Trading Stocks Online - Don't be a Sucker (WALL ST JNL)

• February 20, 2015, 1:56 PM ET

Smart Trading for Those Who Seldom Trade

ByJason Zweig

Christophe Vorlet

Even the most patient stock investors have to buy and sell sometimes, and how you trade can make a big difference in how much money you make.

You could buy or sell a stock using a “market order,” an instruction to your broker to trade as soon as possible at the best price available in the market. Or you could use a “limit order” that indicates the highest price you are willing to pay if you are buying—or the lowest price you will accept if you are selling.

In today’s world of electronic exchanges dominated by high-frequency traders using advanced technology to trade at blazing speed, market orders can wreak havoc on your returns without warning.

Consider data from Eric Hunsader, founder of Nanex, a firm in Winnetka, Ill., that analyzes trading patterns. It looked at recent price moves in the shares of Parsley Energy of Austin, Texas, an oil-and-gas production company with a total stock-market value of about $2.1 billion.

Let’s say you placed a market order to buy shares in Parsley at 11:06:34 a.m. on Feb. 6, when the stock stood at $16.30. By 11:06:35, it had leapt to $18.20—a 12% gain in a single second. Over the next three seconds, it wilted back down to $16.60.

A spokeswoman for Parsley said the price move could have been related to a positive earnings announcement that morning, although the news was released before the market opened.

This past week, Parsley traded at about $16.80. Someone who used a limit order to buy at $16.30 already is in the black. Someone who, one second later, bought with a market order at $18.20 needs the stock to go up 8% from here to just break even.

Such momentary jolts in price have been occurring dozens of times a day for years, Mr. Hunsader says, and can affect larger companies, too. Only 32 seconds after the market opened at 9:30 a.m. on Feb. 10, shares in General Motors nose-dived from $37.17 to $36.40 in less than one-quarter of a second.

If you had entered a market order to sell GM when it was at $37.17, you might have gotten only $36.40 instead, or 2% less than you expected. Two seconds later, the price had recovered to $37.10.

Investors balk at paying brokerage commissions, but they often don’t even notice that a market order led them to pay far more for a stock than they should have.

One antidote, traders and researchers say, is what is known as a “marketable limit order.”

Stocks are quoted with both a “bid” and an “ask.” The bid is the highest price that buyers are willing to pay; the ask is the lowest price that sellers are offering to accept.

Say the best bid on a stock is $10.00 and the best ask is $10.02. If you want to buy immediately but don’t want to pay more than a few pennies extra, submit a marketable buy-limit order at $10.05. Such an order should be filled at $10.02 unless the market instantly runs up, in which case you are protected against paying more than $10.05. If the market drops, you will buy at that lower price.

A disclosure called a Rule 606 report shows basic information about how a brokerage handles trades, including the proportion filled as market orders. The percentage of market orders in New York Stock Exchange trades disclosed on the Rule 606 filings of retail brokerage firms varies widely, from 15% at TD Ameritrade to 24% at Vanguard Brokerage Services, 43% at E*Trade Financial and 50% at Fidelity Brokerage Services and Charles Schwab.

Some firms, including Credit Suisse Group, say they automatically convert most market orders to marketable limit orders in an effort to get the best prices for their customers. Most retail brokerages charge the same commission on limit and market orders.

Speak up to make sure your trades aren’t being handled as market orders. 

You always should use a marketable limit order when trading, says Lawrence Harris, a finance professor at the University of Southern California and former chief economist at the Securities and Exchange Commission. “It forces you to think more carefully about your order.”

It also could save you from trading at a price that could eat up a year’s worth of return on a stock.

— Write to Jason Zweig at intelligentinvestor@wsj.com, and follow him on Twitter at @jasonzweigwsj.

What is moving the markets? Computers (WSJ)

JUNE 18, 2009, 9:00 A.M. ET Automated Funds Now Dominate Stock Market; Other Traders Wary
By Rob Curran and Geoffrey Rogow
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The U.S. stock market is increasingly switching to automatic from manual transmission, forcing investors to relearn how to drive.

Investors and pundits are left clutching at straws to explain big moves in the stock market, such as attributing a June 8 bounce to rehashed comments from Nobel Prize-winning economist Paul Krugman. The difficulty in divining a fundamental explanation stems from a structural change in the U.S. stock market: The majority of stock trades now originate with fully automated "high frequency" funds, a phenomenon that has accelerated during the market turbulence of recent years because of the relative success of the strategy.

