Understanding Markets & Trading Details
.....Updated 1/20/2000, 1/23/2000, 1/24/2000, 2/20/2000, 3/20/2000, 3/23/2000, 3/29/2000

(Underlined italicized text represents the latest additions to this training guide. Underlined text represents the previous additions to the training guide)


Your ability to quickly and efficiently make trades is paramount to your successful operations. Based on the amount of money being invested and the number of trades the potential savings accrued from trading efficiently can be enormous. First you must understand which market your stock is trading on. Unfortunately many of the quote reporting systems do not adequately notify or identify the true market the stock is being traded on. Trading a stock on one of the major exchanges New York Stock Exchange (NYSE), The American Stock Exchange (AMEX) or the NASDAQ National Market Listings (NasdaqNM) is pretty straightforward. Almost all quoting systems and online brokerages handle these trades efficiently and quote them properly. There is a certain amount of safety in trading these stocks. The other markets NASDAQ Small Cap, Over the Counter Bulletin Board (OTC:BB) and the Pink and Yellow sheets can be confusing. These stocks may not be clearly identified as to where they are listed and issues may move between them as they delisted or enlisted. Usually the order in which they move is from NasdaqSM to OTC:BB and then to the Pink Sheets. Different organizations and institutions handle the different Listings. Today almost all are fully computer traded like NasdaqNM but not as sophisticated and accessible a system and certainly not always available through many brokers. Some brokers will not allow online trading of OTC:BB and Pink Sheet listings and will have increased fees for such transactions when they are available.

It is extremely important when trading OTC:BB and Pink sheet listings to have the brokerage identify where the issue is listed and place only limit orders if possible. The placing of limit orders in these markets is extremely important because there may often be unreasonable spreads between the bid, ask and last price. Placing a market order in such situations and in situations where the order may not be promptly filled may result in buying an issue at a premium price or selling at a very low price. The circumstances and uncertainties in these markets also allow market makers to manipulate prices and market orders for their benefit. You can be assured that when placing market orders you will be paying the highest price available when buying the stock and receiving the lowest price available when selling the stock.

There are a lot of idiosyncrasies to placing effective trading orders. Sometimes it is necessary to place a market order on a constantly rising issue in order to prevent chasing or pushing it by placing ineffective or low limit orders. Some brokers execute market orders differently depending on whether they are a true primary market maker or a secondary player in the market. Some brokers will provide the order in parts, the lowest priced amount available and then the next group at the lowest price available based on the amount ordered. Some brokers will always wait until they can provide the entire amount at one price, sometimes keeping the difference of the amounts available at lower prices as profit to their coffers. Sometimes it may be wise to break a large order into smaller ones either to aid the execution of the entire order at lower prices, or to prevent manipulation by market makers who may see your large limit order on the books as a sign and opportunity for market manipulation. Limit orders are always preferable but they must be followed closely, changed and updated as circumstances require.

Stop Loss orders which set a price at which you want to automatically sell an issue are important tools to prevent losses on issues you cannot watch closely, or that you simply want to limit your losses on. Again these can be changed and updated as needed. It is important to note that some brokers will not allow Stop Loss orders on small priced and OTC:BB stocks. Just as some Brokers, Ameritrade and others will not allow trading online in OTC:BB stocks. The strength of brokers such as Wit Capital is their innovative approach to allowing the individual investor to be fully flexible in trading online, I.P.O. involvement, after hours trading etc.

The wisdom of having several different brokerage accounts cannot be overstated. This provides a degree of flexibility and functionality which will greatly facilitate the logistics of placing effective trading orders and receiving appropriate execution of your orders.

When possible it is essential to upgrade your brokerage accounts to Level II status. Level II accounts are now available for reduced rates and even with OTC:BB quotes. These types of accounts allow real time data on stock quotes, Market Maker trading, Time & Sales reports, size and depth of orders and more. having access to such data significantly enhances the efficacy of trading. In addition many level II type accounts allow for enhanced executions, even market maker type executions which significantly improves your trading capabilities and bottom line profits. The necessity of having level two data and execution capability is that more and more of the competition will be having it in the future and hence it will be essential to keep up with the competition at some point. Currently ABWatley offers an account called Ultimate Trader Free which allows most of the important Level II data and trade execution functions without extra costs when you open an account with $10,000. This appears to be the most cost effective approach to Level II data and executions at this time. Fidelity offers an excellent Level II account with very little restrictions and low trade prices. The Fidelity account requires a minimum of $20,000 deposit. The Fidelity account is the best if you have $20,000. Due to the fierce competition between brokers we can expect that other excellent Level II opportunities will develop quickly in the near future. Stay tuned to "Broker Notes and Comparisons" to watch for these developments. in Level II accounts.

