Market selling under highest bid?
Vincent Cate
I had a bid outstanding (for days) to buy a stock at $12/share.
The low today for the stock was $11 3/4. However, my bid is still
outstanding. I called my broker and asked about this and was
assured that this was normal for over the counter stocks and
that only on the NYSE or American did you really have an
auction. I was told that on OTC (NASDAQ) stocks the market
makers for a stock can just do whatever they want. They also
said that a market order has precedence over a limit order
(like my bid).
This blows my image of the stock market. I had always assumed
that if anyone wanted to sell stock at the market price that it
would go to the highest outstanding bid and not a lower one.
I could see a market order having precedence over a limit
order of the same price but when the prices are different I
can't see a precedence rule coming into play.
Has this every happened to anyone else? (having a low for the
day lower than your unused outstanding bid).
Can someone explain this?
Is there something funny like a broker buying stock at a lower
than market price and not charging commissions?
Thanks,
-- Vince
Gordon E. Banks
>
>I had a bid outstanding (for days) to buy a stock at $12/share.
>The low today for the stock was $11 3/4. However, my bid is still
>outstanding. I called my broker and asked about this and was
>assured that this was normal for over the counter stocks and
>that only on the NYSE or American did you really have an
>auction. I was told that on OTC (NASDAQ) stocks the market
>makers for a stock can just do whatever they want. They also
>said that a market order has precedence over a limit order
>(like my bid).
>
>This blows my image of the stock market. I had always assumed
>that if anyone wanted to sell stock at the market price that it
>would go to the highest outstanding bid and not a lower one.
>
>I could see a market order having precedence over a limit
>order of the same price but when the prices are different I
>can't see a precedence rule coming into play.
>
>Has this every happened to anyone else? (having a low for the
>day lower than your unused outstanding bid).
>
>Can someone explain this?
It happened to me on the sell side. I had a order to sell at 9 5/8
and the WSJ listed the stock on two days as selling for 10, yet
my order wasn't executed. I called and the broker said the market
maker's highest bid was 9 1/4, although he sold some at 10.
He wouldn't buy for more. Sounds like 3/4 point per share is
an excessive profit and this ought to be looked into. But with
NASDAQ we are completely at the mercy of the market maker. I
suppose you could complain to the SEC. Perhaps someone should
set up a computer trading service where we can list our stocks
for sale and buyers can bid without going through the market
maker.
Brett Behm
> It happened to me on the sell side. I had a order to sell at 9 5/8
> and the WSJ listed the stock on two days as selling for 10, yet
> my order wasn't executed. I called and the broker said the market
> maker's highest bid was 9 1/4, although he sold some at 10.
> He wouldn't buy for more. Sounds like 3/4 point per share is
> an excessive profit and this ought to be looked into. But with
> NASDAQ we are completely at the mercy of the market maker.
I was wondering why the spread between bid and ask was so high. At lunch
I usually go home and catch a bit of FNN. One of the issues I follow is
NIKE. You can watch 2 trades go back to back with 1/2 point spreads
all the time. I see it on the NYSE as well, but not nearly as often and
most of the spreads are at an 1/8. I'd sure like to sit back and make
$50-$75 a pop maybe 100 time a day guaranteed. What's that number for
specialist training school?
Brett Behm
John Belt
>The low today for the stock was $11 3/4. However, my bid is still
>outstanding. I called my broker and asked about this and was
>assured that this was normal for over the counter stocks and
>that only on the NYSE or American did you really have an
>auction. I was told that on OTC (NASDAQ) stocks the market
>makers for a stock can just do whatever they want. They also
>said that a market order has precedence over a limit order
>(like my bid).
>
>Can someone explain this?
>
Although I'm not a stock broker, I'll try to explain the situation, IN ENGLISH.
Prices for stocks on the NASD or OTC use a market maker with a bid/ask price.
Say for instance your stock is trading at 11 1/2 bid, 12 ask. This means that
if you were to sell the stock "at the market" and the price did not change,
you would recieve 11 1/2. If at the same time I were to try to buy the same
stock, I would be paying 12. The market maker would make the difference
between the two prices. Assuming once again that you sold 100 shares and I
bought 100 shares and that was the only trading in the stock the entire day,
the paper the next day would show 1 11 1/2 12 + 1/8
which would translate to | | | |
| | | change from the prev day
| | high of the day
| low of the day ``
volume(# of hundreds of shares traded)
All of these figures do not include the commisions we would pay our brokers
for their services :-).
