The New York Stock Exchange experienced a technical glitch this morning that triggered trading halts in dozens of stocks, including big names like Chipotle, Berkshire Hathaway, and the meme stock GameStop. The issue stemmed from problems with the price bands published by the Consolidated Tape Association, which are used to prevent excess volatility by pausing trading if prices move too far too quickly.
While the specific cause is still being investigated, the timing raised concerns given the recent move by U.S. stock exchanges to a one-day settlement cycle last week. This SEC-mandated change requires trades to be settled one day after execution instead of two, compressing timeframes for transferring securities.
Regulators and market participants have been on high alert for potential snags as systems adapt to the new settlement cycle. Today’s incident underscores the critical importance of robust trading infrastructure and risk controls as market practices evolve.
Halting Mechanism Kicks In At around 11am ET, the NYSE listed over 60 stocks as temporarily halted due to hitting their “limit up, limit down” (LULD) bands, which are circuit breaker levels to prevent extreme price swings. While some of those may have been unrelated cases of normal volatility, many were likely impacted by the pricing data issue.
Trading resumed around 11:45am after the exchange confirmed the pricing data problems had been resolved. While temporary, such disruptions can impact market quality, trading execution and risk management for investors and firms.
Need for Resilient Systems As financial markets continually evolve, today’s problems highlight the crucial need for exchanges, trading platforms, and market participants to have ultra-resilient, glitch-proof systems able to adapt flawlessly to changes. Even brief failures can undermine market confidence and integrity.
While technological errors are inevitable at times, regulators and investors alike will be scrutinizing today’s NYSE issue and responses carefully. Having rock-solid trading infrastructure and controls in place to prevent and handle disruptions seamlessly is essential for maintaining fair, orderly and efficient markets.
Want small cap opportunities delivered straight to your inbox? Channelchek’s free newsletter will give you exclusive access to our expert research, news, and insights to help you make informed investment decisions.
If you trade stocks, bonds or other securities, a major change is coming next week that could significantly impact your transactions and capital. On May 28th, the settlement cycle for trades in U.S. markets is shifting from the longstanding T+2 standard down to T+1.
What does this mean? Instead of having two business days after a trade execution to pay up and settle, you’ll now need to pony up your cash and securities just one day later under the accelerated T+1 timeline.
While seemingly a small change, this compression in the settlement schedule could have big ramifications for how you manage trades and the money involved. The transition is expected to cause disruptions, at least in the short-term, that all investors need to be prepared for.
For one, market participants anticipate a spike in trade settlement failures as brokers, banks and trading firms scramble to comply with the tighter T+1 window. With less time to line up cash and shares, there is higher risk that obligations don’t get met when due. History shows failure rates did jump when the U.S. shifted from T+3 to T+2 settlement back in 2017.
Settlement failures can lead to losses on trades, penalties, and reputational damage. The Securities Industry and Financial Markets Association (SIFMA) expects “small changes” in fail rates initially, but any increase could create snags.
There are also concerns that risks and cash crunches could migrate to other areas like foreign exchange funding markets. Foreign investors holding trillions in U.S. securities may face challenges sourcing dollars for transactions in the compressed T+1 timeframe. This could drive demand for overnight lending at elevated interest rates.
Similarly, the shortened settlement cycle could disrupt securities lending by reducing the availability of shares to borrow if there is less time to recall loaned stocks before settling trades.
While ultimately aimed at reducing risks long-term, the shortened T+1 settlement period represents a monumental operational change that the investing industry has been scrambling to prepare for. Over 1,000 different firms have been coordinating testing, setting up monitoring “command centers”, and adjusting processes.
Even with months of planning, there could still be issues and errors in the first few days and weeks as standard practices adapt to the quicker timeline. Major transition risk points to watch include May 29th when trades from both the final T+2 date and first T+1 date converge, creating an expected settlement volume surge.
For all investors, some key implications are clear – be ready for potential trade failures and funding crunches, have contingency plans in place, and expect a Period of adjustment as the new accelerated T+1 regime takes hold. Flexibility and patience may be required as longstanding settlement processes are overhauled practically overnight.
The shift to T+1 is considered vital to modernizing market plumbing. But adapting to its faster payment cadence will put investors’ operational capabilities and capital management to the test like never before.
Want small cap opportunities delivered straight to your inbox? Channelchek’s free newsletter will give you exclusive access to our expert research, news, and insights to help you make informed investment decisions.
