Capital Market, Equity Price, and Volume Volatility
Although capital markets are diligently and carefully regulated, market reaction to various events and news are part of the general course of a trading day. For this reason, it’s important for clients to become familiar with certain information that may occur during those periods in which markets are more volatile.
Impact of Volatility
To better understand what to expect during times of market, equity price, and volume volatility, please carefully review the information below. Any questions should be directed to your financial professional.
- Delays in execution – High volumes of trading at market opening or intra-day may cause delays in execution and executions at prices significantly away from the market price quoted or displayed.
- Delays in reaching firm representatives – Times of market volatility may cause delays in reaching firm representative due to a high volume of phone calls.
- Quotations – Price quotations (bids and offer prices) may be delayed or inaccurate during fast or volatile markets. Consequently, execution prices may vary significantly from displayed quotes. During volatile markets quotations may also be for smaller sizes making it harder to execute your order.
- Margin (applicable to only those accounts using margin/borrowing against securities in account) – Margin requirements (required equity percentage) may increase (up to 100%) for those stocks considered volatile, as determined by regulators and LPL Financial. A margin requirement percentage increase is to help ensure accounts have sufficient funds (equity) to cover large changes in the price of a stock. An increase in margin requirement may trigger a margin call and require either additional funds (equity) to be deposited, or current positions to be liquidated.
- Cancelling and replacing orders – Customers attempting to cancel orders during volatile or fast markets and then attempt to enter a separate, new replacement order assume the risk of both orders being executed. Both execution and cancellation reports may be delayed during volatile and fast markets. Replacement orders should be entered only after confirmation that the initial order was in fact canceled.
- Trading Halts – Unexecuted day orders pending at the time of the halt will expire at the end of the day while orders received after the market close are held for execution at the reopening of the next trading session (unless the client instructs otherwise). At-the-Close or Market-on-Close orders pending at the time trading is halted are cancelled.
- Limit Up/Limit Down – Pursuant to regulations referred to as Limit Up/Limit down bands, certain equities may experience a pause in trading if orders to buy or sell are outside of an established price band.
Pursuant to regulations referred to as Limit Up/Limit down bands, certain equities may experience a pause in trading if orders to buy or sell are outside an established price band.
Types of orders
The types of orders placed during volatile or fast markets may have their own benefits and risks, as noted below.
- Market orders are fully and promptly executed without regard to price. Execution price(s) may significantly differ from the current quoted price.
- Limit orders will be executed only at a specified price or better. They offer price protection, but there exists a possibility that the order will not be executed.
- Initial public offering (IPO) securities that begin trading in the secondary market may experience rapid and volatile price quote changes that subsequently do not keep up with the trading price of the stock itself. Therefore, execution prices may significantly vary from the quoted or displayed bid and offer price.
Stop Order Disclosures
Stop Orders are triggered by published last-sale transactions. Once triggered, stop orders become market orders and are subject to the prevailing price at the time and executions may vary considerably (higher or lower) from the trigger price.
Stop-Limit Orders are triggered by published last-sale transactions. Once triggered, these orders become limit orders that will be executed only at the specified price (or better). Note: Stop limits will only be filled if the market price reaches the limit price. This type of order is also subject to the Stop Order risks described above.
Odd-lot trade executions (i.e. 99 shares or less) do not trigger Stop Orders.
Trailing Stops may be subject to a limited number of execution venues. LPL will monitor trades for best possible price, however orders may not be eligible for certain “price improvement” consideration based on this limitation.
Please consult your financial professional for further details or questions related to these types of orders.