Kevin Haggerty

Kevin: In the context of confirming an uptrend or downtrend, how important is it for a stock close above its opening price (for an uptrend) or below its opening price (for a downtrend)? Keep up the good work.

Kevin Haggerty:

Obviously it’s very good when the stock closes above its open, but if I get a stock that’s traded above the prior day’s action, and it may have opened at the top of its range, closed below, still above the midpoint, and where all the action was above the prior day, I would not be unhappy; I’d be very excited. The most important thing to look at, I feel, is where the stock closes. It’s very important that it’s above that midpoint.

Submitted by ericrallen:

I hold overnight positions looking for gap openings. It seems on the NYSE, a stock that finishes strong at the high, opens lower before moving back up. This seems to always wash out the weak hands. Could you elaborate?

Kevin Haggerty:

The old rule of thumb was that if a stock finishes strong, and the market finishes strong, you hold a position overnight, the stock will probably trade higher the next day. The problem we have now is the S&P futures controls our openings. You have no way of knowing what kind of opening you’re going to get, and I think the reason you might see that is that maybe you had a stretch of down futures pre-opening of the NYSE. The perfect example is Micron Technologies. Who wants to get caught in a situation like that?

Submitted by Trial User:

Kevin, what’s the best way to use NYSE volume for intraday trading?

Kevin Haggerty:

All I do use is price and volume on individual stocks. If you’re referring to overall volume, when I’m taking a trade, I want to see the market dynamics improving, and that certainly includes increased overall NYSE volume as the market advances.

Submitted by dankur:

Kevin: It is said that the only traders to make it are those that have an edge. What would you say is your edge and what would you recommend to others to obtain an edge? Thank you for your insights.

Kevin Haggerty:

I feel my edge is understanding market dynamics and how institutions buy and sell stock. You can improve your edge by not trading patterns with a mechanical resolve, but by keeping a closer eye on what the size is doing and concentrating on whether the stock continues to trade on the offered side or at a minimum, the mid point of the bid and ask (assuming you’re a buyer). The ratio of wins-to-losses on intraday trades increases dramatically when the market dynamics are in the direction of your trade.

Submitted by traderx21:

Kevin, how do you determine where to take profits on your trades?

Kevin Haggerty:

The cliche is “I let the market determine when I take the profit.” Assuming the dynamics are good, I will usually sell 1/3 – 1/2 of my position up 1/2 and then attempt to get a moon shot on the second half. A moon shot is when you’re getting 1 1/2 to 2 points on a trade.

Submitted by dankur:

I understand that sometimes a specialist will show size on the offer to shake out weak longs, to satisfy bigger buyer or will show bid size to shake out shorts to help a seller. How can you tell when the size shown is for shakeout purposes?

Kevin Haggerty:

First of all, it’s hard to tell whether it’s for shakeout purposes, because the specialist is really regulated by the market performance committee. But you can’t tell whether it’s a specialist or whether it’s a customer, unless you’re actually talking to a broker and you’re getting names on who executed the stock, and unless you’re an institution or a major brokerage firm, you won’t get that information. How I do it now, trading from a machine upstairs, I look for two things: whether the stock is following it down being offered on a minus tick, or whether it’s always offered on a plus tick. But neither of those indicate what the specialist is doing. If the size follows the market down on a sell or increases on the upside, obviously there’s a buyer or a seller (depending on your side), but you don’t know whether it’s a seller that’s selling stock in order to buy stock, which is the case if somebody has a married put, but it more than likely will not be the specialist influencing the market because that is against the regulations that he lives under.

Submitted by Moderator:

This concludes our Live Forum for tonight. We’d like to thank Kevin Haggerty and all the attendees for their contributions. We got hundreds of questions, and did our best to answer as many as we could.

Submitted by Kevin Haggerty:

I want to thank everyone for joining me. This forum will be archived should you wish to return to it.

Submitted by traderx21:

Kevin, can you explain why almost all specialists make money?