The New York Stock Exchange (NYSE), the iconic centerpiece of global finance, is exploring a groundbreaking shift that could reshape how stock markets operate worldwide. The proposal to transition to 24/7 trading is a bold move that promises both opportunities and challenges for investors and market participants alike.
The Lure of Continuous Trading The driving force behind the NYSE’s consideration of round-the-clock trading is the desire to align with the increasingly global and interconnected nature of modern financial markets. As the world’s economic activities continue to transcend time zones, the traditional trading hours impose limitations on investors’ ability to react swiftly to events that could significantly impact stock prices.
By embracing a 24/7 trading model, the NYSE aims to democratize access, allowing investors across the globe to participate in the markets at their convenience. This could potentially enhance liquidity and market efficiency, providing a more seamless flow of capital and pricing information.
Moreover, the rise of digital currencies and their associated markets, which operate continuously, has set a precedent that traditional stock exchanges are keen to emulate. The promise of reducing volatility at market openings, as news and events would be immediately reflected in stock prices, is an enticing proposition for advocates of 24/7 trading.
Navigating Potential Risks However, this revolutionary shift is not without its challenges and concerns. One significant apprehension is the potential for increased price volatility, particularly during off-peak hours when trading volumes may be lower. Uninformed or less experienced investors could face substantial risks if prices swing erratically due to lower liquidity or unforeseen events.
The NYSE’s survey specifically probes for mechanisms to safeguard against such volatility, underscoring the need for robust investor protection measures in a 24/7 trading environment. Regulatory bodies, such as the Securities and Exchange Commission (SEC), will play a pivotal role in shaping the framework and rules to mitigate risks and ensure market integrity.
Operational and logistical demands pose another significant hurdle. Staffing for overnight sessions, upgrading technical infrastructure, and overhauling clearing house operations to accommodate non-stop trading will require substantial investments and coordination across the financial ecosystem.
Implications for Investors and Markets If the NYSE successfully navigates these challenges and implements 24/7 trading, the implications for investors could be far-reaching. Individual investors may benefit from increased flexibility, as they would no longer be constrained by traditional trading hours. This could democratize access to market opportunities, allowing investors to react more swiftly to global events that could impact their portfolios.
However, the potential for increased volatility during off-peak hours could pose risks for less experienced or risk-averse investors. Prudent investors may need to adjust their strategies and risk management approaches to account for the possibility of sudden price swings during overnight trading sessions.
For institutional investors and market makers, 24/7 trading could present both opportunities and challenges. While continuous access to markets could enable more efficient portfolio management and risk hedging, it may also necessitate adjustments to staffing, trading algorithms, and risk management protocols to accommodate round-the-clock operations.
Moreover, the transition to 24/7 trading could have broader implications for market dynamics and behavior. With the traditional opening and closing bell ceremonies no longer demarcating trading sessions, the psychological and behavioral factors that influence market participants may evolve. Investors and traders may need to adapt their decision-making processes and strategies to account for the absence of these temporal anchors.
Conclusion The NYSE’s exploration of 24/7 trading represents a pivotal moment in the evolution of financial markets. While the potential benefits of continuous trading, such as increased liquidity and market efficiency, are appealing, the industry must carefully navigate the associated risks and challenges.
As the world moves towards a more interconnected and digitized financial landscape, the future of trading may indeed lie in a 24/7 model. However, achieving this paradigm shift will require collaboration among exchanges, regulators, and market participants to ensure investor protection, operational readiness, and market stability.
The road ahead may be arduous, but the prospect of more accessible, efficient, and globally inclusive markets could usher in a new era of trading that better serves the needs of a rapidly evolving financial ecosystem.
Deciding if Buy and Hold or Trading is Best for You?
New investors today have powerful tools that may exceed what was available even at institutions just a decade ago. This provides a leg-up on those of us who had to cover high trading fees, buy and sell, before we made a dime. Then, there is today’s information availability. Stock prices were printed in the morning from the day before close; that is how investors were updated. Then there is all the other up-to-the-minute information from your broker and company data and research from platforms like Channelchek and others.
This can be both helpful and overwhelming to a new investor deciding where to focus and what type of investment style suits them.
The least expensive discount brokers, when I bought my very first hundred shares cost $100 in and $100 out ($200 round trip). So exceeding two dollars per share on each round lot (orders not in lots of 100 cost more) was necessary to break even. Between this and the non-current price information, a buy-and-hold position was the only position that made much sense.
