Fast Markets

You've probably heard about "fast markets" in the news. But what does it really mean? What are the dangers of a fast market? How can you protect yourself as an investor?

We will discus the following topics related to fast markets:

A Fast Market in Action

A fast market is an event that's becoming increasingly common: A hot new technology company goes public. Within minutes of opening the Initial Public Offering (IPO) on secondary markets, investors from around the country are online trying to get a piece of the action. With only a limited number of shares of the small company available, the stock price skyrockets.

Or there's the opposite scenario: A popular stock disappoints investment analysts or fails to meet projected earnings. By the close of market, its stock price has been sent tumbling by investors eager to unload it from their portfolios.

Up and down, volatile stocks have been spiking in both directions sometimes as much as 10% to 50% in the course of a day or even a few hours. While this kind of fast market activity has spelled success for some investors, it has meant disastrous results for others.

In a fast, high-volume trading environment, the price of a stock can change so quickly that by the time a real-time quote on the computer screen is updated, it's already history. The result can be market order execution prices drastically different from what an investor expected.

How It Starts

News about a company hits the wires, like:

• An Initial Public Offering (IPO).

• Change in a company's earnings, positive or negative.

• Recommendation by an analyst or publication.

Trading Gets Heavy

• Internet, phone and broker orders pour in.

• The balance of trade orders is upset with more buys than sells or vice versa.

Order Executions Are Delayed

• Orders are placed so fast, a backlog may develop.

• Trades are lined up in a queue and executed in the order received.

Systems Can Overload

• Market Makers turn off auto-execution systems and revert to manual order handling procedures in which execution of trades is on a "best efforts" basis. The trading process slows down and the "reasonable time" it takes to execute an order can greatly increase.

• Orders are often subject to partial fills at various prices.

• Trade reports are delayed so investors checking their accounts don't know if their trade was executed. Trying to change or cancel orders may result in duplicate orders or orders that arrive too late to halt the trade.

• Sometimes volume is so heavy that access to brokerage web sites can slow down or be unavailable.

Prices Fluctuate

• Price of the limited number of shares available can change quickly as demand grows.

• Trades executed first in the queue can influence the price of subsequent orders waiting behind them.

• Quotes including real-time quotes can't keep up with the huge trading volume and lag far behind actual market prices.

By the time a market order is executed, the stock price may have skyrocketed or plummeted far beyond what the investor expected as much as 50% or more.