Kevin Haggerty:

It’s often said that all specialists make money, but I think that when you do have exceptions, those specialists that do not make money end up going out of business or have to merge with other specialist units. The primary reason why the specialist makes money over a period of time is because they’re always trading with the edge, which is buying on the bid and selling on the offer. The second reason is that they see all the order flow that is posted in their electronic books that is told to them by floor brokers indicating what they have to do in a stock and what they have behind their initial order to do. To some extent, they don’t divulge all of it. So if I’m a specialist, and I see that order flow, and I see the look of greed or fear in their eyes when they’re at my post, and if I have just average skills in recognizing market dynamics, I will make money. The exceptions, and they are very critical to understand, and why the specialists do such a good job on balance, is when they take a tremendous amount of risk in the following situations:

Submitted by Trial User:

Does the activity of the regional exchanges (phlx, otc, cse, bsx, etc.) affect the trading style of the specialist?

Kevin Haggerty:

I think the regional stock exchanges do an excellent job and they don’t get credit for it. They have created a competitive environment for the NYSE specialists and it only serves to make the entire auction market as strong as it currently is. Also, these regional specialists are very conscious of price improvement. Although they don’t have the same capital as the New York specialists, at their level of trading, they’re as good as New York, as far as price goes.

Submitted by art:

Kevin: When you first enter a trade, before it moves in your favor, where do you put the stops? In other words, how much do you initially risk on a trade? I’ve found that if I give them room, I lose too much, and if I keep them tight in the beginning, I am too often stopped out. Thanks.

Kevin Haggerty:

I keep my stops very tight, never more than 3/8, if it’s an intraday trade. On short-term position trades, which are never more than ten days, I don’t like to risk more than 3% – 4%. If a stock is trending on an intraday trade, I expect to be right immediately, or I will scratch the trade, take my quick loss. Sometimes, it might be at the same price I entered, but if not, I will re-enter the trade at the original entry point, if given the opportunity. I’d rather take three quarter-point losses and make one point, and still come out ahead on one out of four trades. The other criteria is the amount of capital that you are utilizing.

Submitted by Moderator:

Welcome to the tradingmarkets.COM Live Forum, featuring Kevin Haggerty.

Submitted by Trial User:

The IBD has a list of specialist short positions. Do you think this is a useful tool?

Kevin Haggerty:

I’ve never seen that. I don’t think it’s a very useful tool. Specialists don’t carry large positions overnight if they can help it and there’s always a lag when you see those numbers.

Submitted by oncewoven:

When a specialist liquidates a position, is he trading for his own account?

Kevin Haggerty:

If a specialist is either selling on a minus tick or buying on a plus tick, he is more than likely liquidating a position. You do not know this information unles you’re talking to a broker on the floor on the NYSE.

Submitted by WINNER:

What trading advantages can you gain by knowing how the specialist is going to act?

Kevin Haggerty:

The only advantage I feel I gain is on the opening, and understanding, after watching a stock trade for a period of time, how the stock reacts in both up and down markets. Certain specialists will get a stock to the volume faster than others in certain types of markets. You can learn this by studying your time and sales and watching how a stock trades in a down market and an up market.

Submitted by Moderator:

Kevin, what’s the role of the specialist?

Kevin Haggerty:

The primary role of the specialist is to maintain liquid and continuous two-sided auction markets by acting as agent and principal.

Submitted by Trial User:

Do you think that the public/specialist short sales ratio is still an effective indicator?

Kevin Haggerty:

At extremes, it still offers some significance, but as a result of so much hedging, I think it has lost some of its significance. The reason for that is the specialists do not maintain the same positions they used to carry overnight because of the increased volatility in the marketplace. They only take them home if they have to.

Submitted by Moderator:

Kevin, can you talk a little about how specialists trade?

Kevin Haggerty:

By definition, and by complying with the NYSE rules, specialists are almost always fading the trend, i.e. they are buying on minus ticks and selling on plus ticks. The major exception to this rule is when specialists are liquidating a position, either long or short.

Submitted by ericrallen:

How reliable is the bid/offer quote when trading NYSE stocks? Is the size misleading to facilitate selling or buying by the specialist?