Now, transacting is just point-and-shoot. Even bid versus ask spreads are minuscule. This makes it more practical for an investor to decide not to ride out a perceived slide even if they have confidence that it will reverse later. Instead, with the ability to unload before an expected trouble spot develops, an investor that waits instead, may become angry with themselves that they held and their account value has declined.
Today’s set of circumstances has a lot more investors acting like traders and trying to time the market. The tolerance for seeing a holding is up, say 6% over a period of time, only to be down 2% over a longer period, then up 7% down the road is much more rare. Newer investors don’t have as much price swing tolerance, they want to take a profit before the market drops. Some then expect as much as a 20% dip that they can buy back into.
Of course, hitting the near tops and low points to maximize profit is unlikely. And trying to do it usually leads to frustration from missed opportunity when it doesn’t then move in the direction that would benefit the trader.
So is it prudent to try to time price moves up and down and trade the shares, to take advantage of so much information? Or, should they do research, find companies they expect will do well, and then look for a good entry point, not even thinking about an exit unless it begins to behave outside of expectations?
This is particularly relevant in a year where the market is up above average, which means if it gravitates back to its mean average annual return, the overall market will end the year lower than it is now.
There is no one simple answer, but a practical approach is to have core holdings to take the long ride with, and then view other stocks separately that maybe move a little faster, up and down, that are for timing moves. This leads to diversification in holding periods. But, in order to work, one has to not forget or give up on the individual strategies of the two investment styles that are to be thought of separately, perhaps even in two different accounts.
But when does one sell from the buy-and-hold portion, is there a trigger? And what is the trigger with the assets in the trading portion?
The same idea could apply to both sets of assets. Set the parameters for every trade and stick to them. Take a profit or a loss when the parameter is met, regardless of what you may feel at that time. Good decisions and “if-this, then-that” thinking is best when not in the heat of battle. Plan your trade and trade your plan regardless. In some cases it may have worked out better if you had acted differently than planned, but if it is based on realistic expectations or probabilities, then chances are, over the years it will reap greater rewards.
This ongoing reassessment, regardless of expected holding time, has the investor set levels, both above and below a stock’s current price, that, when struck causes the investor to evaluate. That evaluation may simply be asking oneself has anything changed since I set this parameter? If not, act. It may also be asking oneself, is this the best use of my capital right now, or is there a better place that I believe has the potential to outperform the current holding?
Take Away
An investment portfolio plan with meaningful rules to follow helps reduce the anxiety of investing. Whether 90% is earmarked buy-and-hold, or 90% is to achieve short-term gains and avoid big drawdowns, the trades must be managed to a pre-thought-out sensible plan. The expectation then is that none of the positions will work out perfectly timed, but as a whole, over a long enough period, the investor will be better off than if they had no guidelines or fewer boundaries.
ChatGPT-Powered Wall Street: The Benefits and Perils of Using Artificial Intelligence to Trade Stocks and Other Financial Instruments
Artificial Intelligence-powered tools, such as ChatGPT, have the potential to revolutionize the efficiency, effectiveness and speed of the work humans do.
And this is true in financial markets as much as in sectors like health care, manufacturing and pretty much every other aspect of our lives.
I’ve been researching financial markets and algorithmic trading for 14 years. While AI offers lots of benefits, the growing use of these technologies in financial markets also points to potential perils. A look at Wall Street’s past efforts to speed up trading by embracing computers and AI offers important lessons on the implications of using them for decision-making.
This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of,Pawan Jain, Assistant Professor of Finance, West Virginia University.
Program Trading Fuels Black Monday
In the early 1980s, fueled by advancements in technology and financial innovations such as derivatives, institutional investors began using computer programs to execute trades based on predefined rules and algorithms. This helped them complete large trades quickly and efficiently.
Back then, these algorithms were relatively simple and were primarily used for so-called index arbitrage, which involves trying to profit from discrepancies between the price of a stock index – like the S&P 500 – and that of the stocks it’s composed of.
As technology advanced and more data became available, this kind of program trading became increasingly sophisticated, with algorithms able to analyze complex market data and execute trades based on a wide range of factors. These program traders continued to grow in number on the largely unregulated trading freeways – on which over a trillion dollars worth of assets change hands every day – causing market volatility to increase dramatically.
Eventually this resulted in the massive stock market crash in 1987 known as Black Monday. The Dow Jones Industrial Average suffered what was at the time the biggest percentage drop in its history, and the pain spread throughout the globe.
