Section III : Trading Thin Issues
Situation: You are responsible, either as an agency broker or as a buyside trader, to execute a buy order, monster block of 2,500 shares, in APU, Amerigas Partners. The date is January 14th, 2010. What can you expect to happen should you send 2,500 shares to buy at the market pre-open? It closed at $40.77 on January 13th, and there is no news on the stock.
(A) You can expect a fill within $0.15 of the $40.77 close. The specialist at the post will add liquidity and maintain a fair and orderly market, and fill you at perhaps $40.90 – $41.00, as the stock had been trading up over the past few days, and the specialist will allow himself some profit room by shorting you the stock a tad higher, so that he can buy back his short and make perhaps $0.10 or so.
(B) You can expect a fill at $42.94, up over 5% from the prior close. The automated prop trading “HFT Specialist” will bless you with their liquidity by shorting you the stock up 5%, with full knowledge that no regulatory authority will watch and care, and no self regulatory officials at the chosen exchange will even look at the transaction, as it is inside the “erroneous trade” policy at that exchange, which is at a threshold of +/- 250% of the stock’s prior traded price. The HFT Specialist will short you the stock at $42.94, and buy it back (see 9:30.06 trades that total the same amount as that opening print) for $41.00, making $1.94 as their reward for “risking” their capital and providing you liquidity.
(C) A fish in a chandelier
Answer and Explanation:
If you answered (c) you are in the wrong class. Abstract Thought is in Room 304, not 403.
If you answered (A), you are a dinosaur. This is not 2003. Your thought process makes no sense in today’s world. Go back to 1963, take a few days off vacationing in the Pocono’s Mount Airy Lodge in your Chevrolet Impala Wagon Deluxe. Buy a pair of Pro Keds with the Blue and Red stripe on the outside sole. And go work out the remainder of your working career at Walmart as a greeter. You have dinner at Macaroni Grill with the family at 5:15pm
If you answered (B), congratulations! You understand our market structure. You understand our regulatory environment! You have adjusted! A job awaits you at any number of consulting firms that cater to today’s new style of trading. Your Bentley has been delivered to your Rumson home. You have an 8:30 dinner reservation at 21 Club awaiting you and Taylor Swift.
Folks, do not answer (A) or (C). Times have changed. (FWIW I really like Macaroni Grill. Really!)