The following information is provided as a discussion
of customer concerns about trading in fast markets, and what we
do to support our customers during periods of market volatility.
Fast markets are typically characterized
by wide price fluctuations and heavy trading within a short period
of time. They often come as a result of an imbalance of trade orders
in one direction or another for example: heavy buy orders and few
sell orders, and can be spurred by such events as a company news
announcement, strong analyst recommendation, or a popular Initial
Public Offering (IPO).
Price quotes may not be accurate.
Prices and trades move so quickly in a fast
market, there can be significant price discrepancies between the
quote you receive one moment and the price at which your trade is
executed the next. Remember, in a fast market environment, even
real-time quotes may be far behind what is currently happening in
the market. In addition, the number of shares available at a certain
price (known as the size of a quote) may change rapidly, affecting
the likelihood of a quoted price being available to you.
Market order execution price may differ from
During a fast market, orders are submitted
to market markers and specialists at such a rapid pace, there's
likely to be a backlog that can create significant delays, sometimes
exceeding thirty minutes. As a result when you place a market order
under these conditions, the quote you receive is more an indication
of what has already happened in the market than an indication of
the trade execution price you will receive. Market orders are executed
on a first-come, first-serve basis. In the short time between when
your order is placed and when it's executed, other trade orders
already in line ahead of yours can affect the stock price. Finally,
when a stock is trading in a fast market, a market order normally
cannot be changed or canceled once the stock begins trading.
Delays in trade executions and/or trade reports.
There may also be delays in trade execution
and/or trade reports due to the sheer volume of trades being processed
in a fast market. To avoid creating duplicate orders, you should
consider these delays and the chance that your trade order has already
been executed but not yet reported, before placing a change or change/cancel
order. Change or change/cancel orders do not expedite trade reports
when a stock is trading in a fast market. In fact, they have the
opposite effect by cluttering the trading systems with more information
Delays in electronic trading or reaching
Heavy volume may also affect investor's
ability to access electronic systems for trading through the Internet
system. Broker-assisted trading is available during normal business
hours at 1.800.736.7460. While every effort is made to ensure the
availability of electronic systems and brokers, no guarantee of
access can be made during periods of exceptionally heavy activity.
In addition, system response and account access times may vary or
service may be interrupted due to other conditions, including system
performance, Internet traffic levels and other factors.
Special risks of short-term strategies.
Fast markets pose a special risk for investors
who employ short-term strategies such as day
trading. Such short-term strategies are inherently more risky
than long-term investing. Intraday price changes may be significant,
and you risk loss of value, especially in time-sensitive issues.
Delayed quotes and/or executions may make it extremely difficult
for the investor to determine market value. In addition, temporary
unavailability or delays in reaching brokers or placing electronic
trades may lock the investor out of the market at critical times
during especially high-volume trading days associated with volatile
market conditions. Investors who adopt short-term trading strategies
should do so only with funds they can afford to lose as the downside
risk of such strategies is substantially greater during a volatile
Additional Risks Involved With Trading On
There are a number of additional risks that
all investors need to consider in deciding to trade securities on
margin. These risks include the following:
- You can lose more funds than you deposit in the margin account.
A decline in the value of securities that are purchased on margin
may require you to provide additional funds to the firm that has
made the loan to avoid the forced sale of those securities or
other securities in your account.
- The firm can force the sale of securities in your account.
If the equity in your account falls below the maintenance margin
requirements under the lawor the firms higher "house"
requirementsthe firm can sell the securities in your account
to cover the margin deficiency. You will also be responsible for
any short fall in the account after such a sale.
- The firm can sell your securities without contacting you.
Some investors mistakenly believe that a firm must contact them
for a margin call to be valid, and that the firm cannot liquidate
securities in their accounts to meet the call unless the firm
has contacted them first. This is not the case. As a matter of
good customer relations, most firms will attempt to notify their
customers of margin calls, but they are not required to do so.
You are not entitled to an extension of time on a margin call.
While an extension of time to meet initial margin requirements
may be available to customers under certain conditions, a customer
does not have a right to the extension. In addition, a customer
does not have a right to an extension of time to meet a maintenance
margin call. It is important that investors take time to learn
about the risks involved in trading securities on margin, and
customers should consult LaBrunerie Financial regarding any concerns
they may have with their margin accounts.
