You have written about the flash crash and its impact on how the markets are working. Has there been anything done to assure that it won’t happen again, or to make the spreads tighter for the average trader? —Maverick99Boston
Talk about a timely issue! My first reaction was to say, “Of course things are much better” — but then I asked Dennis Dick, one of my resident experts, on the topic. He had just put together an article about the subject. Some excerpts:
I bought 500 shares of IBM on the opening print today. You would think 500 shares would be pretty easy to liquidate within a penny or two considering how our market scholars claim that the market has deeper liquidity and tighter spreads than ever before. Anyway, a minute after the open, this is the quote that I was trying to liquidate that 500 shares into (Figure 1).
FIGURE 1: IBM TIGHT SPREAD
Yes, that’s right, you are reading the quote correctly. The spread was 37 cents — 100 shares x 100 shares. Looks pretty thick and deep to me. And why does the quote change so many times in the one-second increment? High-frequency trading (HFT) liquidity providers change their quotes continuously in that increment, usually trying to aggressively penny each other, but then canceling their orders simultaneously.
So if I wanted to sell my 500 shares at the market, I could be filled on 100 shares at 203.10 and pay that 37-cent spread. And on the last 400 shares, who knows where I would be filled?
Well, IBM is a $200 stock, so of course the spread is going to be wider. This isn’t the case with other Dow Jones Industrial Average (DJIA) components, is it? No, they are indeed tighter.
Procter & Gamble (PG) had a nice tight spread of 21 cents, 19 seconds after the open. Coke (KO) had an 11-cent spread, in the first 30 seconds of trade. MMM had a cool 25-cent spread after the open.
These are supposed to be some of the most liquid stocks on our exchanges. Where is all this liquidity that our scholars claim the market has? More online at http://premarketinfo.com/author/premarketinfo/