Keep abreast of the "Broker Notes and Comparisons" training guide which is constantly updated with new information about online brokers. Your choice of broker will significantly affect the way and efficacy of how you trade. this can mean savings or losses of thousands of dollars and is of extreme importance. hopefully everyone will at some point be able to afford a proper Level II brokerage account, since without it the playing field is not even.

When possible watch the stock price in real time. Many online brokerages offer quotes in real time. Be sure to watch the particular issue you are attempting to buy or sell in real time before the purchase or sale. Review the HIPS reccommended brokers to see which offers real time quotes, Fidelity, Ameritrade, Etrade, and Datek all do. Remember if your budget ot trading habits will allow it use a brokerage or service than provides Level II quotes for NASDAQ listed stocks. The Level II NASDAQ quotes will allow you to see market depth, analyze the trades as they happen, see who is actually making the trades, provide the best view of what is actually happening with the issue at the time. The Level II quote systems are indispensible if you are trading NASDAQ listed stocks and in keeping up with the competition. Level II quotes improves your ability to predict what will happen to the stock in the immediate time frame and may even give you valuable information of how and when market makers play and manipulate the market.

Use of Reverse Limit Orders with OTC:BB Stocks

A major problem with OTC:BB stocks is the lack of predictability in getting a good price execution. This situation is even more pronounced when a market order is placed to sell in a market falling sharply, or when placing an order to buy in a market that is rising quickly. Generally unless you have a broker like Fidelity who apparently operates their own market making activities with noncommissioned brokers and market makers, most brokerages place your OTC:BB trades with independent market makers for execution. These independent market makers make their money from playing the spread in the stock. They must follow certain S.E.C. and stock exchange guidelines to prevent gouging traders, but there are ways to get around the rules in certain circumstances. Human behavior then becomes a powerful factor in the execution of certain trades. In particular in the two situations described above independent market makers realize that their gouging actions will be less likely challenged because of the rapidly changing conditions and so orders placed with them under such circumstances are inevitably be executed in their favor. When they come across such an order they immediately identify it as an easy source of extra profits. It becomes important then that the trader never succumbs to the pressure of the moment to place such orders unless you have an account with a broker like Fidelity who claims to use their own market makers and noncommissioned brokers. You may pay a higher price for such trades but you may save thousands of dollars on certain large executions.

One solution to the problem is to place a limit order at or below the price of the bid when you are trying to sell, and a limit order at or above the price of the ask when you are trying to buy in these rapidly changing situations. Now understand and remember two things, Stop Loss orders which are the best things to use in the sell situation are not generally available in OTC:BB stocks, and secondly, limit orders were not designed to be used in this way. Limit orders were designed to help the seller get the best price above a certain set price which is higher than the current price at the time the order is placed. Similarly, a buy limit order is usually placed at a price below the current price to allow a buyer to designate a lower price than current at which he would like to purchase the stock. In both these cases if a better price can be obtained above the sell limit or below the buy limit it should be given.

Now back to the solution to the particular problem where we use the limit order in atypical ways. When the seller places this "Reverse Limit Order" at or below the bid price he ensures that the price achieved will be at or better than the limit amount as long as he sets the limit low enough so that at the time the market maker receives it the current price is still above it. The same is true for the buy order, it must be placed high enough that at the time it is received it is still higher than the current price. What happens then is that such limit orders accomplish what a properly executed market order should do if not for market maker gouging in such circumstances. In other words the limit order will usually be executed very close to the current price at the time the order was placed preserving the integrity of the execution process. This occurs for one very simple reason. In the heat of battle with a rapidly changing market in the stock, market makers have previously identified the market order in those situations as easy pickings and although the market order is supposed to take precedence over limit orders in time of execution, the typical market maker understands that he can probably withstand the scrutiny of a fill challenge due to the circumstances. He therefore takes the extra time needed to manipulate a preferred position for himself which also makes the situation worse for the trader. However, when he receives a limit order, time and circumstances are not in his favor. His protections from liability are not in place because the limit order is mandated to be filled at the limit price or better. In a fast moving market the market maker does not have the ability to play the limit order or decide the circumstances and details of how the order was placed. He is now under pressure to accomplish the execution. Ironically he is in a similarly pressured situation like the trader who feels like he must place a market order in a fast moving market. But now, the tables have been switched by the reverse limit order. Again market makers understand where their potential challenges and liabilities lie, and they have identified the limit order that is close to its execution price as an order to give preference to so as not to miss the mandate. Market makers have the ability to maneuver and reconcile trades and settlements and so they can take chances on either side of the plate. You want to make them take chances when you are in the drivers seat and not them.

