In recent discussions among traders and market analysts, the dynamics of executing trades in a fast market have captured significant attention. A volatile market, defined by sharp price swings and unpredictable buy/sell order levels, offers its own set of investor hurdles. When you try to buy 10,000 shares, it should fill you instantly at the current market price. You’ll notice this price in real-time quote displays. Because of the nature of fast markets, there can be a big difference between what prices are quoted and what prices will be executed at.
These challenges of trading in such adverse environments illustrate several key risks that may affect investors’ behaviors. Tote orders are filled in the order they are received. Due to this, the quote in real time can be very different from the situation when a market maker or specialist ultimately fills the order. This article breaks down these risks and offers advice on how traders can negotiate them with aplomb.
Understanding Real-Time Quotes
Especially with the current market moving at real-time speed, these traders analyze live quotes to make split-second decisions. For example, a trader might see an order of 10,000 shares. If they see a quote with 15,000 shares at $5, they’re counting on their market order executing at that price. Reality can differ significantly.
Orders placed in advance of a trader’s request will get executed first and may partly fill at one price and the rest at different prices. So for instance, you could execute an order of 10,000 shares in two separate pieces. You might do 2,500 shares at $5 and then 7,500 shares at $10. This result occurs due to the potential change in the market. It can change from the time that you view the quote to when you checkout.
“Real-time quotes may not be accurate.” – Source
Given the speed of transactions, prices can fluctuate at a speed where they might be different in seconds. Therefore, traders need to be alert and on the lookout for these types of inconsistencies in order execution.
Risks Associated with Fast Markets
The risks involved in a lightning-speed market are enormous. Prices are subject to quick, daily change. You may see drastic changes between the quotes you are given one minute and what is offered the next. This volatility not only makes trading strategies difficult, but can lead to sudden and potentially significant financial loss.
To address these risks, traders may opt for certain order types over others. To get more control over their trades, they utilize options such as “all or none” and “fill or kill.” These types of options give traders flexibility to set parameters for when their orders should be executed. The “immediate or cancel” option takes a hard line. This means that if an order cannot be filled immediately at your specified price, it will be canceled rather than left in ethereal purgatory.
Traders need to consider margin maintenance requirements when trading stocks with high volatility. Some sectors, such as Internet and high-tech stocks, can have increased margin maintenance requirements because of their built-in volatility.
“$2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales.” – Regulation T of the Federal Reserve Board
This heavy-handed regulation is meant to prevent brokers and investors from incurring large losses in times of extreme volatility.
Strategies for Trading in a Fast Market
For those keeping tread on the go-to paths of speedy markets, finding their way can be priceless. Investors unsure about how these market dynamics might affect their trades can contact a phone agent at 1-800-TRADERS for assistance. This provides traders with the ability to choose the most proper trade while not putting themselves at great risk.
Moreover, knowing which order types to use when can make you a more effective trader. And with features such as “good til canceled,” orders remain indefinitely until they are executed. “Day orders” expire at the end of the trading day if they have not been executed.
To ensure compliance with margin requirements and avoid penalties, such as account freezes for 90 days, traders should monitor their accounts closely. To investors, higher margins on volatile issues appear prudent and protect us. They serve as an insurance policy against unexpected market moves that can lead to large monetary damages.