V. 22:3 (74): Q&A by Don Bright
Q: Why are you so sure you will be on the same side as the specialist when using envelope orders? Would you please explain the basics about how you select your stocks (criteria)? When do you enter a trade (and when do you pull the order to avoid getting filled)? Finally, you say you have this automated. Does that mean you trade only the price movements of the particular stock?
A: When you “envelope” the bid and offer, you are looking to take advantage of what we call trade-throughs. This is when the stock drops or rises an unusual amount to accommodate a large order and trades through the existing bid or offer price. Note that the existing orders are entitled to the block trade, or improved, price when they print. The specialist usually
participates in this accommodation.
We primarily use high-cap NYSE stocks for this technique. We understand that as traders we must help the markets by providing liquidity, and sometimes we get rewarded for it.