When placing a trade in a fast market, choosing
to place a limit order will establish the buy price at the maximum
you're willing to pay, or a sale price at the lowest price you're
willing to sell. Limit orders in a fast market will reduce your
risk of receiving an unexpected execution price. What's more, a
limit order allows you to place an order at the price level you're
most comfortable with when buying or selling a security. Although
a limit order does not guarantee your order will be executed, placing
a limit order does guarantee you will not pay a higher price than
Limit vs. Market Orders
A limit order is an order you place to buy
or sell a stock with a restriction (limit) on the maximum price
you are willing to pay (in the case of a buy order) or the minimum
price at which you are willing to sell (in the case of a sell order).
A limit order allows you to set your price, but it does not guarantee
that your order will be executed at that price. If the price moves
above (or below) your limit, the trade will not be executed unless
the price moves back within the limits you have specified.
A market order is an order to buy or sell a stock
at the best price available at the time the order is executed in
the market. Due to minute-by-minute fluctuations in price, these
orders typically assure a fill, but not a specific price. Market
orders are normally placed on a day-only basis, and because they
are typically filled quickly, they generally cannot be canceled.
When trading in a fast market, it's possible
that your market orders - particularly large ones - will be filled
in segments. Generally, the number of shares available at a given
quote provides an indication of the price at which a market order
might be filled.
For example, if you place a market order to buy
5,000 shares and the market quote indicates 10,000 shares at 15
¼, you might expect your order to be executed at 15 ¼.
However, even in the best of market conditions, there is no assurance
that you will get the quoted price. In fast markets, however, due
to the backlog of orders, as well as quotes that may not be current,
there is a greater possibility that the shares will not be available
at that price. You may find that by the time your order is received
for execution, that only 1,000 shares remain available at 15-¼.
If this is the case, only the first 1,000 shares of your order will
be executed at 15 ¼. The market maker or specialist then
executes the balance of your order at the next best price(s) available,
depending on how many shares are offered at each price. In fast
market conditions, with prices changing almost constantly, this
can be a lengthy process and result in your order being filled at
several different prices.
In a fast market, it's rare that the opening
price for volatile securities matches the previous day's close.
There are special circumstances involved in setting opening prices.
Orders accumulated since market close the day before are not considered
"normal" with respect to the open. Remember, on an average
trading day, one-third of a day's trading occurs at the open. If
there is a backlog of orders from fast market stocks execution prices
may differ greatly from quotes and the process of clearing the backlog
may result in lengthy delays in both executions and position updating.
This opening volatility accounts for some of the recent substantial
price differences between announced offering price and actual initial
public trading of volatile Internet and high-tech issues.
Due to the extraordinary volatility of certain
securities and their derivatives, we have adopted the following
trading restrictions as a protection for our clients:
IPO Market Orders
Effective immediately, LaBrunerie Financial
will not accept market orders for IPOs on the opening day of trading.
We will continue to accept limit orders.
Former SEC Chairman Advises Caution
Investors should be cautious about using
the Internet for online investing in stocks, former Securities and
Exchange Commission chairman Arthur Levitt says.
"Online investors should remember that it
is just as easy, if not more so, to lose money through the click
of a button as it is to make it," he said. Levitt's comments,
follow the recent wide swings on the technology-laden NASDAQ market.
"The SEC will do everything it can to protect
and inform investors during this time of great innovation and change,"
Levitt said. But investor protectionat its most basic and
effective levelstarts with the investor," he said.
Levitt said there are three "golden rules"
for all investors: They should know what they are buying; know the
ground rules under which a stock, option, bond or other security
is bought or sold; and know the level of risk to which they are
Moreover, he said, there are some issues specific
to online trading. Investors have complained to the SEC about delays
in new systems, difficulty getting on line or receiving confirmations,
and a lag between the prices investors see on their screens and
real-time market movement.
For this reason, Levitt urged investors to rely
more on limit orders when they want to buy a "hot" stock.
Limit orders let investors specify a maximum price at or below which
they'll buy a stock, enabling them to protect themselves from having
to pay far more than they expected when a stock's value has risen
while their order was being carried out. Limit orders also can be
used to specify a minimum selling price.
The former Chairman also commented on day-trading
which is increasing in popularity, especially in Internet and other
high-tech stocks and options. "Strategies such as day trading
can be highly risky, and retail investors engaging in such activities
should do so with funds they can afford to lose," the former
chairman said. "I am very concerned when I hear of stories
of student loan money, second mortgages, or retirement funds being
used to engage in this type of activity. Investment should be for
the long run, not for minutes or hours."