(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.
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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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