What are fast markets?
Inherent risks of trading in fast markets
Limit orders can reduce your risk in fast markets
Market orders, limit orders. What's the difference?
Frequently asked questions about trading in a fast market
Schwab service in a fast market
From time to time, the stock market has experienced high levels of activity and large price fluctuations in a relatively small percentage of stocks—mostly recently, Internet-related stocks and especially Internet companies going public (IPOs). The result is that some investors, wishing to take advantage of the potential they see in emerging companies, place trade orders and then experience substantial differences between the price at which they expected to buy or sell a stock, and the price they actually received in the market.
In a fast-market stock, when the sudden demand to buy or sell shares outpaces the supply of shares offered, there may be dramatic price movement. It's not unusual to see 10-, 20-, even as much as a 30-point movement over a short period of time. If an investor places a simple "market order," that is to say, an order at "the market price," he or she could end up buying or selling shares at a price that is significantly different from the market price displayed only moments earlier. For example, in a fast market, you could place a trade order at a projected price of $10 and end up paying $40. It can, and does, happen.
If you decide to place an order in a fast market, entering a limit order (instead of a market order) allows you to establish a buy price at the maximum you are willing to pay, or a sell price at the minimum you are willing to receive.
At Schwab, we have always advocated a long-term investment philosophy. We are understandably concerned about protecting our customers from risks inherent in volatile markets. So we have taken steps to help our investors gain access to the information that they need to make decisions that are right for them.
Schwab has built special communication systems into our website and TeleBroker® service so we can keep our customers informed on particularly fast-moving stocks. In addition, from time to time, we may limit web access to certain stocks and ask instead that our customers speak with a Schwab representative to place orders for those stocks by phone. (Be assured that this does not affect the vast majority of stocks on the market. This way we can alert you when a stock is experiencing extreme activity and provide you with information that can help you make the appropriate trading decision.)
Schwab will continue its efforts to make sure investors like you have free and open access to the market coupled with information that allows you to act on your trading decisions with confidence. With the right balance of access and information, we can all take better advantage of today's market potential.
Fast markets are typically characterized by wide price fluctuations and heavy trading. They often come as a result of an imbalance of trade orders in one direction or another (e.g., all "buys" and no "sells") and can be spurred by such events as a company news announcement, strong analyst recommendation, or a popular Initial Public Offering.
- 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 your quote.
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 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 to process.
When you consider placing a trade in a fast market, making the choice to place a limit order will establish a buy price at the maximum you're willing to pay, or a sale price at the lowest you are willing to receive. 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 you expected.
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.
A limit order is an order to buy or sell a stock with a restriction on the maximum price you are 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). While a limit order allows you to set your price, it does not guarantee that your order will be executed.
Q: Why did my market order get filled at different times and at different prices?
A: When trading a stock in a fast market, there is increased potential that your market orders—particularly large ones—will be filled in segments. Ordinarily, the number of shares available at a given quote provides some indication of the price at which a market order might be filled. For example, if you place a market order to buy 2,000 shares and the market quote indicates 3,500 shares at 10¼, you might expect your order to be executed at 10¼. 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 and quotes that may not be current, there is higher likelihood that the shares will no longer be available at that price. You may find that by the time your order is received, only 500 shares remain available at 10¼. In that case, only the first 500 shares of your order will be executed at 10¼. The market maker or specialist then seeks to execute the balance of your order at the next best prices available, depending on how many shares are offered at each price. In fast market conditions, with prices changing constantly, this can take some time and may result in your order being filled at multiple prices.
Q: Why are market openings particularly volatile, especially for stocks trading in fast markets?
A: Due to the special circumstances involved in setting an opening price for all the orders accumulated since market close the day before, market openings are not considered normal market conditions. On average, one-third of a day's trading occurs when the market opens. Add to that a backlog of trade orders from fast market stocks, and you may have execution prices that greatly differ from quotes and lengthy delays in trade execution and trade reports.
Before the market opens, if there is an indication that a stock is going to be extremely volatile, Schwab may decide to remove that stock from trading on our website and Schwab by Phone™ trading systems. Our goal is to reduce the potential risks for our customers by providing Schwab's one-on-one service to help you place a trade order that meets your objectives.
You'll be notified that such stocks have been removed from trading on the web in the Urgent Notification section of your Account Overview page on Schwab.com. If you attempt to trade a fast stock through Schwab by Phone, you'll be redirected to a Schwab representative.
In the event that you are unable to place your trade order through Schwab's electronic channels, we will still apply the appropriate commission discounts to your trade order.