Bob Norman brought this article to my attention. It's not explicit as to whether it refers to Market Orders or Limit Orders, but it would appear Mr Cruz is talking about Market Orders...........
Some online brokers seek good deal for themselves rather than for clients
Sept. 16, 2000
The Savings Game
Humberto Cruz
.......day by day, when there is no fraud, investors are losing out by not knowing the basics of investing online.
Say you go to your online broker's Web site, click on "trade," then "buy stocks" and write in or "enter" how many shares you want to buy. You click again and, presto!, your order has been executed.
If that's what you think happens, you're wrong. And if you're feeling smug because the trade cost you only a few dollars, you may be wrong again.
"This is an area in which investors most need to be educated," Nelson said, referring to the placing and execution of online trades. "I don't think the level of understanding by investors is where we'd like it to be."
Clicking "buy," "sell" or "confirm trade" on your computer does not execute or carry out an order. It just sends it to your online broker to be executed.
Your brokerage firm can then do any number of things, including routing your order to a "market maker" that may pay as much as 1 cent to 2 cents a share for "order flow," that is, for sending orders its way.
If that is the case - and the practice is common - your online broker could be bypassing another market maker or an electronic communications network that could have executed the trade at a better price, either buying for less or selling for more.
Depending on how many shares you trade and the difference in price - 1/16th of a point on a 1,000-share trade is $62.50 - investors may lose more than whatever they saved on a rock-bottom commission rate.
"Few investors understand how important execution is or how they can get hurt. All they focus on is how much the commission is for the trade," said Peter G. van Hengel, director of research for The Noble Financial Group in Boca Raton, Fla., which discusses the issue in its current investment strategy report to clients.
Last year, an SEC review of 29 online firms found that 17 "improperly emphasized payment for order flow in deciding where to send orders" and did not even try to assess the prices available from trading firms other than those that were paying them.
As a result, the commission has been urging investors to insist that their brokers provide the best execution possible, which involves price, speed and other considerations, and that they disclose whether they receive payment for order flow.
"It is about time that investors realize that payment for order flow is corrupting trade executions at many online firms," van Hengel said. "It is the usual penny wise, pound foolish. . . . Why is it that people always go for the cheapest deal?" That is, the cheapest commission without considering the cost of execution.
Since most online investors are "active players," that is, make many trades, the money lost to bad execution can be substantial. Make that another reason not to trade too much.
"Lots of investors think they are excellent traders," van Hengel said, "but studies have shown time after time that the more active the investor the lower the results will be compared to a buy-and-hold strategy."
Humberto Cruz welcomes questions and comments from readers. Although he cannot respond to each one individually, he will answer questions of general interest in his column. Write to Cruz c/o Milwaukee Journal Sentinel, 435 N. Michigan Ave., Suite 1500, Chicago, IL 60611. Send e-mail messages to: HCruz5040@aol.com.Tribune Media Services
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I get my orders filled at the limit price most of the time. On occasion, I'll get the absolute high or low for the day. There are also those times when a stock gaps up or down at the open and I get a price better than my Limit Order. My best guess is that less than 5% of my orders are executed at a price "better" than my limit order. Still, since the limit order fits my business plan, any extras are just pennies from heaven.
Does anyone else have comments on this subject?
Best regards, Tom |
