Trading in Fast Market Conditions

What Characterizes a Fast Market?

Fast markets are typically characterized by heavy trading with wide and sometimes fast price fluctuations. They often come as a result of an imbalance of trade orders in either direction (e.g. - all "buys" and no "sells") and can be spurred by such events as a news announcement, an analyst's recommendation, CNBC News Coverage, or market rumors. Examples of stocks recently trading in fast markets include the shares of several financial companies (banks, investment banks, insurance companies, etc.), Fannie Mae, and Freddie Mac. While technology on Wall Street has improved dramatically over the past few years, these fast market conditions do still occur and investors and traders should be aware of the ramifications listed below.

Potential Risks of Trading in a Fast Market

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 other words, the "real-time" quote you're receiving could very well be indicative of what the price of the stock was several minutes before. 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 your quote

During a fast market, orders are submitted to market makers and specialists at such a rapid pace, there's likely to be a backlog that can create significant delays, sometimes for several 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. The same applies to stop orders which are typically placed to secure a profit or prevent further loss. A stop order becomes a market order as soon as the stop price is reached, thereby placing it in line behind all other market orders which have been placed prior to your order becoming a market order. Stop orders may not provide any protection at all in a fast market. Finally, when a stock is trading in a fast market, a market order 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 duplicates 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 cancel order. Change or 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 to process.

Limit Orders Can Reduce Your Risk During Fast Markets

When you consider placing a trade during a fast market, placing a limit order will establish the maximum purchase price you're willing to pay (in the case of a buy order) or the minimum price you are willing to receive (in the case of a sell order). 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 that you will not pay a higher price than you expected.

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