tick on Listed Markets).
Short Offering involves shorting the stock by offering it on the ASK with the minimum spread of 1
penny intact. This selling is not a ‘forced sale’ but an attempt (fishing) to sell. The result of which does
not force the stock lower.

Other restrictions are that you cannot short a stock without a bullet (even by short-offering) if the stock
is trading below $5.00 / share. Also, the stock cannot be an IPO.

The student needs to understand this difference clearly.

 Illegal versus Erroneous Trades
Any trade occurring outside the current market (bid by ask as defined by the National Quotation System) is a clearly
erroneous trade. However, only if one of the two individuals reports the violation and asks for the trade to be broken will the NASD
step in and enforce the regulations regarding trading outside of the current market. A trade must therefore be made outside of the
current market and be reported by either the buyer or seller of the stock before anything will be done about it.

More often than not such trades go unreported due to either the relatively insignificant share amounts or price discrepancy.
However, there is always the possibility that any trader involved in a trade outside of the current market, through preferencing or
otherwise, will have the trade broken by the NASD.

Any trade typically broken by the NASD will be broken only if reported within fifteen (15) minutes of the trade. The NASD
can, however, take several days to complete this activity. In either case only the erroneous trade will be broken. Assuming that a
trader used the erroneous trade to flatten out a long position, the trader will find him or herself once again long in the same stock. If
the erroneous trade took place with the initial purchase of stock then the trader will obviously be flat. Whatever side of the trade was
made outside of market will be broken while the other half of the trade remains and this can lead to significant change in a trader’s
profit or loss.

Traders who are involved in a clearly erroneous trade are required to report the transaction to a staff member well within
fifteen minutes in order for Swift Trade to monitor trades that may be broken by the NASD. Early warning will allow Swift Trade to
notify the trader much sooner than if we must investigate in order to determine who actually was involved in the trade. The Island
ECN has its own rules in regards to erroneous trades: A clearly erroneous trade is defined as a trade that is out of market at the
time of the trade. For example, a trade that is $0.50 out of market on a $3.00 stock may be considered a clearly erroneous trade. A
stock that is $4.00 out of market on a $200.00 may be considered clearly erroneous. However, a trade that is $0.375 on a $100.00
stock may not be considered a clearly erroneous trade. Island reserves the right to determine a clearly erroneous trade and traders
are responsible for bearing the cost of the filing. The Island rule states that a filing fee of $0.40 per share will be charged for filing a
clearly erroneous trade to a maximum of $10,000.00. A $0.40 per share rebate will be issued to the contra party.

Illegal trades are less severe in the profit and loss to a trader’s blotter but can lead to serious ramifications if the trader is
thought to have purposely conducted an illegal trade and worse yet if he does not report it.
 Examples of illegal trades include:

•not declaring a short position (usually by overselling a long position)

•Shorting an IPO

Traders are responsible for any and all losses incurred through an illegal trade. Illegal trades not reported
by the trader will be identified through annual audits conducted by the Securities and Exchange Commission.
Traders who have made illegal trades and not reported them will risk financial penalty from the SEC. Serious or
repeat offenders may have their trading privileges suspended or revoked.

The trading software used at WTS attempts to keep a trader trading within the confines of SEC
regulations. However, it is possible, under certain circumstances that illegal trades will occur.

Erroneous trades can clearly cause much more havoc with a trader’s profit and loss then illegal trades.
Conducting illegal trades however can lead to a trader being financially penalized or having her trading
privileges suspended temporarily or permanently.
MARKET INDICATORS

 Averages
 Indices
 Futures
 Relative Strength
Trading Psychology (Part I)

“He who knows much about others may be learned, but he who understands himself is more
intelligent. He who controls others may be more powerful, but he who has mastered himself is
mightier still.”
-- Chinese philosopher Lao-tzu

It is difficult for beginning traders to accept, but the tools that are essential to successful DAET
trading do not necessarily come in the form of strategies but in the form of mind sets. Although
experience offers substantial evidence of the importance of both focus and discipline, many
new traders still find it hard to accept. However, focus and discipline are two characteristics
that can only be imposed on a trader by themselves. 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:

1) the ability to remain focused

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 will see a
well analyzed opportunity based on strategy & probability and then be able to execute a trade
automatically due to well practiced software and keystroke skills, as well as, highly concentrated focus.

