From the Trading Desk of Oliver L. Velez

Hello my fellow traders. I'm back from my mini hiatus. It was a wonderful holiday season for me, which offered a much needed break in my busy schedule, although most would not classify my breaks as being restful. But it was, and I hope the season brought you the same joys that I experienced. It's back to "full throttle" now, however, and it's good to be back.

Professional Trading Versus Retail Trading 
Many people who have entered the wonderful world of trading vaguely understand the fact that there is a difference between professional traders and novice traders, or what the industry calls "retail" traders, but they are usually not all that certain about what those differences are. It's really quite simple. There is only one distinct difference between a pro trader and a retail trader: A professional trader is paid to trade the market and a retail trader is charged to trade the market. It's as plain and as simple as that.  

How the Market Pays Pro Traders
Many retail traders trading with firms like E-Trade, Schwab, Interactive-Brokers, Scott Trade and the like are bewildered when I explain to them that my VCM Traders actually get paid not only by the gains they make from their trading, they actually get paid an extra fee for placing those trades. That's right. You read me correctly. Professional traders receive a fee for placing certain types of buy orders and certain types of sell orders, and that's before any gains occur as a result of the movement of the stock. This is why many VCM Traders net more than they gross. Let me explain by showing you a two day record of one of my VCM Traders in training.




The above diagram shows the summary report of a VCM Trader's trading activity over two days. Most of the categories should be self explanatory, but I'll provide a brief explanation of all columns to ensure that you have a full understanding of how to read one of the numerous reports our traders can run from our system.

Symbol - All stocks in which transactions took place that day

Fills - These are not actual trades, but rather how an order or orders got executed. For instance, one can actually place a single buy order for 1,000 shares of a stock, and get filled 10 times in 100 shares lots. The number of fills are quite irrelevant to our traders as it has no bearing on costs. It makes no difference if an order got filled in one shot or in 10 shots.

Qty - This represents to total number of shares executed. This is important as it has a direct bearing on the trader's cost. VCM Traders get charged commissions on a per share basis. As of this writing, we have over 560 traders and do an enormous amount of volume each month. As a result of our size and high volume, we enjoy one of the lowest commission rates in the U.S. Our traders are charged 2 cents for every 100 shares traded. A round-trip of 100 shares (100 shares bought and sold) would cost our traders 4 pennies. A round trip of 1,000 shares would cost 40 cents. Today, commissions have become a non-issue for professional traders. It's an entirely different story for retail traders who are getting taken to the cleaners. They come out clean, alright. Clean of money that is rightfully theirs. Sad!

Gross Realized - This is usually regarded as the most important column because it reveals how much the trader made or lost from each trade, before any commissions or fees.

Commissions - This should be self-explanatory. This is the direct commission charged for each trade, which as you know is only 2 cents per every 100 shares for VCM Traders.

Fees - This column shows two types of fees: a) fees charged to remove liquidity from an ECN (Electronic Communications Network); b) fees received for adding liquidity to an ECN.  Herein lies where and how professional traders get paid by various exchanges for placing certain types of buy and sell orders. For some orders they get charged just like retail traders do. For others they actually get paid. I'll explain in more detail below.

SEC - This is a small fee/tax levied on traders by the Securities and Exchange Commission. SEC fees are the biggest for trading NYSE stocks.

TAF - This is a small tax levied on traders for placing trades in the OTC market.

Net Realized - Of course, everyone knows what the net column reveals. It shows how much the trader made or lost after all costs (fees and taxes). It is this column that will reflect if a trader has actually collected more fees than he was charged, resulting in a net that is larger than his gross.

Now, let's take a look at the day of January, 4, 2008 for this trader. As you can see he only traded one symbol the entire day, which is something I train traders to do, to "specialize" in one to three stocks. I believe that if one becomes intimate with a single stock and its players, an added edge is obtained, which leads to greater success. Note that despite trading only one symbol, he grossed more money than he did the prior day when he traded three symbols and more total shares. His gross on the 4th was $834.00. But it's the Fees column that I want to focus on, which will explain how pros get paid for certain types of orders.

