PM: = Paul Mullen (Interviewer)
BT: = Ben Tippen (US Stock Scalp Trader)
PM: What is a stock scalp trader and what you do?
BT: A stock scalp trader is someone who takes small moves out of the market but with bigger size.
PM: Okay, and when you say small moves in the market with bigger size, what kind of size move are you talking about?
BT: One to three cents.
PM: What kind of size would be involved in that?
BT: That obviously varies, depending on the skill of the scalper, but I would say once you get into a situation to where you make a living out of it, I would say 10,000 shares and then once you’ve become a bigger player you’d be up to 50,000 to 100,000 shares.
PM: What you said there is a 10,000 share move would be something like $100 profit
BT: $100 for a one cent flip.
PM: So, $100 is obviously not enough to live on so how many times a day would you do that?
BT: Many times, maybe around fifty plus.
PM: So what you’re saying there is; if you could, by looking for a one cent move and fifty times a day, that’s somewhere in the region of $5,000 a day.
BT: If every trade was successful, yes.
PM: Okay obviously many people would like to be able to scalp but the costs involved in that means it’s prohibitive. For example, some people who are trading with a retail broker would incur quite hefty costs doing that. Let’s say you’re trading 10,000 shares and you’re looking for a one cent move, which would give you $100; what would the cost be for you in doing that?
BT: You simply can’t do it with a retail account. I’ve had several retail accounts and the commission structures do vary, depending on the deal you strike with the broker, but all the deals are a million miles away from what you need to be able to do this style of trading. You need to be able to flip for a penny and have half of the profit as net profit.
PM: When you say flip for a penny, what do you mean by that?
BT: If you’re going for a one cent move and you’re using 10,000 shares, you need to have $50 of that as net profit from the $100 gross
PM: So $50 is the actual profit you make from that one cent move.
BT: Exactly and the example you gave where if all 50 trades were successful, you would actually only be netting $2,500 out of the 5,000 if every trade was successful. It is a different picture when you look at it like that.
PM: But you also said that one cent is the minimum you go for. Do you frequently go for two or three cents ?
BT: That’s where the real profit is. If you can go for just that one extra cent, that’s all net profit because you’ve paid for the commissions in the first cent. That’s where the real profit is.
PM: What markets do you trade?
BT: At the moment I only trade NYSE (New York Stock Exchange) but I’m not saying it’s not possible on others as people also do it on the NASDAQ. The reason I’m on the New York Stock Exchange is because part of the strategy I use involves having a special order routing system. It’s only available at the moment on the New York Stock Exchange.
PM: You talked about a special order route there. What does that involve?
BT: On a standard retail account, generally speaking, you would be routing to exchanges and ECNs for example, ARCA or BATS or NSDQ or any of those standard exchanges or ECNs. If you were to bid or offer, i.e. passively take a trade, wait for someone else to take your order out of the book – we call that adding liquidity to the market. The ECNs would pay you to do that. If you take liquidity out of the market, i.e. you hit a market order or you hit what we call an inside limit order, the ECNs charge you for that.
With the order route I’ve got, even though I’m adding liquidity, I don’t get a rebate back. I still have to pay because my route allows me to bypass the thickness in the book and I route it straight out into the NYSE floor where there is a specialist who tries to match my shares. For the privilege of doing that, even though I’m adding liquidity, I have to still pay.
PM: It’s an interesting concept you talked about there. You said you can actually bypass the order book queue so by that, and correct me if I’m wrong here, but you’re saying that if you’ve got six or seven levels of orders being shown on a level two screen, and you’re at the seventh or eighth level, you could get filled quicker than the people above you.
PM: How do you actually go about that then? Most retail traders don’t have access to that so presumably you’re linked to something else?
BT: That’s the advantage of being part of a group like Affinity Trading Group where I’m a coach there for scalping and also a trader there. You simply could not do it without these tools and you need the route. There is also another route we use called "managed" which allows us to hit a market or inside limit order and we hit a dark pool of liquidity, and that quite often allows us, even on a one cent spread, on a $3.5 dollar stock you can still get an average fill of in between the one cent. When you’re using big size, even one tenth in your favor on 10,000 shares is $10.
PM: Just to clarify what you’re saying there, is that for the price that’s being shown, you could actually get a better price by half a cent sometimes or even a tenth of a cent?
BT: Exactly and the other big side to it is it’s also free. That?s very good because the idea of this style is that you get filled using our special route onto the NYSE floor, when there is plenty of thickness in the book and then if you think that thickness is going to deplete and it’s going to go against you, then you try to punch out using our managed route, which is free, for a flat trade. The idea of this style is you never see red gross P&L, in theory.
PM: That’s in theory. You talked about "dark pool liquidity". Can you say a bit about what dark pool liquidity is?
BT: Basically it is where orders are matched that are not shown on the order book and that could be through a broker who may have clients who they can match to each other.
PM: How did you get started in the industry?
