In today’s supercharged financial markets, a trader’s execution of orders faces more hurdles than ever before. Proper trading in a hyper-competitive market is unchartered waters with historic implications. This can lead to enormous slippage between real-time quotes and the prices trades are actually filled at. Market conditions change all the time. Investors need to keep these dynamics in mind to inform the best possible measurable trading performance against their various trading strategies.
When a trader receives a real-time market quote, it may not accurately represent the state of the market at the moment their order reaches the market maker or specialist. Stocks and bonds can go up or down within minutes. This can lead to dramatic price fluctuations between bids received on the same project and sometimes even the same day. This leaves traders vulnerable to execution prices that are vastly different from what they expected.
NASDAQ is set up with a structure of competing Market Makers, and more than 500 firms currently make vigorous markets in this competing role. Together, each of these firms fulfills an important role in making trades possible. In a rapidly moving market, the conditions under which an order gets executed can become very complex. For instance, an order for 10,000 shares might be filled in two parts: 2,500 shares at one price and 7,500 shares at another. Fragmentation typically occurs when there is a huge change in the market. That can happen from the time a trader gets a quote to when they physically enter their order.
In volatile markets, orders are filled with a strict first-come, first-serve policy. This is if there are other orders already ahead of a trader’s limit order submission, which will be honored first as well. In practice, this can cause even more delays in adding to the upward change order execution price. For instance, if a trader places a stop order at $50, that order is triggered when the price of the stock reaches $50 or falls below it. After that it becomes a market order. The same thinking would generally go for any other stop order placed above the market, like $67.
The mechanics of executing trades in high-speed markets reinforce the serious need to know how stop limits work and how they could affect you. If the trade price of the stock ever falls to or below your set stop limit price, your trade becomes a limit order. It will only fill at your specified price or at an improved price. This unique order type distinguishes itself from typical stop orders. In contrast to them, normal stop orders can be executed at varying prices as a result of market movement.
Traders need to be keenly aware of the associated dangers with extremely high-margin stocks. This is crucial in industries like the Internet and e-commerce. This volatility can mean that some of these stocks have high initial and maintenance requirements—up to 70%—at the outset. This increased standard of care is a warning to broker-dealers who might be thinking about making investments in these spaces.
If there’s any doubt regarding your ability to trade in volatile markets, use phone brokers instead. More than anything, they can provide another step of protection to your purchases. For example, investors can call 1-800-TRADERS to place trades directly with a live broker. This approach can protect them from the unintended consequences that often accompany fast-paced action in the market.
“However, fast market conditions can affect your trades regardless of whether they are placed with an agent, over the internet or on a touch tone telephone system.” – Wells Fargo Investments, LLC
Nothing is a bigger challenge than fast markets. Service response times and account access may be affected by other factors outside our control, such as system performance. Market makers can fill orders at prices far away from the quotes seen by retail traders.
“Even ‘real-time quotes’ can be far behind what is currently happening in the market.” – Wells Fargo Investments, LLC
This serves as a reminder of how important it is to be careful when using real-time quotes in turbulent trading conditions. The increasing speed at which orders are entered has led to long lines and major delays in executing trades.
“Your Execution Price and Orders Ahead In a fast market, orders are submitted to market makers and specialists at such a rapid pace, that a backlog builds up which can create significant delays.” – Wells Fargo Investments, LLC
In addition, traders who are tempted to cancel and resubmit their orders should think twice because of possible repercussions. High-speed markets frequently lead to catastrophic execution lags. Therefore, in case a trader modifies their initial instruction, there is a risk of having two or more orders of the same type being executed.
“Please consider these delays before canceling or changing your market order, and then resubmitting it.” – Wells Fargo Investments, LLC
The decision to place limit orders rather than market orders, for example, is an important aspect of risk management. Indeed, this is even more the case in volatile market environments. A limit order allows traders to define a maximum purchase price or minimum sell price they will accept. This strategy allows them to insulate themselves from surprise execution costs.
“Placing limit orders instead of market orders can reduce your risk of receiving an unexpected execution price.” – Wells Fargo Investments, LLC
By understanding these intricacies and potential risks associated with trading in fast markets, investors can better prepare themselves for the challenges that lie ahead.