Adding Liquidity Versus Removing Liquidity
There are primarily two ways to buy a stock and two ways to sell. One way is to buy on the bid, or what pros call, "joining the bid." By attempting to buy a stock on the bid you are trying to save the spread which exists between the bid price and the ask price. There are other traders trying to buy at the bid price as well, so you in effect "join" them or get in line with them in an attempt to get filled at a cheaper price than the ask or offer price. The other way to buy is to simply pay up and "take" the asking price. When you simply want in and don't want to risk not getting filled, you usually opt to "take" the price being offered, which is to "hit" the ask price, to use another popular phrase. Most novice traders take the ask when buying and hit the bid when selling. They pay up, in other words. When you want out, you either try to sell at the ask by joining those trying to save money on the offer. If you want out right away, you simply hit the bid as I just mentioned. Just remember, when you hit the bid, you are removing an existing bid, so you are removing shares from that price. That's called removing liquidity, and pros get charged extra for that.

You see, the various electronic exchanges vie for volume. Volume is king on Wall Street and because the markets are fragmented into multiple exchanges and ECNs, there exists fierce competition between each one to get the most volume. The exchange with the greatest degree of liquidity will get the most business. So, to encourage traders to place their orders on their exchange instead of another, many of the exchanges will pay a trader for "adding" liquidity to their exchange. On the other hand they will charge a trader for "removing" liquidity. You remove shares from the books of an exchange whenever you hit the bid to sell or take the offer (hit the ask) when buying. Market orders are liquidity removing orders...always.

Payments for Adding Versus Fee for Removing
Now, most ECNs have become uniform in their fee structure although not exactly. They are close enough today, so I will give your the current basic payment our traders receive to add shares versus the fees they get charged to remove.

To Add: A rebate of $2.00 per 1000 shares is paid. So on a 1000 share buy at $20.00 bid, the trader pays 20 cents to execute, but gets $2.00 for joining the bid price, for a net gain of $1.80. If the trader then immediately sold the shares at the ask price (joining those selling at the offer) of $20.01, another 20 cent commission would be levied, but another $2.00 rebate would be received, for another $1.80 net. But wait, let's not forget the gain on the 1 penny difference. That's $10 (1 penny gain on 1,000 shares). So without the price really moving, the trader netted $13.60 ($1.80 + $1.80 + $10). Wow! Without a movement. Now imagine this on hundreds of thousands of shares. My top trader does between 2 million and 4 million shares per day, most of which is placed by adding liquidity.

To Remove: A fee of $3.00 per 1000 shares is charged. So on the trade above, this transaction would be radically different. The cost would amount to a total of $6.40 ($3.00 to buy at ask + $3.00 to sell at bid + .20 +.20), and that's assuming the price to buy and sell was the same, add a penny loss to this and the cost goes up by $10, making it $16.40, for being wrong a penny. Quite a difference right? This is why in my live 5-day Trading Lab, I spend a lot of time practicing execution. the drills are numerous and frequent. By the time the 5-days are over, the traders can place the right orders with their eyes closed.

Let's look at the trader in the diagram above again. Note that on 1/4/08, the trader traded a total of 33,000 shares of JNPR. As you can see by the Fee column, most of his orders were of the "adding" variety. How can you tell? He has a negative amount in the fee column, which means he was owed back that amount. A positive number would represent what he was charged. If the market owed him money, his Fee column would be negative, which is the case here by ($48.00) Now, when you move over to the Net Realized Column, you will see that the net number is higher than the Gross column, because the rebates for adding liquidity were added to his gross totals.

Better Than Trading for Free
This trader is not only trading for FREE, he's being paid to trade, on top of his trading gains. How nice it is to be an elite VCM Trader. I love it!

Are you Retail? If so, I'm sorry, but perhaps it's time to step up your world. Don't you think? If you'd like to give it a shot, I'm waiting for you .