BT: I was in the car trade for just under ten years, with my father. It was around the other side of London and we had some really good years but it was getting harder and harder as we approached the recession we’re now in. We didn’t know it was coming, but we felt it way before in the fact that the car sales were dropping off and it was becoming harder and harder. Also the manufacturers were obviously feeling it without knowing it was coming either, because they were getting tighter and tighter in the margins they were giving us. The whole business wasn’t looking as viable as it used to be so my father and I decided it would be better if we sold the business.
In the last few months of that I was looking for something else to do and I started getting interested in trading from the radio adverts that I used to listen to every day. I’d go into work in the car trade and I’d listen to these interviews. I looked into it and found out that these adverts were obviously not being honest so that wasn’t a route for me to go down but it did get me interested in the industry. I ended up opening a retail account. I had a few lessons, I won’t name the people they were with, but they were all well known coaches.
I just couldn’t get their styles to really work for me. I really did give it my all and I tried. I also met a few people off Trade2Win on the meetups and one of them joined a trading group called Nostrum, which is now The Affinity Trading Group. Having spoken to him and the CEO, I came to the conclusion it was a genuine company and if I was going to have any hope, this was going to be my final chance at it. I already discovered that I didn’t have what it took to do it on my own, with a retail account, so I joined them and I was initially trying to do P&L trading which is not scalping but looking for bigger moves, smaller size, what a standard retail trader would try and aim for.
PM: Still on the U.S. stocks I presume?
BT: Still on U.S. stocks, yes, and although I had a great deal from them, I just couldn’t get it to fit my personality and I found that I suffered a lot from over trading. I couldn’t stop trading. I always saw what I thought were good patterns and good setups but I just never had the skill to be able to really notice a good setup and go for just those trades. In the end, I decided to go to New York and spend a week with the CEO for further training. Whilst I was there, he took me down to a sister company and I watched them all trade down there. Mark was a trader there as well and I just was shocked about the amount of money they were making, so consistently, whilst I was there. One of the things that interested me was the fact that they all traded exactly the same, or very similar. They all were focusing mainly on level two. The only charts I saw were daily charts and some of the best traders there didn’t even have charts up at all. They were just looking at levels in the level two. They were very consistent and were doing very well and they were all making four figures, every day, whilst I was there.
PM: Four figures would be over $1000?
BT: Yes I think the biggest was just under five figures where someone made $9,000 one of the days I was there, but they were all four figures, every day. I was very impressed by it and thought, "That’s what I’m going to focus on now," and when I started focusing on it, I started realizing that I was getting back of the queue every time I got an order filled, no matter how long I left it in the book. It was better in the NASDAQ stocks but certainly on the NYSE stocks I was leaving my orders half an hour before the market opened at what I thought was a key level, and then half an hour after the market opened it would get to that level so my order had been sitting there for an hour and I still got filled at the back of the queue.
I was saying to the Mike Di Gioia who is CEO, "Why am I always getting back of the queue?" Mike looked into it and found these routes and came up with the tools and set it all up. Since then I’ve done very well with it.
PM: So the new order routes are a relatively new activity then?
BT: It’s all new and actually allowed me to become consistently profiable
PM: I know I asked you how you got started in the industry. How long have you actually been trading for total now?
BT: Just over two years.
PM: So two years and you have found scalping is something that you are happy with?
BT: It seems to fit my personality because I’m quite quick with the hot keys and I’d like to constantly be trading, which suits that style. Being quick with the hot keys, it allows me to get out for those flat trades, allows me to focus on the overall strategy without worry about taking the loss. The risk is something that, because of the style that I’m doing, it automatically gets taken care of, which is one of the most important parts of trading.
PM: Do you have any qualifications that you think are required for doing this?
BT: I don’t think you need any qualifications. I studied maps and computers at university but I don’t think it’s any relevance at all.
PM: How are you remunerated for what you do? Do you get paid a bonus? Let’s say you take a trade and you make three cents on 10,000 shares or $300. What percentage of that would you actually get?
BT: It’s a 50/50 split. Everyone’s deal is slightly different. Obviously, I’m a coach so there is stuff I get for doing that. I also trade live in front of the other members of the group every now and then. That all benefits me but as a standard trader, you’d be looking at getting a 50/50 split.
PM: What are the hours like?
BT: That’s all down to how long you want to spend. Everyone knows the market is open from 9.30am in the US, I’m here in the U.K. The market opens at 2:30 my time and to be honest; the majority of the action is in the first two hours and then the last hour.
PM: You’ve got basically a three-hour day when you’re trading, so the first two hours and maybe the last hour at night?
BT: That’s right. We have a term we use to describe what the fills are like when we’re routing through to specialists, and we say whether the stock is "in colour" or not. That is not necessarily so dependant, always, on the time of day. It can be in the doldrums which is the lunchtime period when suddenly a stock comes into colour, for whatever reason. That would then be the best time to trade. What a lot of this style is about is just feeling your way through the stock until that colour comes. That’s the time when you really get big.
PM: When you talk about stock being "in colour" what do you mean by that?
BT: It means that for whatever reason the order flow is there for us to use our specialist route and get the fills quickly. Remember, we’re not anything to do with routing into the standard level two order book you’re seeing, so it doesn’t matter how thick the level two is. If I put my order for 10,000 to 20,000 shares on the bid, if it’s in colour, I’ll get that filled within seconds. If it’s not in colour, I could end up sitting there for a while.
