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Investors today can purchase or sell stocks with a simple click of a mouse or even on the move with their tablet or even with their smart phones, all this through almost one hundred on-line brokers from which to choose from. So investing on the stock exchange has never been easier. The actual mechanics of trading might be easy and the order can be entered with a mouse click. However, when will the order be executed? Probably almost immediately in calm waters but in a volatile stock market, that could be another matter. The caution with which investors make an investment decision should be repeated when stock trading on-line.
The problem with investors who are using trading platforms to buy and sell shares, is that in times of extreme volatility investors cannot be sure that the deal will go through at the price they want. This is because in times of extreme volatility brokers whether they are on-line or they are traditional stockbrokers are working with huge trading volumes and large numbers of stock buy and sell orders. This causes tremendous imbalances of orders which lead to backlogs of order execution, computers systems become overloaded, and orders are left in systems queues. To cope with these extreme periods, online brokers and brokerage houses have developed procedures which are designed to protect them from exposure to extreme market risk and at the same time try to continuously execute their customers’ orders. Some firms for example temporarily stop automatic order execution and try to deal with orders manually. They might also reduce the amount of stocks that can be purchased in a particular industrial sector. Usually these are the sectors that are suffering from the most volatility.
Investors therefore should always try and educate themselves on how their particular broker executes stocks and shares transactions. This entails talking to their chosen brokers and asking questions about transaction execution in times of high volatility and high volume. This conversation should take place prior to opening an account and starting to trade.
The problem with delays in order execution on days of high volume and high volatility is that there is a high probability that the order will be executed at a price which is a significant distance away from the original quoted price. Investors should also ask their chosen broker to explain fully the difference between a market order and a limit order and how these different orders are executed in times of high volatility. In other words, should investors only use limit orders as an investment strategy during volatile times and not risk market orders. The danger here of course is that in volatile markets their limit orders might not be executed at all.
Investors should be aware that they could suffer significant losses during periods when the markets are suffering high volatility especially if there are significant delays in order execution.