In response, regulatory authorities implemented a number of measures to restrict the use of program trading, including circuit breakers that halt trading when there are significant market swings and other limits. But despite these measures, program trading continued to grow in popularity in the years following the crash.
HFT: Program Trading on Steroids
Fast forward 15 years, to 2002, when the New York Stock Exchange introduced a fully automated trading system. As a result, program traders gave way to more sophisticated automations with much more advanced technology: High-frequency trading.
HFT uses computer programs to analyze market data and execute trades at extremely high speeds. Unlike program traders that bought and sold baskets of securities over time to take advantage of an arbitrage opportunity – a difference in price of similar securities that can be exploited for profit – high-frequency traders use powerful computers and high-speed networks to analyze market data and execute trades at lightning-fast speeds. High-frequency traders can conduct trades in approximately one 64-millionth of a second, compared with the several seconds it took traders in the 1980s.
These trades are typically very short term in nature and may involve buying and selling the same security multiple times in a matter of nanoseconds. AI algorithms analyze large amounts of data in real time and identify patterns and trends that are not immediately apparent to human traders. This helps traders make better decisions and execute trades at a faster pace than would be possible manually.
Another important application of AI in HFT is natural language processing, which involves analyzing and interpreting human language data such as news articles and social media posts. By analyzing this data, traders can gain valuable insights into market sentiment and adjust their trading strategies accordingly.
Benefits of AI Trading
These AI-based, high-frequency traders operate very differently than people do.
The human brain is slow, inaccurate and forgetful. It is incapable of quick, high-precision, floating-point arithmetic needed for analyzing huge volumes of data for identifying trade signals. Computers are millions of times faster, with essentially infallible memory, perfect attention and limitless capability for analyzing large volumes of data in split milliseconds.
And, so, just like most technologies, HFT provides several benefits to stock markets.
These traders typically buy and sell assets at prices very close to the market price, which means they don’t charge investors high fees. This helps ensure that there are always buyers and sellers in the market, which in turn helps to stabilize prices and reduce the potential for sudden price swings.
High-frequency trading can also help to reduce the impact of market inefficiencies by quickly identifying and exploiting mispricing in the market. For example, HFT algorithms can detect when a particular stock is undervalued or overvalued and execute trades to take advantage of these discrepancies. By doing so, this kind of trading can help to correct market inefficiencies and ensure that assets are priced more accurately.
Stock exchanges used to be packed with traders buying and selling securities, as in this scene from 1983. Today’s trading floors are increasingly empty as AI-powered computers handle more and more of the work.
The Downsides
But speed and efficiency can also cause harm.
HFT algorithms can react so quickly to news events and other market signals that they can cause sudden spikes or drops in asset prices.
Additionally, HFT financial firms are able to use their speed and technology to gain an unfair advantage over other traders, further distorting market signals. The volatility created by these extremely sophisticated AI-powered trading beasts led to the so-called flash crash in May 2010, when stocks plunged and then recovered in a matter of minutes – erasing and then restoring about $1 trillion in market value.
Since then, volatile markets have become the new normal. In 2016 research, two co-authors and I found that volatility – a measure of how rapidly and unpredictably prices move up and down – increased significantly after the introduction of HFT.
The speed and efficiency with which high-frequency traders analyze the data mean that even a small change in market conditions can trigger a large number of trades, leading to sudden price swings and increased volatility.
In addition, research I published with several other colleagues in 2021 shows that most high-frequency traders use similar algorithms, which increases the risk of market failure. That’s because as the number of these traders increases in the marketplace, the similarity in these algorithms can lead to similar trading decisions.
This means that all of the high-frequency traders might trade on the same side of the market if their algorithms release similar trading signals. That is, they all might try to sell in case of negative news or buy in case of positive news. If there is no one to take the other side of the trade, markets can fail.
Enter ChatGPT
That brings us to a new world of ChatGPT-powered trading algorithms and similar programs. They could take the problem of too many traders on the same side of a deal and make it even worse.
In general, humans, left to their own devices, will tend to make a diverse range of decisions. But if everyone’s deriving their decisions from a similar artificial intelligence, this can limit the diversity of opinion.
Consider an extreme, nonfinancial situation in which everyone depends on ChatGPT to decide on the best computer to buy. Consumers are already very prone to herding behavior, in which they tend to buy the same products and models. For example, reviews on Yelp, Amazon and so on motivate consumers to pick among a few top choices.
