OF MARKET ORDERS AND SLEEPLESS NIGHTS

Some investor placed a purchase order at a ‘best market’ price. The order went to the market, and was executed at a price of Kshs. 900, for a share that, at the close of the previous day, was at Kshs. 168. The share-price closed at Kshs. 368 on that day, remained dormant for a few days, and has edged downwards since then.

In this era of ATS (Automated Trading System), a market order can be catastrophic. Brokers carry their orders on a flash disk which they then feed to the system at the trading floor. The system just searches for any marching orders and passes any such order as executed.

After material information is received on the market, the 10% boundary is off, and the initial price after release of the information is determined through an auction till a match is found. The price can thus escalate or plummet to whatever price that finds the match.

In the “open Outcry” system, such an outrageous match would not have been captured since the dealers would have covered the buyer. A machine however goes by rules and has no way of telling whether a match is extreem.

Of course this particular transactions was nullified, but the one for City Trust was not. The buyer got stuck with City Trust at Kshs. 500, and they are currently doing Kshs. 80 levels.

With the set up being somewhat devoid of human touch, it becomes much safer to put a cap on any order placed. It doesn’t take receipt of material information to have your orders executed at a disadvantaged price. Even on a normal day, with prices oscillating at 10% boundaries, you could still get your purchase orders executed at price way above the day’s average or sold at prices way below the average sale price.

Kenya Airways or example, having closed at Kshs. 120 on the previous day can trade at between Kshs. 100 and 132 on the next day’s trading. Should you then place a sale order at “best market”;

- Our market does not cater for the “best” part of a “best market” order (in fact I wonder whether we have any that does.
- Your share will probably go at the lowest price of the day since it is almost guaranteed that there will be a buyer placing their order at Kshs. 100.
- The same goes for the buy side.

Of course the downside of placing cap would be, should the price go slightly beyond the cup (for a buy order) or below the cap (for a sale order), then your order would not be executable. The idea is to place the cap at slightly above the previous day’s closing price.