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Tuesday, September 15, 2015

More on Trade Execution

In an earlier post I reviewed best practices related to trade execution that a good advisor would avoid and that robo advisors, human advisors, and individual investors may miss. The drag on performance may be well in excess of anything you might pay to a "more expensive" advisor that is more sophisticated in his trade execution.

The WSJ reviews another "bad practice" in trade execution: trading on the market open especially on a Monday morning.

Rising stock-market volatility is proving especially costly for retail investors who typically buy and sell stocks soon after the market opens—often the most perilous time of the trading day.
Buying and selling by individual investors is especially heavy in the minutes immediately after the market opens in the U.S. at 9:30 a.m. Eastern time, when the chances of getting the best price for a stock are lower and swings tend to be bigger, traders and other market observers said.
But within minutes, the gap between the price sellers want for a stock, known as the “ask” price, and what buyers are offering, the “bid,” shrinks sharply and continues to narrow up until the end of the trading session. This quirk in the market has been amplified in recent weeks amid the big market swings.
The smaller gap, or spread, is better for investors because they are less likely to overpay for a stock or sell below the prevailing price in the market. The wider the spread, the more exposed investors are to high costs, which can erode returns at a time when major stock indexes are down for the year.
Of course it doesnt matter whether the market is up or down for the year, these costs reduce the return on the portfolio.
Trades for individual investors tend to be executed in the morning, because they put in orders the previous evening through their online brokerage accounts or their financial advisers, often after they have been able to catch up on the news after work. About 15% of average daily trading volume is driven by individual investors, according to TABB Group, a research and consulting firm focused on financial markets....
And Mondays are even worse:
“Mondays are generally going to be some of your busiest market opens as well because you’re queuing up orders over the weekend,” said Gregg Murphy, senior vice president of retail brokerage at Fidelity. “A large percentage of trade activity takes place in the first 30 minutes of market open.”

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