Since decisions made by the generative AI-powered chatbot are based on past training data, there would be a similarity in the decisions suggested by the chatbot. It is highly likely that ChatGPT would suggest the same brand and model to everyone. This might take herding to a whole new level and could lead to shortages in certain products and service as well as severe price spikes.
This becomes more problematic when the AI making the decisions is informed by biased and incorrect information. AI algorithms can reinforce existing biases when systems are trained on biased, old or limited data sets. And ChatGPT and similar tools have been criticized for making factual errors.
In addition, since market crashes are relatively rare, there isn’t much data on them. Since generative AIs depend on data training to learn, their lack of knowledge about them could make them more likely to happen.
For now, at least, it seems most banks won’t be allowing their employees to take advantage of ChatGPT and similar tools. Citigroup, Bank of America, Goldman Sachs and several other lenders have already banned their use on trading-room floors, citing privacy concerns.
But I strongly believe banks will eventually embrace generative AI, once they resolve concerns they have with it. The potential gains are too significant to pass up – and there’s a risk of being left behind by rivals.
Investors are always searching for the next great investment opportunity; one of the most fundamental factors in making an educated investment decision is determining if the market is undervaluing a specific stock. Valuing a stock involves analyzing various financial metrics and market conditions to determine the stock’s intrinsic value. This represents the true worth of the company, knowing it before others discover the value provides an investment edge and maybe above-average returns.
There are several key factors that investors should consider when valuing a stock. These include the P/E ratio (price/earnings), intrinsic value, GAAP earnings vs. adjusted earnings and other metrics and market expectations. When determining P/E and other ratios, variations that may come into play for a specific industry or economic environment are important measures as well. These could include industry comparisons of price/sales ratio, price/book ratio, and trends like industry grouping conditions improving or deteriorating.
Below we’ll look at many of the numbers that investors use as filters to create watch lists. The lists can then be used to weigh one opportunity against another based on market environments, demand trends, and competition.
P/E Ratio
The P/E ratio, or price-to-earnings ratio, is a commonly used metric for valuing stocks. It’s the ratio of a company’s stock price to its actual earnings per share (EPS). A high P/E ratio indicates that investors are paying a premium for the company’s continued earnings potential, while a low P/E ratio suggests that the company may be undervalued.
As an example, the price-to-earnings ratio (taking the latest closing price and dividing it by the most recent earnings per share) for Meta Platforms (META) as of May 10, 2023 is 23.95. That is to say that it each share is priced at almost 24 times earnings. By comparison, General Morors (GM) has a current P/E ratio of 5.11. This could indicate that the stability or growth potential of Meta (Facebook) is perceived by investors as greater than a traditional car company in an increasingly competitive environment – or that the value of one is not sustainable. This information gives the investor a foundation from which to make decisions.
Of course it is not that easy. It’s important to note that not all P/E ratios are created equal. The P/E ratio can be calculated using either GAAP (Generally Accepted Accounting Principles) earnings or adjusted earnings, which can have a significant impact on the valuation of a company. Non-GAAP financial measures exclude certain expenses. The exclusions include one-time expenses like restructuring charges, gains/losses from asset sales, and other non-operating items. The refined metric is often used by investors and analysts to assess a company’s earnings power excluding certain items that may not be representative of the company’s core business operations.
Variations of P/E Ratio
There are also several variations of the P/E ratio that investors should be aware of. The forward P/E ratio uses projected earnings instead of historical earnings to calculate the ratio, this can provide a more accurate picture of a company’s future valuation potential. Of course, this depends upon the accuracy of forecasts.
The trailing P/E ratio, on the other hand, uses historical earnings over the past 12 months to calculate the P/E ratio.
Price/Sales Ratio
The price/sales ratio is another valid measure of a stocks over or undervaluation. It represents the ratio of a company’s stock price to its sales per share. This ratio is particularly useful for valuing companies that have yet to turn a profit, as it focuses on the company’s revenue instead of its earnings.
Price/Book Ratio
The price/book ratio is a metric that compares a company’s stock price to its book value per share. Book value represents the total value of a company’s assets minus its liabilities, and it provides a measure of the company’s ability to earn per asset. A low price/book ratio may indicate that a company is efficient and undervalued, while a high price/book ratio may indicate that the company is overvalued.
Intrinsic Value
The intrinsic value of a stock represents its true worth based on the company’s underlying fundamentals, such as its revenue, earnings, and assets. Calculating intrinsic value can be a complex process that involves forecasts developed by analyzing financials, market trends, demand for product growth, and other relevant factors. The most common method for calculating intrinsic value is the discounted cash flow (DCF) method, this involves projecting a company’s future cash flows and discounting them back to their present value. Present valuing future cash flows results in what many use as the measure of intrinsic value of a company’s stock.