One additional benefit to placing limit orders rather than market orders is the fact that many times limit orders tend to get filled even after the price has moved significantly through and past the limit price. It is important to leave a limit order in place if you feel it should have been executed. If you cancell it, you give an errant market maker the opportunity to get off the hook . Sometimes limit orders which sit open all day show up being filled at the end of the day. What apparently happens in these cases is that the market makers utilize their conciliation, settlement and inventory capabilities to fill the order even after they originally missed the execution. Some of these conciliatory actions are certainly due to the need to prevent their liability for problems with timely execution of the order. This conciliatory situation will never occur in the case of a market order since there is very little liability to the market maker in filling a market order particularly in a rapidly changing market.

It may be preferable to use reverse limit orders in this way even in normal market conditions if you want immediate execution of your order at the going price without entailing the risk of a market order.

There is however one potential problem with this strategy. Some brokers may not take a reverse limit order particularly if the price is set to far away from the current price. Most however will accept them with the admonishment that they cannot guarantee the execution, or with the advice that the order will work to execute the trade right away and you may miss the opportunity of a potential turn around in the stock price. For example, if you placed a reverse sell limit order of $2.75 on a stock whose current price is $3.00 the limit order will immediately operate to sell the stock unlike a Stop Loss order which will wait until the stock reaches $2.75. In this case because the limit order immediately executes at any price above $2.75 you would lose the opportunity provided by a Stop Loss order when available, to either hold the stock or benefit from any potential increase in value, should the price not fall to $2.75. However, when used in a rapidly falling or rising market in the stock this should not be of concern since there is very little likehood of the price trend turning around on such short notice.

A properly placed reverse limit order is a powerful tool in rapidly changing markets. Not only will it better preserve the price at the time the order is placed, but ironically it may provide for much quicker execution than a market order in such circumstances.

It is important to recognize that such orders will usually have to be placed by telephone since many online trading facilities will not allow the placing of such atypical limit oders online. Online trading software may be programmed to prevent the placing of such reverse limit orders. However the telephone based broker will usually accept such orders and may even advise you how to structure them to allow them to be appropriately accepted and executed based on your intentions.

The Split Limit Order

Another helpful technique is the placing of a "Split Limit Order". That is a limit order placed at a price between the bid and the ask. This is especially effective where there is a large spread or difference between the bid and the ask price in a slow or static market. In such a situation placing a buy split limit order with the price just above the bid or at least closer to the bid, the order will many times get filled more quickly than an order placed at the bid or lower. Likewise a sell split limit order placed just below the ask will get a quicker sale than if placed at or above the ask. These split limit orders are helpful when there is uncertainty about what a market order or regular limit order will produce in fluctuating or unstable market.

 More on Limit Orders Generally

Limit orders can be effectively used in the case of a large spread. Many times such large spreads will cause a market order or a reverse limit order to result in buying or selling an issue at an abnormally high or low price. Judiciously placing the limit order to buy or sell within the confines of the spread will generally get you a better price. By placing the buy limit order higher than the current bid but lower than the ask, or the sell limit order lower than the ask but higher than the bid, these large spreads can present excellent opportunities for good trades. Such situations usually occur when an issue is in a state of price flux and may not last long so the trader must move quickly to take advantage of the situation

Limit orders should always be placed to expire at the end of the day if possible unless you may forget to replace it in the morning. One reason for this is that you want the market makers to place preference on your execution. With limit orders placed as good-until-cancelled it is natural human behavior to put it of if they can to take care of the ones that will expire in a shorter period of time. Particularly in the case of a large order which will sit and be recognized as an indicator of where the market may go. Of course such orders may be placed by wily traders in order to do just that and attempt to influence the market.

Cross Quotes & Closed Market Volume Indicators.

By closely following certain atypical indicators the trader can predict important price movements. Cross quotes which are situations where the bid price may be higher than the ask price, or where both are higher than the last price usually denote that the price is on the way up. This situation usually happens overnight and is an indicator that there has been after-market movements in the stock. A similar situation occurs with evidence of premarket volume that shows up at times just before the market opens. These volume movements can be picked up particularly well with the yahoo quotes source in Medved Quote Tracker. This volume usually menas here will be an immediate change in the stock price wwhther it will be up or down depends on the news and the quotes. usually it means the price will be up because it denotes traders attempting to get their buy orders in early to catch a rise in price. These indicators are important and allows greater predictability when seen.

