Discovering America!
Over the last ten years, Russians' keen interest in financial markets has become truly national in scope. Managers rushing to work in the morning watch RBC TV with a cup of coffee, young people in cafes discuss charts of currency pairs on their PDAs, in general "Forex, pounds, spreads, victories in the struggle for capital".
The years 2006 and 2007 were for depositors in Mutual Funds in gold (provided that they repaid them in time). However, the driver of everything that is happening - the US stock market - remains in the shadow. Brief comments on the changes in DOW and S&P500 - and that's all you can hear from Russian analysts. But it is the one that sets the tone for all other markets! Traders of Russian stocks and futures closely follow "America" because any movement "there" causes correlation "here".
In this series of articles I will try to "Open America" for you. I will try to remove the halo of mystery and complexity from it, and show you how many opportunities the US stock market offers to a trader or investor.
U.S. stock market structure
So, the structure of the U.S. stock market is the three largest venues: NYSE (New York Stock Exchange), NASDAQ (National Association of Securities Dealers and Quotations) and AMEX (American Stock Exchange).
Regulatory bodiesSEC (U.S. Securities and Exchange Commission), the Central Bank or FED Reserve and the Treasury Department, as well as self-regulatory organizations such as NASD.
NYSE
NYSE Euronext - is the largest exchange in the world in terms of exchange turnover (about $60 billion per day) and the oldest in the USA, it trades about 2700 shares with the total capitalization of companies $21 trillion (for comparison, the capitalization of the Russian stock market $850 billion).
Trading on the NYSE, unlike NASDAQ, is conducted on the principle of auction. The key person in the bidding process is . specialistA specialist trades in one or more stocks (usually up to four). The specialist works for one of the seven large-cap firms. The specialist's job is to conduct trades, determine the price at which the stock market opens in the morning, and ensure a liquid and stable market. If temporarily there is an imbalance of supply and demand, the specialist is obliged to use the firm's capital and take the opposite side to smooth out possible sharp price fluctuations. This is the reason why the stock market is technically smooth and smoothly moving prices. And this is very important for us - traders.
NASDAQ
NASDAQ OMX Group - the largest electronic exchange specializing in shares of high-tech companies (electronics, software, communications, biotechnology) and other industries. Along with NYSE and AMEX, it is a division of NASD. About 3200 companies with total capitalization of $4 trillion are traded on NASDAQ. On an average day the market turnover is 1.8 billion shares.
NASDAQ is a non-centralized exchange and by its structure is an electronic network connecting traders through ECN (Electronic Communication Network). Instead of a single specialist, quotes are maintained by many large firms of market makers. Market-makers are obliged to put out two-sided quotes, they earn on the spread and compete with each other to help narrow the spread. On average, 14 market makers work with each stock, and in "heavy" stocks such as MSFT (Microsoft), GOOG (Google), AAPL (Apple) their number can reach 25.
AMEX
AMEX - specializes in trading ETFs and HOLDRS, also due to more liberal requirements compared to NYSE and NASDAQ, it trades stocks of smaller capitalization companies.
ETF (Exchange Traded Funds) - In fact, ETF is a new type of securities, which can be defined as a depositary certificate for a portfolio of shares, since holding this security is equivalent to holding a portfolio of shares. The portfolio of an exchange-traded fund is linked to an index reflecting the dynamics of a particular sector or the market as a whole, or to a particular portfolio of stocks. For a private investor, ETFs are interesting as an opportunity for long-term investment in a certain sector or in the economy of an entire country without the risks that are always associated with investments in specific companies.
Thus, there are: "gold", "oil", "Chinese", "Indian", "Brazilian" and many other ETFs for a portfolio of stocks of the whole sector or a single market. There are also currency ETFs for the euro, pound and other currencies....
All of these venues are being addressed ADR - American Depositary Receipt. In essence, these are securities of companies located outside the U.S. that can be traded on their home exchanges.
A number of Russian companies are traded on the NYSE: VIP (Vimpeltelcom), MBT (MTS), WBD (Wimm-Bill-Dan), MTL (Mechel) and others.
NYSE and AMEX stock tickers have a one, two or three letter designation. For example: А-Alligent Tech, С-Citigroup, BA-Boeing, MA - Master Card, POT - Potash.
NASDAQ tickers have four or more letters: RIMM - Research in Motion, YHOO - Yahoo!, BIDU - Baidu.
