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Neil Mackie asks: in the past there have been times I have been unable to get a market quote when making a large (to me) trade, but was able to get a quote by entering a smaller volume. This set me thinking about whether large trades are somehow less acceptable and whether the price quoted for a large trade is different from that for a smaller trade. So my question is, if I want to trade a share or investment trust that is not very liquid, is there any price advantage to be had (excluding trading fees) by breaking the trade down into (for example) 10 trades of £10,000 rather than one trade of £100,000?
Keith Bowman, equity analyst, interactive investor, says: The price at which we all buy and sell shares is heavily influenced by people called market makers. These are often teams of specialists within the big investment banks and smaller finance houses such as Winterfloods, finnCap and Peel Hunt. They play a crucial role in providing liquidity so that investors can buy and sell individual shares. Understanding how they operate will help explain the price achieved for your trade.
Market makers promise to make a two-way price (a price to buy and price to sell, known as the spread) on a list of stocks and state the size they’re willing to deal in at that price in a single order. This is called the Normal Market Size (NMS). Orders no greater than the NMS will usually be dealt automatically online at the price quoted, which can be at, or sometimes better than the spread.
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However, if you want to buy 10,000 shares in XYZ plc, but the market marker is only making a price in 5,000 shares, you may have to pay more than the spread quoted on your trading screen. It can depend on how the market maker’s book is positioned. Ideally, they will go home at night with no open positions, which means they have no exposure to individual companies. So, if the market maker has bought more stock in XYZ plc and needs to sell some to level his books, they may be happy to sell you all 10,000 shares at the market price.
If the market marker does not own the full 10,000 shares you wish to buy, they may offer to ‘work’ the order, which will involve placing the order over the phone. It means calling other possible holders of XYZ plc shares to see if they wish to sell. Enticing those other sellers can result in a higher price than the initial NMS price quote.
For a client to place two separate orders for shapes of 5,000 shares rather than one shape of 10,000, breaks market etiquette. The market maker has revealed his position. You would also pay two lots of commission. Splitting orders on low liquidity stocks can also drive down the share price against you, so higher if you’re buying and lower if you’re selling. This can mean that the net value you receive is worse than if your stockbroker had tried to work the full order and protect the price.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
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