Pre-Market and After Hours Trading

Pre-market and After Hours Trading are becoming more important. Only recently has the individual investor had the opportunity to trade during the extended hours from approximately 8.00am-9.00pm eastern standard time. Large institutions have been able to do this for years. Trading among themselves after hours allowed large institutions to affect the prices in the marketplace, resulting in stocks closing at one price and gapping open at a different price the next morning. Several alternatives for the individual investor was to trade on the German market or other foreign markets which carried U.S. listings and which operated at different hours due to the time differences. Such alternatives however causes other problems such as those used by the different currency exchange rates between the countries. Now some brokerage and Electronic Trading Networks (ECNs) such as Instinet and Island are affording individual investors the opportunity to trade after hours. To read more about these opportunities visit the Tradingday.com site:

http://www.tradingday.com/quotes_and_charts/after_hours_trading/

This site provides an excellent overview of pre-market and after market trading and a link to some good articles. it is wise to pay attention to after hour trading, news services since they can help to identify early trading trends and price moves, even if you do not actually trade after hours.

It is important to recognize the difference between simply placing your trade with a broker after hours which many brokers allow. These orders however are not filled after hours, but as soon as possible after the markets open in the morning. Other links to good articles on the subject are:

http://www.invest-faq.com/articles/trade-after-hours.html

http://www.pathfinder.com/money/depts/investing/virtual/archive/990316.html

http://www.fool.com/FoolFAQ/FoolFAQ0003.htm

The day to day operation of your business and execution of your trades can indeed make a major difference in your long term success. Beyond doing the right research and finding the right stocks to buy or sell, the question of how to accomplish your trading objectives can be quite demanding. Your expertise in this area will save and make you many dollars. Pay careful attention to the details of the markets and your trading habits and techniques.

Transferring Accounts
One problem which occurs more frequently than expected is the need to transfer accounts between brokers. As traders become more sophisticated and experienced this need becomes more critical since it may tie up your account and cause costly delays in trading. We have heard one story where Ameritrade informed an account holder that a full transfer would take up to three weeks with a partial transfer taking longer. In addition during this time the account would be held inactive for trading. Such a situation would be impossible to deal with. The account holder therefore immediately moved all cash from the account and deposited it in the new account, and thereafter proceeded to judiciously sell out his positions in Ameritrade so that he could transfer the cash out of the account. This is one way to handle these kinds of transfer problems. Another way is to request a "DTC" transfer.

DTC Transfers should be capable of happening within three days. You must request the DTC transfer and relevant information and codes from the respective accounts and stay on top of both brokerages to ensure the quick transfer. Obviously the brokerage to which the account is being transferred should be more than helpful in this process.



Other Important Information
Read this S.E.C. article for other important information on trade executions.
Trade Execution: What Every Investor Should Know

The following excerpt is a good review of some important information on markets and trading orders in general, published by Fidelity Investments to advise of some of the potential market and trading problems.

Trading in fast changing markets

As today's investors know, the U.S. securities markets are experiencing a period of extraordinary trading volumes and price volatility. While these conditions affect most segments of the markets, currently they are especially acute in certain securities, such as Internet-related stocks and initial public offerings ("IPOs").

In addition, investors in rapidly increasing numbers are taking advantage of technological developments that enable them to obtain market information and personal account information and to initiate securities transactions through electronic channels such as the Internet, telephone, personal computer, and two-way paging devices.

In a recent public statement, SEC Chairman Arthur Levitt reminded investors of the importance of knowing what they are buying, the environment in which transactions take place, and the level of associated risk involved.

At Fidelity, we believe that investors should stay informed about important investing issues. Therefore, we want to provide you with information that is important as you consider your trading through Fidelity.

Potential Delays in Order Execution and Reporting

Fidelity Brokerage Services Inc. ("FBSI") routes all orders to its affiliated broker-dealer, National Financial Services Corporation ("NFSC"). Orders for exchange-listed securities are sent to an exchange specialist for execution. With over-the-counter ("OTC") securities, NFSC either executes the order as market maker or routes the order to an unaffiliated market maker for execution. Market makers generally have their own procedures for handling orders (consistent with industry rules). In periods of heavy trading and price volatility, market makers may alter their procedures on individual stocks or groups of stocks. For example, they may execute orders manually rather than electronically, or reduce the order size for which they guarantee execution. Changes in trading procedures and other circumstances may result in queues and backlogs of orders, both intra-day and at the market opening, and corresponding delays in executions in the OTC and listed markets. In such cases, the execution price of a market order may be significantly higher or lower than the market price quoted or displayed at the time you entered your order. During such heavy trading periods, the quotes displayed on your computer screen as "real time" may not reflect the current trading price of the security. These conditions may also delay the transmission of order execution reports. To help you manage some of the risks of trading in a volatile market, below is a reminder of the types of orders you may place and how they are handled in the market.

