As you’ve experienced, in recent weeks the stock market has been nothing but volatile. This unpredictability has caused significant and justified concern by investors that real-time market quotes cannot be trusted. Trading activity is beginning to heat up, especially among companies in the Internet, e-commerce and high-tech sectors. Consequently, the market has shifted into what most refer to as a “fast market.” This environment can create unusual challenges, including how the timing of trades could profoundly affect execution prices and the viability of broader trading strategies.
In a fast market, real-time quotes may not accurately reflect the current state of the market at the moment an order is received by a market maker or specialist. Consider the decision of an investor who wants to purchase 10,000 shares of a company. They might see that you have 15,000 shares on offer for only $5. Because of the speed of the market action, that limit order might get executed only partially at the higher price. The order might be fully executed with 2,500 shares at $5 and 7,500 shares at $10. This occurs even though the original quote suggests that there were sufficient shares at $5. This difference shows how quickly prices and trades can change in a matter of seconds.
“Even real-time quotes are often behind the eight ball on what the market is actually doing right now,” said one industry expert. This has created a considerable burden for merchants. This scenario highlights the need for traders to be aware of the risks that come from trading in times of increased volatility.
Traders need to understand the distinction between stop orders and stop-limit orders. A stop-limit order features two critical components: it sets a specific “buy price” at which an investor is willing to purchase a stock and a “sell price” at which they are willing to sell. A simple example would be if an investor places a stop-limit order to sell stock at $67, they are in charge of their trade. This strategy allows them to better manage the squeeze of sharp price increases.
When times are volatile, margin maintenance requirements become more stringent. Right now, some stocks have initial and maintenance thresholds of 70%. This is largely a consequence of the dramatic price fluctuations that are the hallmark of a hot market. The extreme shifts in intra-day trading, up to 8 percent, triggered this recalibration. Consequently, brokers have recently begun placing greater margins on some contentious volatility. Reg. T imposes a minimum investment of $2,000 or 50% of transaction value for eligible securities purchased on margin. This rule applies to short sales, with the minimum being 50% of the gross proceeds.
Practitioners must be cautious when moving in this rapidly evolving space. The effect of having more than 500 companies serving as NASDAQ Market Makers can further muddy trading waters. If investors become unsure about the risks of blistering markets, they can be gun-shy on particular trades. To get further detailed assistance, they should reach out to a phone agent using 1-800-TRADERS for further step by step assistance.
A lightning paced market does not leave room for traders to react later to shifting market pressures. Having the tools to respond at the first whiff of an outsize, unexpected, unargued-for price move can mean the difference between protecting investment and maximizing opportunity. For that reason alone, investors need to arm themselves with the right information and tools to best navigate these tremendously complex and quickly changing environments.