I hope I have helped and haven't confused the issue more.
--
John Belt (513) 865-1328
Mead Data Central Data Fabrication Technology
P.O. Box 933 mead!j...@uccba.uc.edu
Dayton, Ohio 45401 ...!uccba!mead!jsb
phd...@gsbacd.uchicago.edu
>In article <1990Sep13.2...@cadre.dsl.pitt.edu>, g...@dsl.pitt
edu (Gordon E. Banks) writes:
[ an unfortunate anecdote about the bid-ask spread, prompting
Brett Brehm to ask ]
>I was wondering why the spread between bid and ask was so high.
>Brett Behm
The bid-ask spread has been theorized to come about due to information
asymmetry between the market makers and and the investors with whom
he/she trades, which leads to adverse selection in the market. I
don't think that I can add to the following explanation, so I
will just quote it. From:
_Games and Information_, by Eric Rasmusen (Basil Blackwell, Ltd. 1989),
p. 197.
"Adverse Selection can explain the bid-ask spread. The price of a
particular stock, which is an estimate, based on public information,
of the firm's value, can either rise or fall. If marketmakers compete
in offering liquidity services to traders no better informed than
themselves, the bid-ask spread should be narrowed to the transactions'
cost - nearly zero."
"But if there exist some informed traders, who have better information,
themn the bid-ask spread must be greater. If the marketmakers only
break even trading with the uninformed, they consistently lose money
trading with thThe marketmakers problem is adverse selection because
he would like to trade with the uninformed at a small bid-ask spread,
and not trade with the informed at all, but he must pool the two types."
I hope that provides at least some explanation for the phenomenon.
Keith Bockus
phd...@gsbacd.uchicago.edu
so I'm reposting the corrected quote.
> From
>_Games and Information_, by Eric Rasmusen (Basil Blackwell, Ltd. 1989),
>
>p. 197.
>
>"Adverse Selection can explain the bid-ask spread. The price of a
> particular stock, which is an estimate, based on public information,
> of the firm's value, can either rise or fall. If marketmakers compete
> in offering liquidity services to traders no better informed than
> themselves, the bid-ask spread should be narrowed to the transactions'
> cost - nearly zero."
>
>"But if there exist some informed traders, who have better information,
> then the bid-ask spread must be greater. If the marketmakers only
> break even trading with the uninformed, they consistently lose money
> trading with the informed. Hence the bid-ask spread must be large
> enough that the profits from the uninformed balance the losses from
> the informed. The marketmakers problem is adverse selection
> because he would like to trade with the uninformed at a small bid-ask spread,
> and not trade with the informed at all, but he must pool the two types."
>
>I hope that provides at least some explanation for the phenomenon.
>
>Keith Bockus
>
And I hope that provides at least some explanation for the garbled post. :-)
Rajeev Seth
out options and my broker keeps giving me the same bull: "The market maker
can and does trades for his own account; so the high of the day or the
low of the day that you see may have gone to him or some of his favored
party; so you cannot assume just because that you had a limit order at
that price that you would get it!"
SOunds suspicious to me; I think some brokers are overly ineffecient
compared to some others as far as the placement of their reps on the
floor is concerned. THis may be esp true for deep discount brokerages
that not many people have heard of. But I have raised hell and have to
talk to the manager on Monday to pursue the case further. Meanwhile I
have stopped trading at that brokerage and today made a successful trade
at Charles Schwab. They have their own rep on the floor. The other guy
probably goes through another middleman.
In this fast market, you don't want to be with a
broker that you can't trust to get you in or get out at your prices.
--Rajeev
Vincent Cate
So my broker (Schwab) sent me a brochure titled "Trading in
the NASDAQ National Market" that seems to explain what is going
on. It says that the average NASDAQ stock has more than 11 market
makers. For large orders (normally over 10,000 shares) a market
maker will negotiate the price directly with the customer. The
negotiated price may well be outside the current best bid and
ask prices.
So if someone desperately needs to sell 50,000 shares of XYZZY while
the current bid is $12 and the ask is $12 1/4 the market maker may
agree to buy them for $11 3/4. Now since there are outstanding bids at
12 the market maker can turn around and sell at least some of these
shares at a quick profit but he may take his time so as not to drive
the price down too much. My buy at $12 was filled about 4 hours later
that same day so I can believe this is what happened in my case.
-- Vince
John Hallyburton
In article <2...@hpindda.cup.hp.com>, (Rajeev Seth) writes...
