In the fast-paced world of stock trading, the accuracy of real-time price quotes often comes into question. During a fast market, where rapid price changes occur, these quotes may not accurately reflect the current state of the market. This discrepancy is largely due to the speed at which prices change, influenced by factors such as highly anticipated Initial Public Offerings (IPOs), significant company news, or influential analyst recommendations. The impact of these events can trigger a fast market, leading to substantial variations in price quotes from one moment to the next.
Orders in a fast market may not be executed as a single transaction. For example, an order for 10,000 shares might be split into two blocks of 5,000 shares each. This division occurs because orders are processed on a first-come, first-serve basis. The backlog of orders can also result in executions at prices different from the real-time quotes initially seen by traders. This scenario highlights the importance of understanding how orders are handled and executed in fast markets.
Market Makers play a crucial role in this dynamic environment. These NASD member firms are responsible for buying and selling NASDAQ securities at prices they display within the NASDAQ system for their own accounts. They actively compete for customer order flow by presenting buy and sell quotations for a guaranteed number of shares. With over 500 firms currently acting as NASDAQ Market Makers, their involvement is pivotal in facilitating transactions and maintaining liquidity in the market.
In the midst of rapid market changes, traders must also be aware of different order types and their implications. A stop limit order, for instance, differs from a stop order in that it becomes a limit order once the stop price is reached. It can then be executed at the limit price or better, providing traders with a tool to limit losses or secure profits. In a fast market, a sell stop set at $67 could become a market order if the stock price drops to $67 or lower. The subsequent trade might be executed above, below, or exactly at the $67 stop price.
Real-time quotes in a fast market might not accurately indicate the number of shares available at a specified price. This inconsistency can be attributed to the rapid influx of orders and subsequent adjustments in quoted prices by Market Makers. As they strive to manage these fluctuations, Market Makers may alter their displayed prices frequently, contributing to the significant price differences observed between consecutive quotes.
The prohibition of freeriding is another critical aspect of market regulations that traders must consider. Freeriding occurs when an investor buys securities without having sufficient funds to pay for the purchase and then sells them before paying for them fully. This practice is strictly prohibited and can lead to penalties, including the freezing of the customer's account for up to 90 days.