Business Conditions
It is always important to consider the overall business conditions when valuing a stock. This may be why GM has a much lower P/E than META. The growth in demand for tech is expected to continue to be greater than the growth in demand for cars. In other words, a company that is operating in a growing industry with strong demand may be more valuable than a company that is operating in a declining or increasingly competitive industry. Similarly, a company that is well-positioned to take advantage of new technologies or trends may be more valuable than a company that is lagging behind its competitors.
In all cases, it’s imperative that investors consider macroeconomic factors, such as interest rates, inflation, and geopolitical risks, that could impact the overall market conditions and the company’s performance.
Take Away
Self-directed investors typically have at their disposal a platform that can filter and sort through many criteria. This helps investors that are trying to determine if a stock is currently undervalued. The information that one pulls from these filters and ratio analysis is only as valid as its accuracy and completeness. But it can serve as a good starting point to avoid stocks that are currently overvalued and to uncover companies that are not getting the attention they need to have its stock trade at higher valuations.
An investor doesn’t have to be first to recognize an undervalued stock, but discovering it early and then hoping others follow may require an investor to look at companies not making headlines every week. The 6,000 small-cap stock names on Channelchek, complete with enough data to compare the ratios and other elements mentioned above, may be the only stock universe needed to help an investor create a watch list of potentially undervalued opportunities.
One Should Never feel Forced to Trade or Get Involved Because They are Bored
Most start off a New Year with great intentions. These often include saving money, starting a family, or finding a better job. A co-worker of mine is intent on skydiving before year-end – whatever. To each their own. For many involved in the markets, 2023 has become the year they want to further improve their trading. This usually begins with stepping back, reminding themselves of trading basics, then not falling into old habits weeks later. Another step is developing new understanding and new companies. It also includes not trading with the need to make back last year’s losses in a hurry.
There is one trading basic that is often ignored because it feels like it conflicts with other goals. But it doesn’t. It is knowing when being uninvolved is the best decision. Doing nothing without feeling you may be missing something takes practice for most. It may take more practice for those that have experienced the thrill of a mostly green trading account.
Trade No Stock Before its Time
Over the holidays, family members would ask, “should I buy Tesla?” or “should I be buying Apple down here?” My mom would instead ask, something that in my mind is a similar question. She’d ask, “when are you going to get married?” These are all similar because Tesla and Apple, when considering the whole universe of stocks, are probably not the best fit for the accounts of these people. Similarly, in the absence of finding a good personal fit, unless someone is holding a gun to one’s head, I believe in waiting for circumstances with a high probability of a positive outcome. Don’t get involved because you’re bored, or because you think you have to is the message.
If your win rate is over 50%, you’re doing better than average, this is as true in trading as it is in relationships. If you force either, your success rate goes down, and you’ve wasted time, money, and invited frustration. Yet so many investor/traders willy-nilly jump into something because they are bored, feel they are missing out, or are told it is what they are supposed to be doing.
Forcing trades, no matter how tempting it may be, how bored you are, or how much FOMO you’re experiencing, has a lower chance of being successful than if you wait for your perfect setup. Sitting on your hands so you can’t press the “Buy” button is preferable to being in the situation of trying to unwind a trade you spent too little time waiting to come to you. Good opportunity doesn’t always arrive on schedule, but if you have capital tied up in a mistake, you may not be able to jump at a real match for your portfolio later on.
Trading is Not Glamorous
The definition of booyah is “expressing triumphant exuberance.” If you yearn to say “booyah” or do any other kind of touchdown dance, you may find you will pull the sell trigger too early. A main key to trading is knowing what you want, then patience. Patience is one of the most important skills you can have as a trader. You need to have the control and the discipline to wait for a quality setup according to your individual strategy. It may take a while, but confidence the trades will come helps. Develop a trading strategy so you know the guidelines you will adhere to; abandoning that strategy just to be involved, over time, will cause you to be worse off.
Consistently successful traders will tell you that one of the most important things to remember with trading is that you should never let your emotions control your actions. If you can’t think rationally if you aren’t planning your trade and trading your plan, sit on your hands until you can. Really, defund your account, find another way to get your thrills. Because if you force a trade and it works out anyway, you have reinforced a bad habit. Many trading accounts of good people got fried in 2022 because they did the wrong thing in 2021, but in 2021 they were bailed out by the markets. Doing the wrong thing and succeeding is costly because you tend to repeat it.