>This has happened to me over the past week two times while trying to sell
>out options and my broker keeps giving me the same bull: "The market maker
>can and does trades for his own account; so the high of the day or the
>low of the day that you see may have gone to him or some of his favored
>party; so you cannot assume just because that you had a limit order at
>that price that you would get it!"
You have to remember how these things are traded. There are brokerage reps
filling customer orders and locals (who function like market-makers but
have no such obligation) trading for their own account. Frequently there
are many people vying for each trade. On the one hand this gives you good
liquidity (low bid-ask spread) but on the other hand it means that the broker
has to compete with a large number of other traders.
Here's the rub: EVERYBODY trading there is going to want to sell the high
for the day. So if an option is trading at 2 7/8 bid, 3 asked and some guy
sends down a 10-lot buy order at 3, what's going to happen? HIS broker will
offer the 10-lot at 3 and dozens of greedy locals are gonna shout "SOLD!",
along with YOUR broker (representing your order), and mine and others.
Obviously only one of those traders is going to get the other side, i.e.,
will be able to sell at 3. The odds of it being your broker are pretty slim.
There may have been hundreds of customers looking to sell at 3 and only one
person, probably a local, got the order. But everybody sees the ticker
record the transaction and many of them wonder why THEIR order wasn't filled.
On the bright side, if an order trades through your limit, i.e., later on
somebody buys at 3 1/8, then you can be confident your order got filled at 3.
This is unlike the recent NASDAQ experiences and is a result of the higher
liquidity available in open-outcry markets.
>In this fast market, you don't want to be with a
>broker that you can't trust to get you in or get out at your prices.
Fer sure, fer sure. But be aware that a broker who does a fine job trading
IBM options might do a terrible job trading Exxon options. Different floor
reps, different pit crowd, etc. One thing I would recommend is NOT giving
orders in round numbers. Sell at 2 7/8, not 3. Buy at 1 1/16, not 1.
The slight difference in price gives you a liquidity edge over other folks
who tend to issue orders in round numbers.
>--Rajeev
John
1917: Lenin sells capitalism short. | John Hallyburton Jr.
1990: Gorbachev covers the longest and most expensive | Opinions are solely
short sale in history. Thank you, Ronald Reagan.| those of the author.
Kurt Guntheroth
concerning this subject. Here's what she said...
1. The specialist (or market makers on NASDAQ) sets the spread on each
issue and some of them are greedier than others. On heavily traded
and/or not-too-risky issues the spread may be 1/4 point or less, and
on some days there may in fact be no spread at all (depends on the
specialist's feeling about future price moves. I have sold stock at
the day's high price). Stocks that are traded more thinly, the
specialist rewards himself for keeping in inventory, or perhaps
his kid is going to Harvard and he just wants more bucks. Market
makers on NASDAQ tend to use this rule of thumb to be more greedy
on more thinly traded OTC stocks.
2. You get a better deal if you buy a bigger chunk of stock. This
is an informal sort of rule, and depending on the stock and the
specialist, "big" may mean millions of dollars, but I think I've seen
this work in my own modest trading if I'm moving a serious (for me)
block of stock. I do know you get more respect from full service
brokers (and often a commission discount) if you move $5-10K blocks
of stock. By the way, even with the discount, it's way cheaper to
use a discount broker.
Bill Reid
> I have had detailed conversations with (I think) a knowledgeable broker
> concerning this subject. Here's what she said...
>
The priority is 1) very large wholesale customers 2) market orders 3) low
asks and high bids. Market makers (or specialists, same difference)
actually deal in very large blocks of stock, not Joe Retail bidding 12/share
for 100 shares, and what you see in the paper and on the ticker represents
those large sales. For example MM (market maker) "A" will get an order from
MM "B" for 200,000 shares of XYZ at 11 3/4 (MM "B" may have received the
large order from a large mutual or pension fund). MM "A" will quickly look
over his inventory and the outstanding market orders and say "sold". He
will only say "sold" if he sees at least 120,000 shares in his inventory for
11 3/4 or below, or a large number of market sell orders. The remaining
80,000 shares he will buy at the lowest ask prices on the market, to "fill"
the order. In fact, he will even buy some stock at 12! But the ticker will
show only the 11 3/4 price. MM "A" will try to assemble the total order for
an average share price of 11 11/16; this will give him a profit of $12,500
for taking a phone call! And you wonder why your buy order of 100 shares
at 12 is ignored? Before you complain about being ripped off, note that
in the example above, some lucky small fish actually got 1/4 point more than
the quoted price! (Of course, this will happen much less often, because if
MMs consistently filled their orders with stock over the sale price, they
would quickly GO BROKE!)
