My Order Was Filled . . . Where?

"This shall be the ending post of "Phantom's Gift" but not the end of Phantom's attempt to give to you!"
Art Simpson

Phantom has always been anxious to address what the traders questioned in trading. It was with great hesitation that the subjects of order placement and fill prices were finally addressed. He felt more research on his part was necessary. There are so many different situations for traders when they put in orders for their trading.

Some of the questions appeared over the months on the Futures Talk forum. Many traders would get what they felt were bad fills for one reason or another. Phantom knew it was mostly misunderstanding of how a market works in volatile situations. This lack of understanding due to little known knowledge on the subject disturbed him in these situations.

It seems there is a vast opinion by most traders that the brokers are to blame on most of their bad fills. This misunderstanding is a great handicap to traders unless they are aware of what causes bad fills in volatile markets. We shall present some of those situations with the explanation in order to improve order placement by traders.

Little research is done individually by most traders, and Phantom felt this is a big mistake. Phantom has always done his own trace of order placement, execution and reporting of orders to and from brokers in order to know the integrity of his placement. It gives him the ability to know what the edge can or cannot be upon an order placement.

Logging and tracing placed orders early in a trader's career affords the opportunity of knowing just how exact an order must be placed. An order placement for market orders, price orders and stop orders will have different urgency and slippage at various times due to current volatility at execution. Understanding changes in volatility is critical in knowing when and how to place each type of order.

I asked Phantom to give some insight on order placement before we got into particular experiences and results of traders. His insight is based on experience and knowledge of his many orders in his career. Phantom is the only trader I know to have been stopped out limit up and limit down in the same day. It was early in his career, and he takes full blame for not knowing early in his career the situations that can cause such slippage and fills.

Some of the important points on order placement and price fills are seldom talked about or considered. Phantom felt many misconceptions were important to address as well.

Art Simpson (ALS): Can you tell us some of the most important insight you have observed in your trading career on order placement and market prices?

Phantom of the Pits (POP): Let's just start with a normal day and look at an opening, daily range and closing. Regardless of what your order is to be, you will find that there are times during a day that liquidity will be better than at other times. That is really the reason for different ranges each day.

I remember in the early 1970s watching a trader bid the high of the day consistently at each new high. I asked that trader why he would buy the high of the day. His answer was that there would be many highs during a day but at the end of a day only one true high of the day.

If you think about that answer, you'll realize it is true. Each time you buy a high, it is possible that, sooner or later, there will be another new high for the day. To use his method of buying new highs, you would have to be a floor trader to use my rules but it has merits. A reason I say it has merit is because the thin part of markets is at highs and lows. You'll see this if you look back on volume at the end of the day. When the markets are thin, they can be pushed further until liquidity once again enters the markets. Even though markets are thin at the high and low of a day, during the day there will be many new highs or lows that are not the high or low showing at the end of the day. We can never know for sure which high or low during the day is the true high or low for that day.

I got a kick out of some posts on a forum as one was headlined something to the effect that the locals were gunning for the stops. There are some misconceptions in that thought. Locals don't gun for stops; it is just how they trade. If you knew the market was thin at highs and lows and were positioned the wrong way, what would you do if you were a floor trader? It is the traders who are wrong who push the stops before the stops are hit. In other words, you don't want to have to buy many ticks higher if you are wrong and approaching the high of the day. That is what the public tends to do by putting their stops above the high for the day.

I certainly don't think the forum participants were wrong in their thinking but only having fun with the way the markets tend to act on their positions at times. They have really hit the nail on the head, and it just takes some understanding as to why it seems to be that the locals are gunning for the stops. Locals are good at taking the smallest loss possible and going with the flow. It is an advantage over the public traders.

To understand why markets act as a system that tends to prove the most people wrong in any one day is a good start in correcting bad entries when trading. Traders are correct in thinking that the stops will get them out, and then the market will just turn around and go the way they had thought prior to being stopped out. The fact that it happens is reason enough to devise your trading plan accordingly. This idea is especially useful upon planning entries.

I never really liked stops but trading off-floor creates a problem for the public because they certainly need protection from being hurt from extreme moves. Stops do not protect well in choppy markets. Trading plans can be improved by knowing how stops work and what happens far too often.

