Soes commissions and scalpers

Scalping is a day trading tactic used to capture small discrepancies in price, as little as 1/16. Scalping for small fractions has become an increasingly hazardous path toward successful day trading. Popularized through the SOES day trading tactics of the late 1980s and early 1990s, scalping for fractions was less complicated then than it is today. At first, all a SOES day trader had to do was pick off a market maker and offer the stock back out to the street at a better price. This tactic was easy and profitable when competition for the prime executions was minimal because of the smaller number of SOES traders. Market makers also displayed larger sizes on the inside market, and were slower to react to an SOES trade because of antiquated technology.

Today, however, scalping for fractions is much harder. Now there are thousands of traders using SOES, many competing for the same print from a single market maker. It has also become increasingly difficult for SOES scalpers to receive 1,000-share executions, because market makers on NASDAQ can now represent the inside market with as few as 100 shares. If an SOES scalper is being charged $25 per one-way execution, then SOES prints for fewer than 1,000 shares, which are common today, are not cost-effective.

For the day traders who do pay up to $25 for a one-way trade, proper entry is extremely important, because a break-even trade is really a loss of $50. Assuming the SOES trader is using 1,000-share lots to trade, a gain of 1/8 on a trade is only a $75 win, while a loss of 1/8 on a trade is a $175 loss. Just like in a casino, with these odds, the probabilities clearly favor the house. Actively trading with the objective of scalping for small fractions is a losing proposition over time.

If you are focused on scalping for small fractions, make sure that your commissions are as small as possible. Remember that every battle is won before it is ever fought. Take pains to insure that the odds are in your favor before going into battle.

The combination of enhanced visibility brought on with the SEC's order handling rules and ECNs, together with the explosion of competition among on-line brokers for customer order flow, has created a dynamic and rapidly progressing execution environment that benefits day traders. Day traders can now pay under $10 to have a limit order reflected through an ECN or a market maker with the click of a button. As little as five years ago, this ease of access at such a low cost would have been unfathomable.

For day traders, this means that the execution tools are at their disposal to trade on par with market makers—and it's only going to get better. With the increase in consolidation among ECNs today, by the year 2002, only a few will be left standing. The consolidation will act to increase liquidity even further.

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