2) the ability to remain disciplined

Discipline includes the ability to limit losses; the ability to exit a losing trade at a pre-set stop loss price;
the ability to recognize and to admit when you are wrong and being able to learn from it; the ability to
refuse to throw good money after a trade that has gone bad (averaging down); and, the ability to set rules
and follow them.
IPOs – Initial Public Offerings

 We do Not Trade IPOs!

Due To High Risk, High Volatility, and Not Being Able to Short.
 Trader
Order Routing Terminal

SwiftTrade

Confirmation
Executor
(Traffic
Cop)

System and
SN ISB SOES
Technical Troubles
Quote INCA
Servers

Transaction
Server

New York

NASDAQ ISLD INCA

The Other Market Participants:

World
Market Makers (GSCO,
MLCO, SLKC, etc.)

Quote Farm ECNs (BTRD, REDI, etc.)

(S&P
Comstock,
BMI)
Trading Psychology (Part II)

Goal Setting
Simply put, 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 notes, your rules, your lessons, etc. We have a way of
keeping track as well.

Goal Achievement
Goal achievement requires a combination of focus, discipline and setting realistic and
quantifiable goals. Setting a 2 cent stop loss per trade and a daily profit of $100, then $250 net is realistic for
the first 6 weeks.

Development of Self Control and Confidence

Confidence in one’s abilities can only come from positive past experience. Day traders who
practice focus and discipline are more likely to meet their goals which will provide them with a sense of
achievement and control. This in turn will help traders to develop confidence.

Maintaining Objectivity
It is essential that traders maintain a state of objectivity in order to be able to trade
successfully. Emotion will only cloud judgment and interfere with logical buy and sell decisions.
 Getting Started, Things to Do

Do’s and Don’ts

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 disempowers your trading
Don’t beat yourself up – there’s always a great trade waiting

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

Money Management
Control losses:
know what you are willing to risk and stick to it
never double up on losers
never take losers home overnight
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
the trend is your friend
know the intraday trading cycles
use indicators, indices, relative strength
News Sources & Internet Sites

•Always check CNBC.com, Yahoo Finance or Briefing.com for any news or

economic reports that could influence the movement of the stock(s) that you are
trading for the day.

•Other sources are www.island.com (most actives) and www.nasdaqtrader.com.

•Make it part of your morning routine

 General Trading Axioms

1. Plan your work and work your plan – our plan works, so follow it.
2. No overnight positions period.
3. Limit losses (trade with discipline) to 2-3 cents at most.
4. Buy into strength and sell into strength by buying at the ask and selling at the ask, once
understood and practiced begin bidding for the stock – this takes better timing skills.
5. Trade in full lots.
6. Have more than one reason for getting into a position (“when all the planets align”) – but
do not overanalyze – many times a technical trader looks at too much info, hesitates and then
misses the opportunity all together.
7. Don’t trade any stocks that are not approved by Management.
8. Don’t focus on profit or loss too much as long as you are working you plan.
9. Don’t “hope” a stock will do something. Make decisions based on what the market is
telling you.
10. Absolutely no averaging down.
11. You will only trade stocks with good volume. Volume provides liquidity; you can get in
and out easier. We suggest 1 million or more shares traded per day on average.
12. Take many small profits instead of waiting for that one ‘big’ trade.
13. Have rules for yourself and stick to them.
Sun Tzu- The Art of War for Traders and Investors
>>> Trade To Make Money – not for fun and games! <<<

>>> Concentrate! <<<

>>> When initiating a Trade – Always get the Edge = BUY the BID – SELL the OFFER! <<<

>>> When liquidating a Bad Trade – Give up the Edge and HIT the BID – or take the OFFER! <<<

>>> A scratch Trade is a WINNER <<<

>>> Make 1 Tick on a Million Trades – Not a Million Ticks on one Trade! <<<

>>> Discipline, Discipline, Discipline <<<

>>> Once you have a PROFIT – Never let it become a LOSS! <<<

>>> Do not be a ONE WAY Trader – be flexible <<<>>> Take a Break after 3 LOSING Trades in A ROW <<<

>>> Take responsibility and be willing to be humble when relearning! <<<

>>> Ask questions to review good and bad trades & choices/decisions! <<<

>>> Discuss opportunities – do not focus on what is not working! <<<

>>> Repeat decisions that WORK favourable - eliminate the ones that don’t! <<<

>>> Have measurable goals, track & appreciate progress, however small! <<<

>>> Realize that all large losses started small, get rid of them early on! <<<

Happy & Prosperous trading!