Lately, many investors have been exposed to new terms and techniques which are used by Wall Street Firms and many investors do not know what or how these terms apply to “the market” for stocks. Let’s start with the term “order flow”. Most people cannot explain what the term “order flow” means with respect to the money earned (or, in some cases, unearned) by a number of firms, and you know who these “no commission”, “no fee”, “no charge” and discount trading firms are. To understand, one has to go back to the workings of an auction market. In a typical auction, there are two parties vying to trade a particular stock, bond, option or derivative. There is an offer or ask price and a bid price which are different, one being higher than the other. This is the spread. For any security, this difference may be very narrow or it may be quite large. Usually, stocks are purchased at the “ask” price and sellers must be content with the “bid” price. Both the bid and ask move up or down, causing, the spread to narrow or widen depending on the audience participating in any transaction representing volume and frequency. This assumes that there is a security available for trading. Traditionally, the order flow was controlled by a specialist or specialist firm which maintains an orderly market. This is supervised by the various exchanges. The key to making money is the spread. If a specialist acts as a market maker, as these discount firms do, they “match” the buys and sells in house at the posted price but keep the spread. In other words, they “earn” the spread that they make. There have evolved computer programs which can instantaneously survey all the market makers and choose the one with the narrowest spread or the widest spread. Which market maker chosen for the order flow is determined by the discount broker. A good broker will seek the narrowest spread but the door is wide open for an abuse of the system. You may draw your own conclusions.
A person wishing to earn a living by trading stocks or other securities would do well to study the experiences of others who have analyzed their own thinking, their own emotions and the forces which surround the market environment. For those seeking the benefits of the experiences of a famous Wall Street personality, I refer you to “Reminiscences of a Stock Operator”. It captures the experiences of one Jesse Livermore, one of the greatest market speculators and traders.It is chronicled by Richard LeFevre. Here are a few passages which you might find interesting.
“Nobody should be puzzled as to whether a market is a bull or bear market after it fairly starts. The trend is evident to a man who has an open mind and reasonably clear sight, for it is never wise to a speculator to fit his facts to his theories”
“Speculation in stocks will never disappear. It isn’t desirable that it should. It cannot be checked by warning as to its dangers. You cannot prevent people from guessing wrong no matter how able or how experienced they may be. Carefully laid plans will miscarry because the unexpected and even the unexpectable will happen.” (I am thinking of the COVID-19 Pandemic.)
“Observation: There is always a sense of urgency when the decision to sell grips you.
However, a buyer can be patient, especially in a falling market environment. And yet, the buyer will pile on when he feels he has missed his chance to get in.”
“One of the most helpful things that anybody can learn is to give up trying to catch the last eighth–or the first. These two are the most expensive eights in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.”
“There is the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily or sufficient knowledge to make his play an intelligent play.”
“A Speculator must concern himself with making money out of the market and not insisting that the tape must agree with him. Never argue with it or ask it for reasons or explanations. Stock market postmortems don’t pay dividends.”
“The speculator will risk half his fortune in the stock market with less reflection than he devotes to the selection of a medium priced automobile.”
“Check the volume, charts and price actin first and foremost. Numbers don’t lie.
Analysts, people and company representatives don’t always tell the truth. In other words, the market reflects all that is known and can be known about a stock.”
“The recognition of our own mistakes should not benefit us any more than the study of our successes. But there is a natural tendency in all men to avoid punishment. When you associate certain mistakes with a licking, you do not hanker for a second dose, and, of course, all stock-market mistakes wound you in two tender spots–your pocketbook and your vanity.”
“Fear and hope remain the same; therefore the study of the psychology of speculators is as valuable as it ever was. Weapons change, but strategy remains strategy, on the New York Stock Exchange as in the battlefield…expressed by Thomas F. Woodlock: ‘The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past’.”
I will conclude with a event of profound psychological import: A sucker is born every day. Ergo: “Luxury book publisher, Kraken Opus, has created what is perhaps the most expensive new book ever. The limited edition, $75,000 book, which celebrates the cricket star Sachin Tendulkar’s career, contains literally a piece of Mr. Tendulkar. The publisher took one pint of the batsman’s blood and mixed it into the paper pulp to create the final paper. All ten copies have already sold out.” (Reminiscences, Volume 22, Number 8, August 2010.)