Kevin Haggerty:

More of the games are played by the brokerage firms and the large customers that are giving their order to them. The quotes you see are absolutely good for the size that you see on the screen, but if the market is weak, and I’m a buyer, I’m not going to show the specialist all that I have to buy if I’m a major institutional buyer. As long as that stock is coming to me, and the market stays weak, the game is going my way. What usually happens when the market turns to the upside and I’m a buyer, I’m not going to be able to get enough stock in. The specialists are not allowed to unduly influence the market quotes, nor are they supposed to interfere with the public orders. That’s called their ‘negative obligation.’ The negative obligation says that the specialist should stay out of the way so public orders can be executed against each other without undue dealer intervention within the framework of the current market. Where I see the specialist take advantage is if he is short, and the market is going down, and there’s a large seller on the floor, it behooves him to only bid for the minimum amount of shares that he is required to bid for under the rule, and that is not very much. For example, if I see a $60 stock start trading down every 1/8th on a minimum amount of volume, 500-700 shares each 1/8th, and then all of the sudden 20,000 – 30,000 trades at 59, or 59 1/8th, and immediately a bid is shown for 5,000 – 10,000 shares, I know that there’s a good chance that seller is finished for the time being and the specialist took the stock down to a level where the buyers are. Chances are, he was able to buy considerably more stock at the low level, which obviously gives him a better opportunity to make money on the way back up. The motto is “Take it to where it trades. You lose money anywhere in between.”

Submitted by Moderator:

How do the things you’ve mentioned affect what happens during market openings?

Kevin Haggerty:

Market openings are unique to the auction market. The specialist has an obligation to bring together all willing buyers and sellers at an agreed-upon price within the framework of current market conditions. When there is an imbalance on either the buy side or the sell side, the specialist is expected to fill that void. In order to do that, he has to take a position opposite the imbalance.

Submitted by ericrallen:

I would like to know if trading with the specialist, for example, shorting the gap open of Hewlett Packard (HWP), is a good strategy?

Kevin Haggerty:

Oftentimes it is, because when the specialist has to fill in the imbalance, in the case of HWP, there obviously were buyers. The specialist knew he had to provide stock on the opening, and when that’s the case, he will try to open it up as high as he can within his compliance requirements. In today’s case with HWP, usually, when stocks are gapped, such as HWP, there will be opportunity, most of the time, for that stock to trade down below the level of the opening very quickly, and there usually is opportunity to make money on that reversal of the opening. But, the one thing that you’re never sure of, is what comes in to buy or sell after the opening, depending on which way the gap was. For example, today in HWP, that opening could have attracted many more buyers that did not particpate in the opening on the buy side and the stock could have run another point or two. Having said that, I love to fade gap openings when they’re delayed long enough and open high enough.

Submitted by basis:

How much time and discretion does the specialist have with DOT orders, and is this power often abused?

Kevin Haggerty:

That’s a good question. DOT orders have the same standing as orders entered directly on the floor. The specialist may not compete for his own account with a customer, whether it’s DOT or floor. Specialists must reflect, as soon as possible, the DOT orders when they improve the bid or offer, and also must include those orders in the existing size. The one exception on the DOT order is if there’s a possiblity of price improvement where a block is going to trade, if the block is not executed within thirty seconds, the specialist must reflect the order at its limit price. Sometimes the reporting gets slow in a busy market.

Submitted by Trial User:

When stops accumulate above and below the market, does this create vulnerability in the direction of the stops? If so, do specialists push prices down (or up) to hit the stops, not only to create order flow for themselves, but to also remove this vulnerability from the market?

Kevin Haggerty:

Not as much as you see in the futures market because the regulations that the specialist must comply with regarding stop orders are very stringent. A specialist must report all stop orders to the Exchange that are accumulating on his books that equal or exceed 5,000 shares or $200,000 or the normal daily volume in the stock. Any accumulation of 20,000 shares or more (at all price levels) must also be reported to a floor governor. In addition, a specialist must not make a transaction for his own account in a stock in which he is registered that would result in putting into effect any stop order he may have on his book unless his bid or offer, made with the approval of a floor official, improves the price at which the stop order is elected.

Submitted by Trial User:

Do you use TRIN and TICK? If so, can you explain how?

Kevin Haggerty:

I use TRIN and TICK all the time, especially TICK. I set my screen up with the S&P 500 Futures on top, the NYSE ticks, tick by tick, live, underneath. I find one of the best trades is when I get a divergence in ticks relative to the S&P futures and this happens due to the programs. I get at least one to two trades per day utilizing the divergence in ticks versus the S&P futures, either entering on the buy side or the sell side. The ticks will lead the futures.

Submitted by Trial User:

Do you trade any type of setups dealing specifically with gaps?