All three sites open at 9.30 a.m. U.S. Eastern Time (17.30 Moscow time) and work until 16.00 (00.00 Moscow time). At that, before the opening the so-called Pre-market or pre-session trading is available, where it is possible to place preliminary orders and trade the paper before the opening. But the "pre-market" is characterized by the lack of liquidity. There is also Post-market, which is similar to Pre-market and starts in the paper after the close. But pre-market and post-market are not available in all stocks.
Thus, the NYSE, NASDAQ and AMEX provide tremendous opportunities to trade with any style and capital! You can always find technical securities with low entry risk and incredible moves. Many stocks in their movements make hundreds and some even thousands of percent in a short period of time (AIG in March 2009 went from $10 to $40 in 4 days, in August repeated the "flight" from $14 to $55; DTG in April 2009 was worth $2, in October updated $27.50, and there are many such examples). Intraday moves can be 10-50% from the opening price. Where else will you find opportunities like this? Nowhere...
Fig. 1. Dynamics of AIG movement.
Figure 2. DTG motion dynamics.
At the same time, you are full-fledged participants in price formation. Your orders "create the market", you are not pawns in the game of numerous intermediaries, but full-fledged market makers market.
This is where everyone will find their niche. Day traders will find technical stocks and will be able to make money every day; position traders will be amazed by the swings of their securities, and investors can be calm for their capital, as the U.S. is less exposed to political and governmental risks, although they are present in any market, it should be taken into account.
Trading technology
NYSE and AMEX are centralized exchanges, have their own building and trading floor. NASDAQ is akin to Forex, a purely electronic system, but unlike FX, it is regulated.
On NYSE and AMEX the largest blocks go through "specialists" - a separate person who "leads" the stock. He brings together large orders from Floor - brokers. And ensures liquidity and smoothness of price movement. On NASDAQ, market-makers follow this. But their duties are not as strict as those of a specialist, and it is a more "free" market for execution of orders. Hence the sharp fluctuations of share prices NASDAQ.
A private trader or investor has 2 ways to transact in a stock:
1. Independently through the trading terminal of direct (DAT) or indirect access.
2. give an order to your broker, who will send this block to a specialist or a market-maker through his channels.
Let's consider the first method, as the second one took place in the recent past and more and more often traders and investors resort to placing their orders independently.
Direct Access Terminal or DAT (Direct Access Trading)
What is direct access? It is an opportunity to send your order directly to a specialist, market maker and any counterparty on the exchange, bypassing intermediaries. In this case you can see the "internal market" and its "depth" (the so-called "glass"). In the Market Maker window you can see all buy and sell orders, their total volume on the tier and the last transactions - prints. Thus you have full information about the traded instrument. Popular CFDs and FX do not have such information and are limited to a chart. And, as you know, the chart is a reflection of the "internal market", a derivative of the "tape of prints", and such information is simply irreplaceable when analyzing the instrument. Standard terminals have windows of orders, positions, etc.
Figure 3. DAT image.
Stock charts
Most direct access terminals have built-in graphics. Some do not have them. They are removed in order not to load the system, where the speed of order entry is crucial. As a rule, these are terminals for professional day traders.
There are separate providers of US stock market data: Interactive Data, CQG, Bloomberg and others.
Bloomberg and eSignal have become the standard on Wall Street. Fast data on any stock from any stock exchange in the world is available to their subscribers.
News and fundamental data on companies
At first contact with the stock market, Russians are shocked by the huge amount of information about stocks, and even in English. Or they simply do not know where to get this information.
Below I'll give you a few tools for finding and analyzing U.S. stocks:
1. Scanner - allows you to select from a vast list of stocks only by specified parameters: price, volume, capitalization, yield, sector or technical filters: leaders of growth/decline, leaders by volume, etc. There are a lot of scanners, but I want to emphasize two: Investertech.com - the best, in my opinion, scanner. Especially suitable for day traders. MSN.com - a scanner focused on fundamental parameters.
2. source of fundamental news by issuer: Bloomberg.com + Bloomberg TV, Finance.Yahoo.com, Finance.Yahoo.com, Briefing.com, CNBC TV, Earnings.com
3. terminal for order entry (with open account with broker), Chart charts, scanner and stock news.
That's all you need! Nothing complicated!