PM: That explains it. I wanted to make sure that people who are going to be reading this would understand that. What would be a typical working day for you, then?
BT: I log into the room at 2:00pm UK time (9.00am ECT). The different moderators go through what they think is going to happen today as far as the news, what stocks have been in the news and are going to react from it. That sort of information is more useful to the swing traders and P&L traders. The scalpers generally focus on a handful of stocks that they get to know very well. For me, I literally trade City Group; that is it. Some of the other scalpers trade BAC (Bank of America) or GE, but that’s all down to personal preference. I just focus on City Group. I think the scenario of City Group is perfect for the style that I do. It’s thick and it tends not be too volatile in its movements.
PM: You said a couple of things there. You said it’s "thick". What do you mean by thick?
BT: I’m just talking about how much volume there is on the bid and the ask.
PM: So there is a lot of volume. You also said it’s not very volatile so by that I presume it doesn’t move a large amount, one way or another, very suddenly?
BT: Exactly, if it moves suddenly, that’s not such a problem. It’s when it moves without indication. I’m looking for levels to cleanly deplete before it moves to the next cent. Sometimes it doesn’t always do that. When it’s behaving erratically the levels can start to slightly deplete and then suddenly everyone pulls their orders out and the level just jumps to the next cent. That’s very bad for this style because if we think it’s going to go against us, we want to get out for the flat cost when we think a level is depleting. If everyone is going to suddenly pull their orders and it’s going to jump, to lose a cent on 10,000 shares is very damaging to the P&L.
PM: I understand that. Does that sometimes work in your favour as well? Sometimes if the levels deplete do you sometimes find it gives you more of a profit than you thought you were going to get?
BT: I guess, but that would be gambling. You don’t want to be trading big size when that’s happening. Yeah sure it’s nice when it goes your way but you’re essentially gambling because you can’t control it if it doesn’t go your way.
PM: That’s fair enough. I just wanted to clarify that. You’ve talked a lot about that. From my understanding, you’re saying that the Affinity Trading Group is a group of people who come together to trade and within that you have different styles of trading. They have particular routes people can use to place orders, which are different to what other people have and therefore they get filled more quickly. The costs are significantly less than retail trading.
What advice would you give to somebody who wants to become a stock market scalper?
BT: I would say trying to do it on your own is next to impossible, not just because of the education side of it but because of the tools you’ve got. I don’t think you can get these tools in a retail account. The reason why we get such good commission structures and rates is because there is a whole team of us all trading big volume. On an average day I do between 200,000 and 500,000 shares and I’m not necessarily a big trader. Some of the bigger traders do 2 Million shares a day. When you combine all our share volume, you get a much better deal with your broker. When you’re on your own, even if you were doing the same volume as I do, 200,000 to 500,000 shares a day, you’re still not going to get anywhere near the deal to a group that’s doing tens of millions of shares a day.
PM: Okay, so what advice would you give to somebody who wants to do the same?
BT: I think the advice is to join a group similar to ours. We’re always looking for traders so you get the tools, the education, the support, and continuous mentorship. It’s not possible without such a group, in my opinion.
PM: Is there anything else you’d like to add?
BT: I think one of the important things I’ve learned through it all is that if you really want it and you really want this as a career, you have to keep battling and fighting with it as long as you can. That’s one of the things I was stubborn about. You’ll find that people who are close to you, your family, and your friends, if they don’t know anything about trading they don’t understand what you’re talking about. They don’t understand what it’s all about. They just think you’re gambling and wasting your time in some fairytale dream. If you really want it, I really wanted it and I knew it was a perfect way for me to earn a living, with the personal circumstances that I’m in. I really stuck with it. I changed brokerage firms many times. I had many lessons with all sorts of different people. I joined ATG luckily, and out of all the different things I did, eventually I struck it right and got it lucky and joined the right people.
It wasn’t without trying and I didn’t get lucky the first time. I had lessons with people. I came very close to going on courses, but you have to do all that sort of stuff and stick with it. You can’t let people who don’t know about trading tell you that it’s a waste of time. Once you do get it, it’s a fantastic way to earn a living. You don’t work for anyone. I don’t have to work for a day if my son is ill off school; I just don’t work that day. It’s a perfect way to earn a living.
PM: You talked a bit about the fact that you’re involved in coaching other people as well. In what context does that work?
BT: I only coach people who are interested in the scalping. The way we do it is they have an hour lesson, one-to-one with me per week and at any time they can contact me so I’m always contactable. They’ll watch me trade live to see the system in play. I also watch what they’re doing on their accounts so I can keep track of how they’re managing their day-to-day P&L. It’s very hands-on help, right from the beginning, and we’ve got all different levels you can get to. Once we feel you’re achieving the results at the lowest level, then you move up to your size, so it’s all controlled and you don?t ever go up too quickly. We make sure you’re doing it at the right pace.
PM: Thanks Ben.
Further details can be found at The Affinity Trading Group