In the past few weeks, financial markets have experienced extreme volatility. This chaos has caused countless people to reevaluate the state of trading practices and how they affect investors. A “fast market” can be a recipe for exhilarating opportunity, but it proves a danger. Supplemental condition 2 Real-time market quotes do not give a complete picture of trading conditions. That is the landscape we will examine in this commentary. The recently concluded UK-US trade deal and what it means for tariffs, how NASDAQ Market Makers work, and the dangers of trading with fast price changes.
In a rapidly moving market, real-time quotes can become stale within seconds. When hard market makers or specialists work an order, these quotes often do not necessarily represent the live trading activity. Inconsistency is a function of the prices and trades changing in real time, creating risk of different quotes at any given time. An order for 10,000 shares might be filled in two transactions of 5,000 shares. This is true even if a real-time quote indicates there are 15,000 shares at 10.00.
Making trading even more challenging is when there have been orders already placed in queue. So those prioritized orders jump the line ahead of all the new ones. As a result, investors could be surprised when their trades are executed at far worse prices than expected based on significant volatility. This phenomenon can dramatically affect high-tech growth stocks. These stocks are typically subject to much higher initial and maintenance margin requirements that can be as high as 70%.
More than 500 firms currently maintain at least one security as NASDAQ Market Makers. That vibrant and robust competition is what makes NASDAQ different from all other U.S. primary markets. Such a structure makes possible far more dynamic pricing. While useful, it increases the potential for gaps between referenced prices and what may be executed.
As trading speeds increase, so too do the risks posed by a new fast market environment. So investors should be careful. As we learned the hard way, the market can move massively between when they get their “real-time” quote and when they actually go ahead and place their order. If left unchecked, this can result in personal frustration and serendipitous losses.
If you’re not sure how any of these risks may impact your trades, fear not! You can receive personalized assistance from our dedicated phone agents at 1-800-TRADERS. This choice could offer an extra level of confidence for novice traders wading into these choppy waters.
Along with these challenges in the trading environment, recent geopolitical developments have played a major role in shaping market dynamics. The UK-US trade deal has successfully secured lower tariffs for Britain while maintaining a careful balance regarding ongoing UK-EU negotiations. This agreement should deepen economic relations without undermining the possibility of future negotiations with our European allies.