Types of Orders

Market Orders

When you place a market order, Fidelity will transmit the order to a market center for full and prompt execution without regard to price. Therefore, in a volatile market, a market order may receive an execution price significantly different from the price of that security quoted when the order was entered. Additionally, if you place a market order when the markets are closed (e.g., nights or weekends), your order will be executed at the prevailing price when the market next opens. There can be substantial changes between the most recent closing price of a security and the next opening or available price. If you have limited assets to allocate to a transaction, you should consider placing a limit order, whether during the trading day or after hours. For example, your ability to make additional contributions to your retirement account is subject to certain requirements. Therefore, transactions in retirement accounts are generally limited to the assets available in the account. If your transaction price exceeds your available account balance and you cannot otherwise pay for the transaction, Fidelity will be required to liquidate all or a portion of the transaction or other account assets to the extent necessary to satisfy your financial obligation. Any losses or costs of such a liquidation will be your responsibility.

Since market orders are executed as promptly as possible, it is generally not feasible to cancel a market order even if you have not received an execution report. Your request to attempt to cancel a market order will be handled on a best-efforts basis. Although you may receive an electronic notice or verbal confirmation that we have received your request for the attempted cancellation, do not assume that it means that the trade was cancelled. Fidelity is not responsible in cases where a replacement order is placed and executed prior to your receiving confirmation of the cancellation of a prior order. In addition, due to the queuing of orders, if a market order is entered near the close of trading it may not be eligible to receive an execution.

Limit Orders*

A limit order will only be executed at a specific price or better. With a limit order to buy, the stock is eligible to be purchased at or below your limit price, but never above it. Similarly, with a limit order to sell, the stock is eligible to be sold at or above your limit price, but never below it. By placing a limit order instead of a market order you protect yourself from buying the stock at a price higher or selling at a price lower than you had expected. However, in volatile markets, although your limit order receives price protection, due to priority of other orders your order may not be executed even if the security is trading at your limit or better after your order is entered. Similarly, the security price may move away from your limit after your order is entered in which case your order will not be executed.

Stop Orders*

Stop orders are available on certain securities to buy or sell after a stock has reached a certain specified price. A buy-stop order is placed above the current market price and automatically becomes a market order to buy when the "stop" price is reached. A sell-stop order is placed below the current market and automatically becomes a market order to sell when the "stop" price is reached. As with any market order in volatile markets, the market order triggered at the stop price may receive an execution price significantly different from the quoted price of that security when the order is triggered. Market makers' procedures vary with respect to the handling of stop orders that have already hit the stop price. In addition, some market makers may not be willing to accept stop orders under certain market conditions, and this practice varies among market makers. When this occurs, Fidelity may not accept certain stop orders.

IPO Securities Trading in the Secondary Market

Due to the extreme volatility that is sometimes associated with trading an IPO in the secondary market (particularly one that is trading at a price much higher than the initial offering price), a customer who places a market order for such a security is at risk of receiving an execution price that is substantially different from the market price at the time the order was placed. As discussed above, this risk can be reduced by appropriate use of limit orders. The placement of a limit order in such situations would address the risk of receiving an execution that is substantially away from the market price that was quoted at the time the order was placed. However, as with any limit order in a volatile market, due to order imbalances and fast markets, a limit order may not receive an execution even if the security is trading at your limit or better after your order was entered.

Access to Fidelity

Fidelity has an ongoing commitment to provide the highest level of service and technology to enable you to access your account, obtain market information, and to enter your orders quickly, easily, and efficiently. However, during periods of extraordinary volatility and volume, customers using online or automated trading services may experience delays in accessing their account due to high Internet traffic or systems capacity limitations. Similarly, customers may experience delays in reaching telephone representatives. Please be aware that market conditions, including stock and bond prices, may change during these periods. Fidelity offers multiple channels through which you may place orders or access information, including the Web, touch-tone phone, and telephone representatives, so you have alternative ways to do business with us. Please be assured we are committed to providing the level of service you expect of Fidelity.

* There may be additional fees for limit and stop orders. Refer to the commission schedule for complete details.

 

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