A hail Mary pass sometimes meets the desired goal in a football game, swinging for a home run in baseball and connecting certainly can lead to exuberance and even a winning game. But most often, these are low-probability irrational plays if you actually want to win. Increase your time on base, work on your short plays, study your opponent, or whatever other kind of reference helps convey this thinking. Because saying “I do” to a stock without successful due diligence is like asking to eventually lose. If you just want excitement, then maybe you could consider skydiving.
Final Thoughts
We’re all always learning. Channelchek is a good way to discover less explored companies and to either learn or be reminded of things that may enhance your positive outcomes. Sign up now, there’s no paywall, just good info not found on more mainstream investment sites. Go here.
When Markets are Stormy, Remind Yourself of these Three Rules
Investing is necessary to help build for a future where inflation hasn’t eaten away at savings. But when the investment markets have been at their most difficult in years, most long-term investors have found their investment portfolios have gone into reverse. Many have then committed more cash to their eroding positions as the “buy the dip” thinking, up until recently, has, overall, worked out.
Whether by managing several billion for a large mutual fund or by keeping my household’s stock portfolio out of trouble, I’ve learned a lot. Most of what has been fruitful seems basic but is often forgotten when battling the markets. The information is easy to convey, the actions take discipline. Here are three key thoughts and actions to help you make decisions.
Know that There are Good and Bad Days
Do you fish? Most people understand fishing. You use past experience and current conditions to estimate (guess) what kind of fish might be biting. You then gather the right equipment and bring yourself to the place where you’re most likely to catch something worthwhile and at a time when the fish are most likely to satisfy your desire to catch them.
You choose the tackle that has been most productive for whatever you’re fishing for, get your lines in the water, and then sit patiently.
More often than not, when fishing, things don’t go as planned. The fish may not be as eager to get caught as you had hoped, or you might quickly catch as much as your freezer can hold, or the law allows. Sometimes a boat comes by and cuts your line. Stuff happens.
If the fish aren’t biting, you evaluate if waiting will yield more than fishing elsewhere. If they instead are biting like crazy, and there seems to be a storm approaching, it might be best to reduce your risk and head back before being caught in a storm. Often the best fishing is right before or after a storm, mid storm is a net negative and could be damaging.
Treat investing like fishing. Learn the best spots for the current conditions. This could be industry sectors, or segments based on market cap., within the categories, ask what companies have the highest probability of a positive outcome. Read up on the companies and see what professional analysts are saying about the financials, business model, management, and outlook. As with fishing, the old guy at the dock that has been fishing the area for years may steer you into (or out of) a boatload of success. Still, use your own judgment, and never act on a hot tip blindly.
Investing, like fishing, can be most successful before or after a storm. Taking positions in the middle is for thrill seekers, not investors.
Have a Plan
Seems simple enough. If you are fishing, you may schedule yourself for what time of day the fish are likely to be feeding, and if they aren’t, how long, you’ll wait before you try a different lure or a different location? You’re likely to have several hooks in the water at different depths and a plan to switch to whichever depth is getting the most action.
Moving to a different fishing spot when the one you’re at is still productive may seem unreasonable, but if other fishermen have moved to fish where you are, taking your current catch and moving to where you think you’ll do better can be smart.
As a portfolio manager, I held dozens of positions simultaneously, they all had a purpose. If I couldn’t say what the expectations were of any position, I got rid of it. Rolling the dice is expensive. My portfolio objective was to beat the benchmark and consistently be a top-five fund in the category. My plan to accomplish the objective was to have pre-assessed the possibilities before entering any position. I also told myself what I’d do when any of them occurred. In this way, I had a plan for most all scenarios.
The plan helped prevent me from ever trying to take more out of a trade than it is willing to give. It also forced me to never enter a position without having done my homework on the company and the environment in which the company operates.
Technology makes it easier than ever to do preliminary reading and research. Channelchek and other outlets for quality research, coupled with information and tools usually provided by your broker, means today’s retail investor has more than most professionals did in 2000.
Part of the plan should be when to do nothing. The top portfolio managers get paid quite well to do very little each day except monitoring positions in case something, based on their plan, happens. Don’t ever transact because you’re bored. Each position should have a purpose, if there is something else that is likely to better provide that purpose, no-cost trading makes it efficient to adjust your holdings. But if it is doing everything it should, doing nothing is often the best action. Sit on your hands.
