Investor Question

Sometimes experts commenting on the market assume too much knowledge.  (Mea culpa) An experienced reader asked about why the NYSE would "slow down" trading.

Here is a brief explanation.

If you are running a hedge fund you put in stock orders at the beginning of the day.  These might be buys that are 50 cents or a dollar below the market or a 40 or 50 dollar stock.  The scale could be more aggressive based upon market environment or the options cycle.  Typically they would reflect staged buying on a scale.

You might also be willing to sell a stock above the market by a dollar or so on a $50 stock — just giving an example.

These are typical hedge fund standing orders.  No one has standing orders for 5% moves.

The reason that the NYSE slows down the pace when there is major selling is to give the market an opportunity to respond.  A hedge fund that was uninterested in PG down by 5% might be buying a limit position if the stock was lower by 20%.

In fact there are many "shadow orders" below the market (and shadow sales above).  People do not put in extreme buy orders every day because it takes a lot of time and seems irrelevant.  They monitor the market and put in more orders when circumstances dictate.

That is why the NYSE gives some time to allow markets to stabilize.  It is also why the average investor should beware of panic.

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One comment

  • JohnF May 10, 2010  

    The real disgrace here are the high frequency traders. They are happy to provide liquidity during the goods, but step aside during the volatile times.
    I don’t understand how this is allowable.