If I get my signals for what I want to do, often I can see a new high for the day in the last hour of the day. If I have my signals telling me to sell, it oftentimes will say to sell the new high in the last hour, with the requirement of proving that position correct being that the market must spend little time at or above that new high. This is not saying to take a loss on a stop but saying that the new high is a move created by day-traders, locals getting out or bad buying creating the stop run toward the end of the trade day. For the position to be proven correct, the market must prove that the reason for the new high is just as I previously described.

Markets slip through stops on the bottom toward the end of the trading day also because of the day-traders, locals and bad selling that push the stops that build up below the markets. This is natural in trading and is not recognized often enough by traders, especially new traders.

Another big disadvantage of stops, as I see them, is the feeling by traders that they are protected from adverse moves. When the market is liquid, stops work fairly well. Too often, however, when an important report comes out -- the monthly unemployment report, for example -- markets such as bonds and currencies will do the long jump. There is no liquidity sometimes for as much as several support or resistance points. This means huge losses in a matter of minutes until the stop order can be executed.

Keep in mind a stop order is a market order whenever the price is hit. Most traders blame the broker for not getting the stop order filled at the stop price. How can they, if the market has no bid at your sell stop price? How is the broker to fill your order on a stop when every order he has is the same stop order price and there are no traders or orders willing to take the other side? Everyone sees the same chart. Stops are grouped in the same place.

After a big report, the stops are free game for anyone who wants to squeeze as much profit as they can. If I am correct, I know it will often take three waves of effort before I have to worry about the market reversing and taking my profit back. Why shouldn't I bid the lowest price possible after a report my way? If the market didn't fall substantially on a big report, I would be adding to my position until I see the bad selling. The bad selling is the stop selling after a report. Same on bad buying as the bad buying will be the stops buying at the market.

By understanding the drawbacks of stops, you can come up with a better-suited trading plan to protect yourself. Rule 1 does just that. Your criteria must include getting out if you don't want a flip of the coin at times. Big reports are those times.

Another aspect of getting your order filled way out here is when you go at the market on the open. Order fills look bad to some traders just by the way some of the quotes get reported. Some quote machines show the open price as the price that was the night trading open price. The next day the open may not be anywhere close to the night trading open.

Many trade systems signal a position to take after the previous day's close is used as data in the program and position on the open. This alone can skew the opening price by good margins of price difference. If you are buying and you are on one side of the pit, you may get a good fill. However, a large order may bid above your order in another part of the pit. The broker's job is to buy the offer when it is a market order on the open. They don't have time to look for the cheapest price when there are numbers to do. They take what is offered.

If you wanted to buy a computer and you did, you bought at the offer price. Why didn't you wait six months until the price was half as much? It is because you wanted it now! It is the same in trading. Your market order on the open is saying you want it bought now, not after it went down or went limit up or tomorrow after a selloff.

Just because the opening call was four cents lower and you put a market order in on the opening, are you going to get the low of the day? You might get the high of the day but most likely never the low. You may even be filled five to ten cents higher on the day if news changes quickly enough. Or in orange juice, you might have no sellers at all on the open for several minutes.

Orders are entered poorly more due to lack of understanding of how the market works at certain times in getting orders filled. It is seldom because of a mistake on the order placement by the broker or executing broker that you got filled way over there.

Another misconception of being filled in left field on an order is the thought that the broker is trading for himself. I watch this myself and can attest that what I see has never been beyond providing liquidity by a broker in poor liquidity times. Brokers are position traders. They cannot attend to being day-traders or scalpers. It is their primary job to fill your order first. The brokers I have seen do just that! They fill your order first.

One more aspect of being filled at what looks like huge slippage is the delay in quote prices and the delay in getting your brokerage runner to get the order into the pit in timely manner. They are allowed a certain amount of time to get your orders into the pit as it takes time to go to the desk, take the order to the pit and hand it to the broker who is filling other orders already. Repeat the process again as the runner looks for your order to report your fill price back to you.

Sometimes you don't know you were filled because the runner can't find the filled order before he has to run another order to the pit. Let me give some insight on this situation. If you must know if your was filled, CANCEL the order! This way the runner must require the broker to pull the order from the
deck. If it was indeed filled, it won't be there and the runner will have to look for it. Sometimes new runners don't know to look over in that pile for the filled order. Every runner starts a new career and is not good at it until experience becomes the teacher.