Jonathan Hahn
>
>In article <2...@hpindda.cup.hp.com>, (Rajeev Seth) writes...
>>This has happened to me over the past week two times while trying to sell
>>out options and my broker keeps giving me the same bull: "The market maker
>>can and does trades for his own account; so the high of the day or the
>>low of the day that you see may have gone to him or some of his favored
>>party; so you cannot assume just because that you had a limit order at
>>that price that you would get it!"
>
>somebody buys at 3 1/8, then you can be confident your order got filled at 3.
>This is unlike the recent NASDAQ experiences and is a result of the higher
>liquidity available in open-outcry markets.
I've had limit orders on the NYSE not get executed even when the
trading range (as listed in the paper the next day) passed through my
limit. It happened more than once, and I was quite angry about it. I
called Schwab and asked about it. They said that what probably
happened is that there was no seller for my *quantity* at that price.
BTW, the stock was STK and this happened about 9 months ago.
I accepted this explanation and changed my outlook on limit orders.
Did I do the right thing, or do I have further recourse?
-jon
--
ha...@gigantor.nas.nasa.gov wk: (415) 604-4360
..!ames!amelia!hahn hm: (408) 736-7014
John Hallyburton
(Jonathan Hahn) writes...
>(John Hallyburton) writes:
>>
>>On the bright side, if an order trades through your limit, i.e., later on
>>somebody buys at 3 1/8, then you can be confident your order got filled at 3.
>>This is unlike the recent NASDAQ experiences and is a result of the higher
>>liquidity available in open-outcry markets.
>
>I've had limit orders on the NYSE not get executed even when the
>trading range (as listed in the paper the next day) passed through my limit.
[...]
My comments (">>") were not referring to the NYSE but to the options market,
which is IMHO run much better for small fry like us.
Bob Peirce #305
>I've had limit orders on the NYSE not get executed even when the
>trading range (as listed in the paper the next day) passed through my
>limit. It happened more than once, and I was quite angry about it. I
>called Schwab and asked about it. They said that what probably
>happened is that there was no seller for my *quantity* at that price.
>BTW, the stock was STK and this happened about 9 months ago.
>
The paper lists prices in most/all domestic markets where the stock is
traded. It is not only possible, but likely that a stock could trade
down 1/8, 1/4 or more on one exchange and not another. It is also
possible for a stock to sell off on the Pacific _after_ New York closes!
As for Scwab's excuse, I think that is bogus. You can fail to get a
fill because of "stock ahead", meaning there are orders on the
specialist's book that were placed there before yours, but if any is
offered and you are next, you will get at least a partial fill.
You are really dealing with two problems here. First, you don't know
where the prices quoted in the paper occurred. If the stock went
through your price and you didn't get a fill, you can bet the price was
on another exchange or Scwab never gave the trade to the specialist.
They can tell you where the prices occurred. The other problem is you
may have picked the same price as a lot of other people and seen the
stock hit the price and bounce without a fill. The secret here is to
avoid round numbers and even fractions. If you are a buyer at 20, put
the limit at 20-1/8 if you really want it or 19-7/8 if you don't care.
You can bet everybody and his cousin will be at 20.
>I accepted this explanation and changed my outlook on limit orders.
>Did I do the right thing, or do I have further recourse?
Limits are okay if you know what to expect. In the futures market there
is a neat kind of limit called "market if touched" which _will_ get you
a fill at some price, but straight limits offer no guarantees.
--
Bob Peirce, Pittsburgh, PA 412-471-5320
...!uunet!pitt!investor!rbp r...@investor.pgh.pa.us
Lee Newberg
Even though trades are executed below your requested price to buy,
your trade may not be executed. This is because there are two prices
at which a security is traded. One is called the "bid" and the other
is the "ask." The bid is the price at which the market makers (i.e.
traders on the floor) are willing to buy stock. The ask is the price
at which they are willing to sell. The bid price and the ask price
are usually different.
If you want to buy stock you must pay as much as is asked. If you
want to sell you must request no more than the bid. When the market
makers' bid drops below your bid, there may be trades. However, your
buy order will not be executed until the ask drops to or below your
limit price.
Lee.
Kurt Guntheroth
satisfied when there are no market orders. A stock can trade through your
limit on market orders, then decline slightly, like if all the market orders
on one side are satisfied. You lose because you didn't place a market order.
There's nothing hinky about this.