Why a little discretion may benefit your next stock trade
Author: John Christofilos
February 22, 2018
The bid/ask spread is supposed to provide an accurate measure of a stock’s current value, but what shows up on the trader’s screen has become a bit less reliable in recent years and may not always reflect what it takes to complete a transaction.
This is particularly true when investors are trying to buy a significant position in a less liquid stock. In these instances, investors will often find themselves chasing the trade because the price of the security moves against them at the last moment before execution. This can be highly frustrating and may feel a bit like a friend offering you a ride, only to drive off just as you reach for the door.
To some extent, this is just how markets work, but there’s no denying the growing influence that high frequency traders (HFTs) are having on certain trades. Incentivized by numerous market exchanges to simply sit on the bid and offer of a stock, HFTs will quickly react to any whiff of a buyer and work systematically to maneuver prices higher.
So what can be done to circumnavigate this potentially vicious circle? One good option for retail investors with a longer term horizon is to recognize an acceptable level of discretion to transact outside the bid/ask spread in order to get the trade done. This could mean paying up a couple of pennies to buy a stock or losing out on a few pennies to sell, but it keeps from getting caught up in the chase of an ever changing share price, which can often cost even more in the end.
John Christofilos is a senior vice president and chief trading officer at AGF Investment Inc. He is a regular contributor to AGF Perspectives.
Commentaries contained herein are provided as a general source of information based on information available as of February 22, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI is registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2021 AGF Management Limited. All rights reserved.