There are times when runners are seeing so much volume that the floor managers will tell them to do the most important aspect of their customer business -- that is, getting the orders into the pits and worrying about the fills later.

Often, confidence of customers and a new trader in the way orders are routed and filled is never above a "1" on a 10-point scale. You owe it to yourself to see the flow of orders and understand the strict method that must be -- and is -- followed by the commission houses and the brokers. Believe me, integrity is as good as it has ever been.

I remember when beans had gone above $4.44 for the first time in history, and I fed orders to the floor to sell out my longs as they hit $4.44. My fill was at 4.32. I did my research and checked all time and sales and price quotes that day. When I get a bad fill, I know why today and everyday. It has never been because of the broker not being alert. It has always been because I was not in the pit and did not know what was going on for anywhere from two to ten minutes before my order was filled.

Art, I know we want feedback on this so we can address the input from the Futures Talk forum. I never really had my heart into this chapter as it seems so cut and dried for me, but I know it is important to the traders. They must understand their fate when blame is quicker than answers in difficult market times.

ALS: Okay, traders, Phantoms, paper traders, brokers, newcomers and us old folks alike, let us have it! Your questions and observations, please!

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Note: Within a few days after posting the message above, we had some good feedback from R.H. and it seems fitting to put it in this writing.

R.H.'s comments:

Phantom . . . thanks for another insightful chapter. Unless you've been there or had much experience, you tend to follow the notion that the little guy always gets the short end of the stick. This chapter explains the process of the markets for better understanding.

No specific comments other than paraphrasing my understanding of your words.

On tracing orders, is there other info or stats that one can request other than time and sales and price?

On "gunning for stops" it's my paradigm and others that running the stops creates a quick bounce and, once hit and expanded, the locals offset and is done as a tactic in itself. Your explanation seemed to be that it was not necessarily a concentrated effort to run the stops but rather floor traders positioned wrong, and as they offset near the thin areas, the market pushes through the stops.

On markets proving most people wrong and hitting their stop and heading in the way they had thought, Rule 1 was made for this action. If you position and the market goes against you, Rule 1 offsets the position, allowing for re-entry (in the last hour, in this instance) rather than positioning once with a stop just beyond the daily extreme. So Rule 1 allows us to use these areas to re-enter again or enter (e.g., on the 1 1/2-day move) rather than lose the position and see it go our way shortly afterward.

On stops and a big report, any other ways to see the bad buying or selling other than looking at the same chart everyone else looks at?

Thanks again for providing us clarity on the true workings of a market. R.H.

ALS: Phantom, a couple of questions from R.H. we should answer. His question on tracing orders: Is there other info or stats that one can request other than time and sales and price?

POP: The best way to trace an order is to know by name the phone clerk who takes your order and to identify the runner who takes your order into the pit. For me, this is pretty easy to know because I am pretty well known for requesting all the information I need to keep the integrity of my orders going into the pit.

I like to have the information because I like to prove to myself that the myths of what happened to an order are just that -- myths. Most of the time other traders who put orders into the pit are not aware of what has happened because of fast markets or newly reported information. They only know they got a bad fill.

Well, bad fills all have a good reason. Every time I check to see the reason for my bad fill, I have verified the circumstance that it has indeed been at my own hand that I got a bad fill. I didn't know at the time when I placed my order that I didn't have the timely news or what the liquidity was at the time. How can we always know the situation at all times? We can't!

You see, it is easy to use a crutch in blaming some reason other than a fact that we don't know at the time. It is wasted energy to think our fill was other than with the highest integrity. Even though I could fill all of my own orders, I know I can do a better job giving the order to the professional broker. Now, most traders don't know that.

On tracing orders, most of the time you can get time and sales, but the true event is that your order, if a market order, can be filled anywhere within a time limit of say two minutes. Now, have you ever seen a market move in two minutes? Of course you have! A market can move quite a lot in two minutes.

How do you win the game? If you put enough orders in, you will find it tends to even out. If you put few orders in, you will find you tend to get the short end of the stick as Randy suggested. The short end of the stick is that you will put your orders in just as the market is changing direction and starting to go against you.

