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Author: Gothamgal One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Trading rules Date: 12/12/2007 8:16 AM
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This question is really about trading rules, not fixed income per se, but I believe that many of you have had experience with buying/selling thinly-traded preferreds, so I'm posting here.

On Monday of this week, I entered a sell order for 500 shares of a preferred at a limit of 25.48. Except for the limit order, there were no restrictions. It was not an all or none order. The order was good until cancelled.

I noted that on Tuesday afternoon, a trade had gone through on that day for 25.89. I called to find out why my order had not gone through first, since it was at a substantially lower price and had been made the day prior. The rep put me on hold for a long time, perhaps 20 minutes. He came back and told me that the 25.89 trade had occurred on the open. I did not understand what difference that would make, and after some further back and forth, he told me--as though I did not understand--that both price and order time are involved in determining the order of trades. Yes, of course, but I thought that price trumped time of order. He then pointed me to some language in their trading rules--I'm loosely paraphrasing here--that each exchange has its own rules re trade execution, and that price alone may not determine the order of execution. Incidentally, that opening trade was for 2000 shares and represented a 52-week high. This particular trade did not sustain the high and the price went back down to where the security had generally been recently.

The particular "rule" that I seemingly encountered for the first time seems rather vague and does not sit well with me. Is anyone here familiar with this situation?
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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22454 of 35400
Subject: Re: Trading rules Date: 12/12/2007 9:04 AM
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This question is really about trading rules, not fixed income per se, but I believe that many of you have had experience with buying/selling thinly-traded preferreds, so I'm posting here.

On Monday of this week, I entered a sell order for 500 shares of a preferred at a limit of 25.48. Except for the limit order, there were no restrictions. It was not an all or none order. The order was good until cancelled.

I noted that on Tuesday afternoon, a trade had gone through on that day for 25.89. I called to find out why my order had not gone through first, since it was at a substantially lower price and had been made the day prior. The rep put me on hold for a long time, perhaps 20 minutes. He came back and told me that the 25.89 trade had occurred on the open. I did not understand what difference that would make, and after some further back and forth, he told me--as though I did not understand--that both price and order time are involved in determining the order of trades. Yes, of course, but I thought that price trumped time of order. He then pointed me to some language in their trading rules--I'm loosely paraphrasing here--that each exchange has its own rules re trade execution, and that price alone may not determine the order of execution. Incidentally, that opening trade was for 2000 shares and represented a 52-week high. This particular trade did not sustain the high and the price went back down to where the security had generally been recently.

The particular "rule" that I seemingly encountered for the first time seems rather vague and does not sit well with me. Is anyone here familiar with this situation?


I had a similar experience with a stock and it was explained to me as follows. A limit order isn't really an "order" per se (as far as the trading floor is concerned), it just becomes an order once the stock trades at a price that is at or beyond the limit. Perhaps in this case because there were no trades at or above the limit, your order hadn't been submitted until after that trade took place?

I have no idea if this explanation is correct or not, it's just the one that the representative (a "manager" that I was handed off to by the regular phone rep) on the phone told me, just like I have no idea if the explanation they gave you was correct. Perhaps "on open" and "on close" orders have priority over limit orders, but I don't see how that can be managed exactly, what if the "on open" and "on close" orders are limit orders as well? Or maybe those kinds of orders cannot be limit orders???

It seems to me that the "best" price ought to trump all other considerations (other than, of course, a restriction that prevents the trade - "all or none", "fill or kill", etc).

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Author: Tredos1 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22455 of 35400
Subject: Re: Trading rules Date: 12/12/2007 10:03 AM
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I had the same thing explained to me as well. The limit order is just a note to the broker telling them to place a market order once the target price has been reached. The target price is only reached once there is a trade that meets the limit criterion. So it's entirely possible to have something trade over your limit as the first trade that would trigger your order. Working with limit and stop orders when there is very little liquidity can result in curious results. You could get an execution price a fair amount off from your entered price.

tredos

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Author: Gothamgal One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22456 of 35400
Subject: Re: Trading rules Date: 12/12/2007 10:31 AM
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"So it's entirely possible to have something trade over your limit as the first trade that would trigger your order."

I understand that as a general concept. However, wouldn't that rule also apply to the seller whose order was executed? There had been no previous trade over his order price in the past year, as his execution went through as a 52-week high. What trade then triggered his order? Unless, of course, this rule expands multi-years and this particular seller had his order in throughout some multi-year period and kept renewing it. Does not sound right, but I'm just going to accept it.

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22458 of 35400
Subject: Re: Trading rules Date: 12/12/2007 11:45 AM
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<<"So it's entirely possible to have something trade over your limit as the first trade that would trigger your order.">>

I understand that as a general concept. However, wouldn't that rule also apply to the seller whose order was executed? There had been no previous trade over his order price in the past year, as his execution went through as a 52-week high. What trade then triggered his order? Unless, of course, this rule expands multi-years and this particular seller had his order in throughout some multi-year period and kept renewing it. Does not sound right, but I'm just going to accept it.


If the seller had a limit order similar to yours, then it wouldn't have executed (just like your order didn't execute). But the seller may have noticed that the "bid" suddenly hit 25.89 (i.e. someone was willing to buy at that price) and jumped on it. Or it could have been 2 traders, both on the floor of the exchange, doing the trade with each other.

Some (all?) brokerages don't allow GTC ("good till cancel") orders to remain for years, my broker keeps them for 4 months and then cancels them automatically.

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Author: Gothamgal One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22460 of 35400
Subject: Re: Trading rules Date: 12/12/2007 1:40 PM
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But the seller may have noticed that the "bid" suddenly hit 25.89 (i.e. someone was willing to buy at that price) and jumped on it.

Let's see, this would have to have been a market order not a limit, because, as you say, it would not have gone through for the same reason mine didn't. I'm so used to dealing with limit orders that I sometimes forget that market orders have precedence; but, in the world of thinly-traded issues, market orders are rare, with good reason. I can possibly understand this person's jumping on a market order when he sees such a high bid, still chancing however that someone else's order will not execute before his gets in. What is harder for me to understand is that someone would suddenly put in an on-the-open buy bid at a price so high that is not even close to anything seen in the past year. I realize, however, that it's futile to speculate.

Or it could have been 2 traders, both on the floor of the exchange, doing the trade with each other.

Uh...isn't there a name for that? (lol!)

Some (all?) brokerages don't allow GTC ("good till cancel") orders to remain for years, my broker keeps them for 4 months and then cancels them automatically.

So does mine.

In any case, I thank you for thinking this through with me and providing some insight. I'll never know the entire story, but I'm putting the episode behind me and moving on...

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22461 of 35400
Subject: Re: Trading rules Date: 12/12/2007 2:55 PM
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Some brokers do a lot better than others.

If many strange trading positions show up in reference to your orders, I'd say shop for a new broker. The one you have is not doing a good job for you.

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Author: DoctorOptimist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22468 of 35400
Subject: Re: Trading rules Date: 12/12/2007 11:37 PM
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>> I had the same thing explained to me as well. The limit order is just a note to the broker telling them to place a market order once the target price has been reached. The target price is only reached once there is a trade that meets the limit criterion. So it's entirely possible to have something trade over your limit as the first trade that would trigger your order. Working with limit and stop orders when there is very little liquidity can result in curious results. You could get an execution price a fair amount off from your entered price.


that doesn't sounds right to me

what you described sounds like a "market if touched".
most stop orders operate this way too, unless a stop limit order is enterred

if it operated as a market order it could trade at a less favorable price if the market moved fast before execution. a true limit order can't fill at a worse price

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