Kevin Haggerty:

Submitted by zzcan2:

Do you ever hold positions overnight? If so, under what circumstances?

Kevin Haggerty:

I never hold positions overnight unless they’re protected by options, or I have no stock and just an options strategy, or some funky-funky Broadway stock which means the institutions are not involved.

Submitted by Coach:

Kevin, do you think you could explain the “spiders” (SPDRs) to me? I don’t have much experience but I heard that you are the master of them.

Kevin Haggerty:

The SPYs (spiders) which represent 1/10 of the S&P 500 Cash Index are the most innovative security I’ve seen in 25 years. If someone owned a mutual fund and owned a S&P 500 Index Fund, why not just own the spiders that have less expenses than any S&P 500 Mutual Fund family. The spiders give you entry during the day rather than at the end of the day like the mutual funds. WHen you’re trading the spiders, they’re very liquid; you can sell short on a minus tick, (assuming you have clearance to borrow them, and they are very easy to borrow). I often use them to hedge some good intraday long positions that I think are trading stronger than the market. The problem with the spiders is that unless you have your own company, you won’t be able to invest in them in your 401K if you’re working for someone else, but in your IRA or your own defined benefit plan, you can then use them to your advantage. Mutual funds would never offer them to you as a choice, because then, who needs them?

Submitted by bunes:

Kevin, I’ve heard you mention SPDR’s in your morning commentary. Do you trade futures? Why or why not? Thanks.

Kevin Haggerty:

I don’t trade the S&P futures because I have been a stock trader my entire career. Although I do options strategies with the futures, I’m uncomfortable sitting on the phone waiting for somebody to give their report on a derivitive that I can’t see size. I’m not comfortable with the transparency.

Submitted by art:

Kevin, in your morning briefings to us on tradingmarkets you often mention playing a breakout from such and such patterns. When you do this, are you referring to patterns on an intraday chart or a daily chart? Thanks

Kevin Haggerty:

In my 9:15 am commentary, those patterns are all from the prior day’s daily chart, and I also refer to the 3-year weekly chart and the monthly chart to see if there’s any converging inflection points. When I talk about intraday pullback patterns, I’m talking about watching how a stock forms up on a 5-minute intraday chart.

Submitted by basis:

What information do you feel you get on the opening print? Do you find out how much of the stock the specialist had to do for his own account?

Kevin Haggerty:

You do not know how much the specialist bids for his own account, but you can find out very quickly whether he’s long or short based on how the stock trades after the opening. If it gaps up more than normal amount and it trades down very quickly on small volume, it could only be because of three things: 1. the specialist is short, 2. a seller has much larger than they showed on the opening, or 3. the best of both worlds -if the specialist is short, the seller has more stock and the stock trades down to a level that exhausts the seller and at the level that attracts buyers. That is the point at which you want to enter the market for a strong counter-opening move.

Submitted by dankur:

I have noticed that listed stocks tend to move to saturation points(example: MRK will move +3 1/4 without any retracements), then it seems that the specialist pulls all the bids, creating a drop of 1-1 1/2. Does the specialist do this to create an orderly market or is this just part of the natural flow of the market?

Kevin Haggerty:

MRK is one of our two favorite stocks and prior to the split, that was exactly how it traded. MRK will always give you a minimum of two contra-trades per day. It has a lot of option players involved. Before the split, it was a great stock for the married put players, and the specialist historically is one of the last ones to open the stock. This usually means that the openings are exaggerated and you will get a fast move in the opposite direction under normal circumstances. $160 stocks have a tendency to have air pockets.

Submitted by bunes:

In and earlier question you made a comment that implied the futures market regulations regarding stop orders are not as stringent as other markets, impling a futures trader can be vulnerable to stop clusters. Can you please comment further? Did I correctly interprete your comment.? Thanks!

Kevin Haggerty:

It’s not the regulations that are different. You don’t see stop-running in an option market nearly as much as you see an open outcry market.

Submitted by kiwi:

What technical indicators do you find to be the most helpful?

Kevin Haggerty:

I only use the secondary technical indicators as a minor filter. I rely almost totally on bar charts in identifying bar chart patterns in stocks that are strongly trending. For the short-term intraday trade, I will use a 7-10 period stochastic on the daily chart.