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Mark's Market Blog

9-30-08: Limit Orders, Manipulating Google

By Mark Lawrence

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Well, yesterday was exciting. The House refused to pass the bailout, and the markets let them know that this was not appreciated. I learned a lesson too - another piece of my (very) expensive education.

First, there are two convenient ways to buy stock. You can place what's called a "market order." This means you tell your broker (or in my case, his computer) that you want XXX shares of YYYY stock, buy it right now at the current instantaneous price. Your second easy option is to tell him you want a "limit order." Your order is XXX shares of YYYY stock, to be bought (sold) if the price drops below (raises above) $ZZZ. I've used both, in fact I used both yesterday.

Here's a 5 day chart of GM, we'll be interested in Monday the 29th, the 4th box out of 5. All stock market times are EST.

This week's GM:

GM opened at about $9.80, and drifted around all morning near that price. At about 1pm news hit that Congress had voted down the bail out. This is very bad news for GM, it means the credit markets will continue to be frozen up and no one will be able to get auto loans. GM's price dropped almost instantly down to $9, and hovered there for most of the afternoon. Below the price chart is the volume chart, the number of shares sold in each 5 minute window. The volume was moderate in the morning. There was a very large spike just as the news hit - these spikes cannot be generated by humans phoning in orders. This is a sign of program trading - large investors, e.g. CalPers and CalStrs, which each hold portfolios of stocks with values well over a trillion dollars, have their trading computers hooked directly to Wall Street's computers and program them to buy or sell on particular events without human interaction. Later in the day, just as the market was closing, the computers decided the world was ending and placed market sell orders. These had to be matched up with buyers, which would have been a combination of market buy orders and limit buy orders - mostly the latter, as there was almost no time for market buyers to see and react. The volume rose quickly and the price dropped off the edge of the world. This same thing happened to pretty much the entire market, I use GM in particular 'cause, well, I'm getting ahead of my story.

Earlier in the day I saw the big slide at about 1pm, and I issued limit buy orders on GM, Google, and SPY (a synthetic stock which tracks the S&P 500). An hour or so later the prices had leveled off, perhaps even gone up a bit, and I decided my limit orders weren't happening, but I was too lazy to cancel them. In the last 1 minute of trading, the computers decided the world was indeed ending and started selling everything at any price. Google dropped in 90 seconds from 396 to 381. I had a limit order in on Google at exactly 381, so I got my shares at the ridiculous price. Similarly, I had a limit order in on SPY at 112, but it was at 114-115 all day. In the last 90 seconds it dropped to 111.50, so I got my shares. Finally, I had a limit order in on GM at 8.50. It dropped in the last 90 seconds to 8.51. I never got my stock. Damn. Missed a great deal by a stupid penny.

My lesson: Those of us who buy with some regularity on Ebay know you can often get a good price by bidding in the last 30 seconds. You have to make a high bid which is just past an even number - you don't bid $50, you bid $50.17. This is because if some existing bid has a high limit price, it's likely to be a round number, and earlier bids beat later bids. Turns out limit orders should be the same - you don't place your limit at $50, to buy you place it at $51, to sell you place it at $49. Had I used this rule on my GM order, I would have chosen $8.51 or $8.53 and I would have gotten my stock. I did "use" the rule on Google, but I have to admit that was random, not thought out. I did not use the rule on SPY, and I got my stock only because I underestimated the panic by 1/2%.

Interestingly, today something similar happened - Google was trading all day at $405 - $412 (I was real happy), but in the last 90 seconds the price went crazy. There were non-market sales reported at prices like $272, $241, $200, even apparently one sale reported at $1.25. I sat watching this play out, but the computers were about 3 minutes behind and all I could do was sit here and pound on my keyboard and scream. I called my broker and asked about this - I was told these were "institutional trades," not real market trades, like CalPers selling directly to some hedge fund in an off-market transaction, but reporting the sale. After about 45 seconds of this the trading programs panicked again, and Google dropped in the market place to $329, closing at $320.50. Had I had a limit order in at $350 I would have gotten some of this stock. I mulled this over for a half hour, and vowed to myself that for the next couple of weeks I would put insane limit orders in on everything in the off chance of accidentally getting a great deal. However, 45 minutes after close of market, NasDaq announced that they were investigating "potentially erroneous transactions" in the last minute trades of Google. It's clear to me that what they suspect is that someone reported the ridiculous off-market prices just to trigger the program trading and snap up some cheap stock. I could have ridden along on this - I'm just some ignorant dweeb, I certainly don't have access to any Wall Street computers - but I now think there's a decent chance someone will pay a huge SEC fine and some of these trades will be undone. It's still a good idea to put in some limit orders on big days - thursday of this week, for example, the alleged day of the next house vote on the bailout - but the truly crazy stuff maybe isn't real.

Well, that was fast - 90 minutes after close of market NasDaq announced that "it has canceled certain trades made on shares of Google minutes before the closing bell Tuesday." The exchange said it will "cancel all trades on the stock at or above $425.29 and at or below $400.52 that were executed between 3:57 and 4:02 Eastern." So the prices in the $300's weren't real after all, and I didn't actually miss anything. Good, I'll sleep a bit easier tonight. I can't wait to read some story about who gets the $$$$ SEC fine and loses their trading license.

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