These funds employ no traders in the conventional sense. They employ no economists or chart trackers. Rather, programmers at funds such as those operated by Citadel Investment Group and Renaissance Technologies outfit computers with strategies based on obscure mathematical correlations. Then the machines trade in and out of stocks at light speed without human intervention, a departure from the "fundamental" investing model that dominated trading for the last century.

The growth of these funds is such that institutions whose names have never appeared in the newspaper are now trading hundreds of millions of shares a day. Major hedge funds that have put other strategies on ice are opening new funds devoted to high-frequency strategies and hiring the mathematicians and computer programmers that run them. Some of the fastest-growing market makers, such as Global Electronic Trading Company, or Getco, also use the automated strategies.

With the rise of these automated funds, the stock market is more prone than ever to large intraday moves with little or no fundamental catalyst. Computers don't analyze the news (although some strategies use headlines as triggers) or seek to justify their buying and selling. Even in the relative quiet of the last three months, investors have often watched individual stocks or sectors move by 10% or more without explanation.
Two-Thirds Of Total Volume
Five years ago, less than one-quarter of U.S. stock-trading volume was generated by "high-frequency" traders, and few considered the funds more than a niche strategy, according to Matthew Rothman, an analyst of quantitative funds for Barclays Capital.

That percentage has since more than doubled even as overall volumes increased, with some estimating as much as two-thirds of daily volume now stems from these funds. The niche's role now overshadows that of mainstream brokers, mutual funds and hedge funds.

In 2007, when the bear market started, the popularity of the funds "started to take off (and went) parabolic when volatility spiked," says Bill Cronin, head of electronic sales for Knight Capital Group Inc. (NITE), a broker that serves many of these funds. High-frequency funds, whose average stock-ownership tenure is counted in seconds or even thousandths of a second, became more profitable the more stocks moved during the session, and it was one of the few areas that saw some profits even during the crash. Their success drew more capital into these model-makers, extending their reach just as other money managers lost assets and reduced trading.

For almost every other category of hedge fund and money manager, what Cronin calls the "ungodly" swings of the market caused losses.

"The volatility opened up the door to make money more easily" for the high-frequency funds, Cronin said. "Now, they're popping up like mushrooms all over the place."

Gaming The Market
Traditional money managers face the increased likelihood of seeing orders "gamed," or deliberately gouged. High-frequency funds have myriad strategies, but many depend on sniffing out "order flow" - or what hedge funds, mutual funds and pension funds that hold stocks for fundamental reasons are buying and selling.

Some conventional brokers such as Joseph Saluzzi, a founder of boutique trading house Themis Trading, consider the high-frequency funds troublesome "locusts...feeding off the equity market." Saluzzi believes the current market structure makes it too easy for a high-speed computer to expose a large order before it's fully executed.

"You have to be cognizant of the fact that these people are out there and they're making a lot of money," said Rich Gates, a portfolio manager for TFS Market Neutral fund in West Chester, Pa.

The Securities and Exchange Commission believes institutional money managers are "sophisticated" enough to trade against the machines without further regulation.

"We don't want to curtail liquidity," said Gene Gohlke, associate director for the SEC. Gohlke said it's up to the managers themselves to make sure other traders aren't manipulating their models.

Saluzzi considers the high-frequency trades "phantom volume." He questions whether the increased volumes from the funds in the last couple of years have mitigated volatility as "liquidity" is thought to do, or increased it.

The popularity of these strategies has spawned a cottage industry called "co-location," or "proximity hosting." Exchanges sell the funds "rack space" in the data centers where their servers process trades to gain an extra couple of milliseconds on the competition. Most exchanges have had to turn customers away because rack spaces are full.

To gauge the prevalence of computerized trading, the SEC may soon tag orders executed by "algorithms." Algorithms are computer programs used to slice and dice many kinds of stock orders.

The regulator did the same thing with program trading - a system of executing batches of orders in tandem. But Cronin, of Knight, said algorithms are ubiquitous for both manual traders and automated traders. The algorithm is not a strategy but an electronic method of executing a trade. Even floor brokers at the New York Stock Exchange use algorithms to trade stocks. Tracking them won't reveal the role played by automated funds in the stock market.

-By Geoffrey Rogow and Rob Curran, Dow Jones Newswires; 212-416-2179; geoffrey.rogow@dowjones.com