Hi there - quick one this Sunday!
Riddle me this..
What do you get if you’re within Exchange Market Size (EMS) and you try to sell a stock when the market makers are quoting outside of the spread?
I’ll give you a clue:
Due to the Best Execution regulation, you’re guaranteed to get the best prices.
OK, I might’ve just tricked you.
But will the trade execute?
You probably want to say yes because of the Best Execution rules.
But now you’re thinking no, because otherwise why would I ask..
And you’d be right!
If you’re within Exchange Market Size, and you try to sell a stock when the market makers are quoting outside of the spread…
Then your trade will not execute.
This is what happens when you get suits in offices who have absolutely no idea of how the market works, making rules up on how they think the market should work.
So we have problems like on Thursday when Judges Scientific (JDG) puts out a profit warning, and anyone holding 150 shares or less wouldn’t have been able to sell their shares online.
The regulation was designed to ensure market participants could only execute at prices on the screen.
Sounds sensible, so far.
The issue is when you’re sure a price is going to fall further, and you want to take a price that is below the one on the screen, the regulation won’t allow you.
So instead, you just sit and watch your money evaporate further in your account without actually being able to do much about it.
I know, because I’ve been there.
But you do have several options.
Make sure you’re above the Exchange Market Size, even if it’s just a single share.
If that is too big a position size, then either abort the trade, or ensure you know how to call your broker to exit the trade for you (smile and dial!). This works because market makers are obliged to execute at the price shown on screen. They are not obliged to do the same online, which is where the problem appears. However, this option can be slow because you may have to give in your personal details, address, date of birth, the message on the scroll buried in your garden…
Buy more shares to go above Exchange Market Size, then sell the lot in one clip. This is counter intuitive, and annoying, but if you want to exit the position quickly then it’s your fastest option. I’ve done this before. I didn’t like it. But I did it.
Obviously, these types of situations are rare.
But it’s worth knowing what to do and having a plan.. because it could happen.
You can find the EMS on SharePad’s Level 2 Dealer.
To do this, click “Design” on the bottom left, and “Show market information”.
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And whenever you’re ready..
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