You know what the market is going to do, and it has already done it by the time your order reaches the floor and you got the slippage from the market reaction. The quotes you receive are not the same as the bid and offer in the pit when you put the order in. There is always a lag. I can stand in the pit and watch the tape and be behind as much as minutes at times. I bid and offer according to what is going on around me in the pit. The public cannot do that. At times you are better off with resting orders, but execution is always the most important part of order placement if you don't trade large amounts.

Okay, time and sales is it, and the rest of your research is on your shoulders to check your broker, runner and phone clerk. A good commission house will do this for you but not always when the market is open. Do it when the market is closed and keep your own records. I consider it as if I am hiring the people who work my orders both into the pit and in the pit.

ALS: What do you think of R.H.'s ideas on his interpretation of running the stops ideas?

POP: I don't mean to remark lightly, but R.H. has a good handle on the correct interpretation of what I meant. I can't really add anything to his correct ideas.

ALS: Another question for you on stops and a big report: Any other ways to see the bad buying or selling other than looking at the same chart everyone else looks at?

POP: I see the reason for R.H.'s question on the bad buying and selling. In the pits it is pretty easy to see what is going on. Off the floor it is a sense we have to be alerted to in our thinking. We must know the possibilities of why things happen the way they do in markets. People will trade like herds at times and when the herds have finished their positioning, the market takes a breath and the move starts to fade.

It is the lack of followthrough that tells us when we have seen bad order placement. When we are away from the floor, we must be aware of lack of followthrough. It happens at the highs and lows because of momentum trading, which causes the moves to be quick and sometimes causes artificial moves.

My suggestion is to be alert as to how quick a move happens and then to watch for the followthrough in a proper amount of time. Each market is going to take a little different reaction to such conditions. R.H. has my idea on Rule 1 and the way I trade correct. It is the criteria of followthrough with the combined knowledge of what day-traders have done up to the last hour that I use to help generate a trade during the last hour or two. It is more powerful for me to get the bounce in positioning.

In fact, I have a chapter or two or even a book on the systems I use in trading. Of course, I would not give all of the inputs but enough to help most traders establish a game plan that would match mine.

ALS: Do you want to address any other situations on order fills?

POP: No, I don't as I think it is research that every trader must make on their own, and I cannot give them the results of their ideas of bad fills. They must slay that situation themselves to have the confidence of putting it behind them.

ALS: You've been generous in helping me write "Phantom's Gift." I know the traders do appreciate it and wonder what are the plans from here?

POP: You know I have been rewarded, and as I watch posts of forums, I see the effect this project has had.

Art, I think it is time to see how Robbie does in his trading. We must step back and be the observers again.

ALS: Does this mean this project is completed?

POP: Art, you know the project is not completed. I see the CD on your desk, and I see "Phantom's Gift" in red on the cover. I also know we have the best for last. Now, who wouldn't suspect that? We want our traders to make it big. So far, they have had lots of insight to interpret on their own.

You know the respect and expectation I have for the small trader. It shall happen that they are the winners. For how long I don't know, but they will be the unexpected winners.

The next step is to point out where the pot of gold is. I have a little surprise of a grand trade that is going to happen in the first full week of the new year. Unless you have seen Darrell Jobman's new internet video, you will have to search out the clue yourself. It is somewhere in the internet within your reach. You had better have it two-day delivered and in your hands by Thursday (Jan. 8) unless you want to search clues out yourself.

ALS: I see you can get the tape free with Darrell's book. I haven't seen it. What do you think of it?

POP: First class, just like Darrell!

ALS: Do we go ahead with "Phantom's Gift" on CD with the rest of the story chapters? If so, what will it cost?

POP: Only if our traders want it! Production and distribution will have a cost. It's up to our traders as to what they think it is worth to them. That will be the cost. It has to meet cost of production and distribution. It is all up to our traders!

ALS: What is next?

POP: I am a good observer. I know our traders. Some know me already! It shall get better for the small trader. To keep my mask on makes me pretty obvious, but the small trader has the best advantage this way. Let's keep it that way. Offers are offers, but I want to see my little Phantoms grow up.

ALS: So be it!

Thank you sincerely,
Art & for Phantom

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