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 LPL financial professional. 

  1. Delays in execution – High volumes of trading at market opening or intra-day may cause delays in execution with executions at prices significantly away from the market price quoted or displayed.  LPL routes equity orders to other broker-dealers known as “market centers” for execution.  During volatile markets LPL may experience delays in routing orders and these market centers may adjust how they handle orders routed by LPL.                                                                                                                                                                                   
  2. Delays in reaching your financial representative – Times of market volatility may cause delays in reaching your representative due to a high volume of phone calls.
                       
  3. 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 displayed share size may also be smaller making it harder to execute larger share orders.
                                                           
  4. Margin (applicable to only those using margin/borrowing against securities in their 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 helps ensure accounts have sufficient funds (equity) to cover large changes in the price of a stock(s).  An increase in margin requirement may trigger a margin call and require either the account holder to deposit additional funds (equity), or liquidate current positions within a short period of time.                                                                                                                                                             
  5. Cancelling and replacing orders – Customers attempting to cancel orders during volatile or fast markets and then entering 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. Consequently, entering a replacement or a straight cancellation of an order can result in one or both orders being executed after submitting the cancellation or replacement order. Replacement orders should be entered only after receiving confirmation that the initial order was in fact canceled.
                                                       
  6. Trading Halts – Stocks and Options orders will not be executed during trading halts. The use of limit orders is suggested during a trading halt 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 open trading session (unless the client instructs otherwise). At-the-Close or Market-on-Close orders pending at the time trading is halted are cancelled.

  7. Limit Up/Limit Down – Pursuant to regulations referred to as Limit Up/Limit Down bands, certain equities and options may experience a pause in trading if orders to buy or sell are outside of an established price band.  Specific terms for handling orders outside the price band are established by the market center in which an order is routed.                                                                
  8. Investors may experience market losses during periods of volatility in the price or volume of a particular security when systems problems result in the inability to place buy and sell orders.

Types of orders

The types of orders placed during volatile or fast markets may have their own benefits and risks, as noted below.

  1. Market orders are fully and promptly executed without regard to price. Execution price(s) may significantly differ from the current quoted price.

  2. 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 if the price does not reach the price limit.

  3. 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.

  4. Stop orders have their own unique benefits and risks as described below.

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 stop trigger price if the market is moving rapidly.

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 limit 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.  During periods of volatile market conditions, the price of a stock can move significantly in a short period of time and trigger an execution of a stop order (and the stock may quickly resume trading at its prior price level). Sell stop orders may exacerbate price declines during times of extreme volatility.  The activation of sell stop orders may add downward price pressure on a security. If triggered during a precipitous price decline, a sell stop order also is more likely to result in an execution well below the stop price.

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.

Unlike Stop and Stop Limit orders, a Trailing Stop moves as a stock moves higher but the stop price will never move lower from its price originally set.

Example: Order placed with a 10% trailing stop on a $10 stock. Stop price is set at $9and will not change. If the stock goes down to $9.50…the stop price remains at $9. If the stock moves higher (above $10 when first entered) the stop price or “trigger price” will move higher.

Please consult your financial professional for further details or questions related to these types of orders.

Other Informational Resources:

https://www.finra.org/investors/insights/market-volatility-check-emotions-door

https://www.finra.org/investors/investor-guidance-investors-regarding-stock-volatility-and-line-trading

https://www.finra.org/investors/stock-volatility-0