Plan your trade, trade your plan, and get out when it is not the best commitment of your money.
Know What You Trade
I’m a student of and a participant in the markets, I suppose I’m also a teacher of sorts, but I never stop learning. This makes me a generalist in many categories, with above-average knowledge in a few. It’s important to know your investment realm. If your fishing is to stand waist deep in water with a flyrod catching more than anyone else on the river, it doesn’t mean you’d have the ability to go offshore and have any success. In fact, offshore, you’d probably throw up. Flyfishing and deep sea fishing are related but not the same. If you knowledgeably trade a few small-cap mining stocks and decide to one day buy TSLA or AAPL, your experience may not translate well. If either one dropped $50 a share, it might make you want to throw up.
Knowing different investment types and sectors better so you can focus on those you’re best suited to is, like everything else, education and experience.
Learn to decipher what is good information and what is mostly entertainment. Then immerse yourself. Don’t feel that you have to go where the crowd is. Social media has been powerful in getting us to follow the crowd, but defining the right or best thing for us is critical to any success. No one knows what you want more than you, no one knows what you can stomach better than you, and not everyone enjoys any type of fishing or any type of investing. For those people, there are food stores and wealth managers or funds.
Take Away
No matter the caliber of trader/investor, when markets are turbulent, it’s a good habit to refresh yourself on basics. These investing basics include you don’t always have to be in the market – you can expect to run into problem periods, it’s better to avoid these storms than have to rebuild afterward. Also, pre-thinking actions in an “if this, then that” format before even entering a position will prevent bigger problems and provide greater success. Decision-making while the market is either making you euphoric or the market is punching you in the face is the wrong time. Better decisions are made when thinking clearly. If you don’t think you enjoy investing, leave it to someone else, not everything is for everybody.
For those wishing to hone their expertise, try to learn about everything, but pick a few specialties. I know people that only trade the FAANG stocks and have superior performance. I know others that focus only on biotech and overtime have done well. Then there is the person that only invests in companies with products or services they themselves use, no matter what your focus is, read up on the company and understand how it trades and what its business is impacted by.
Gary Gensler Backs off on Payment-For-Order-Flow, But Promises Something More Comprehensive
The Securities and Exchange Commission (SEC) chairman has softened his harsh talk against the brokerage practice of payment-for-order-flow (PFOF). While securities brokers and investors in the industry breathed a sigh of relief with the news that the practice won’t be banned, firms like Robinhood (HOOD), Etrade (ETFC), and Charles Schwab (SCHW) may have something else to worry about.
About PFOF
There are harsh critics of the practice of PFOF, and there are strong advocates. Proponents of the model say it provides investors more liquidity, while those that oppose the practice question if retail traders are getting the best price.
In a nutshell, what this compensation system does is when investors place trades for stocks, ETFs, and options, the broker uses market makers to execute the order. To compete for price and execution, market makers in the securities offer rebates back to retail brokers. The rebates add to the broker’s profit, which is in part what allows for “free trades.” Additionally, the net cost per share to the investor is often still below most other methods readily available to them.
PFOF provides a significant revenue stream for retail brokers that offer zero-commission trading. Stocks of these brokerage firms have been under downward pressure with the uncertainty of whether the practice that is banned in other countries would be banned in the U.S. The news that it won’t be banned is seen as positive by those in the online broker industry.
New Direction for PFOF
After harping on the idea of banning PFOF, SEC officials (as reported by Bloomberg) have indicated that a ban is no longer being considered. That has been followed by their promise that other changes to the execution mechanism are on the way.
While the final SEC plans for payment-for-order-flow are not known, it is expected that they will allow these brokers to conduct business, and it is not expected to be more profitable for the brokers – most expect it to make it more difficult to maintain current earnings. The Commission is, if nothing else, expected to propose changes that could affect the complicated system of the rebates designed to increase market makers’ trading volume. Additionally, the regulator is weighing a plan to force brokers to disclose more about how much trading with them costs compared with benchmarks, a metric known as price improvement. The metric would allow customers to be able to compare one firm to another.
The SEC may also better clarify requirements for brokerages on what is “best execution” of stock transactions. The scope of the overhaul by the SEC remains to be seen.
The SEC is expected to introduce its plan in the coming months, according to Bloomberg. The plan is likely to make the system more transparent and more competitive and to include regulations lowering access fees that exchanges charge the brokers to execute trades.
