We use this term to refer to a type of stock market trading that takes place before and after it is announced that a stock has had a stock split, or other announcement. These trades are known as “dumb money”. They can take place either before or after the news, but they are often executed by the same person.
For example, if a trading company announced the release of a new drug and that new drug has an R2 ratio of 1, the stock market will be open to trading right after the news and the stock will move into a higher value range. As a result, the stock can then make a huge rise from the news, but as the trading company releases more and more new information, the actual trading volume will decline. A similar situation exists if the company announces that its dividend has been adjusted downwards and that the amount being paid, now being adjusted downwards, is in fact not being paid at all. We call these “smart money” trades.
This is because the smart money is a group of traders that have done so much research that their results are not a surprise, and if executed correctly, can outperform the traditional swing trading patterns.
There are two main methods of executing these deals in the stock market.
Traditional Market-making (TD m) = Trading in real-time
Traditionally, the market-makers enter the market at the exact moment a stock market split is announced, and continue to place trades in line with the split’s R2 ratio.
It is very easy for a market-maker to simply place a buy trade, and then immediately follow up with a sell for the same amount of cash. As a result, most market-makers have their trading hours split evenly between real time (between the news and its announcement) and after hours (after the company discloses the news). This means that the market maker is often in fact the price action, and not the market makers, and there are many traders that can execute smart money trades, especially from a position outside of the market-makers.
One of the greatest advantages of TD m trades is that any movement can be calculated in advance using data feeds. Since all data feeds are calculated on a 24 hour basis and can be compared on any of the major stock exchanges (S&P, Fidelity, Amex, etc). traders can easily and quickly estimate the current direction of the market, and determine if a buy-and-hold strategy would be best to take.
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