Why morning is the worst time to trade stocks
The increasing volatility in stock markets is proving especially costly for retail investors who typically buy and sell stocks soon after the market opens, often at the most perilous time of the trading day.
Buying and selling by individual investors is particularly important in the minutes immediately after the market opens in the United States at 9:30 a.m. Eastern Time, when the chances of getting the best price for a stock are lower and the swings tend to be larger, traders and other market watchers said.
But within minutes, the gap between the price sellers want for a stock, known as the “ask” price, and what buyers are offering, the “bid”, narrows sharply and continues to narrow. until the end of the trading session. This market quirk has been amplified in recent weeks amidst large market swings.
The smaller spread, or spread, is better for investors because they are less likely to overprice a stock or sell below the prevailing market price. The wider the spread, the higher the costs investors are exposed to, which can erode returns at a time when major stock indices are down for the year.
In the first half of the year, the difference between bid and ask prices for S&P 500 stocks was 0.84 percentage points in the first minute of trading, according to data from ITG, a brokerage firm. This spread narrows to 0.08 percentage point after 15 minutes and less than 0.03 percentage point in the final minutes of the trading day.
This difference often amounts to a few cents per share. But it can add up for the many individual investors who crowd the market at the start of the trading day.
For example, at the start of trading on Monday, shares of Scripps Networks Interactive Inc.
had a bid-ask spread of 35 cents, or about 0.66 percentage points, according to trade data from FactSet. By the end of the day, the gap had narrowed to one penny, or 0.02 percentage points.
“The overall cost of trading is lower and the risk of getting a bad trade is less if you wait 30 minutes after the market opens,” said Scott Kubie, chief strategist at CLS Investments LLC, a manager of assets that invests primarily through exchange. – traded funds. After half an hour, the spread between the bid and ask prices narrows and large swings subside, Kubie said.
“At this point, all the orders that were transmitted by people the night before are carried out, and you can avoid swings,” he said.
Certainly, volatility can be beneficial if it allows an investor to buy or sell stocks at a more favorable price.
Trades for retail investors tend to be executed in the morning, as they placed trades the evening before through their online brokerage accounts or financial advisors, often after being able to catch up on the news after the work. According to TABB Group, a research and advisory firm focused on financial markets, around 15% of the average daily trading volume is generated by individual investors.
Stock trading volumes in general tend to cluster near the market open and close, but large institutional investors tend to cluster near the end of the day, the Wall Street Journal reported. In 2014, more than 13% of all trading volumes took place between 9:30 a.m. and 10:00 a.m., a figure that has been stable for the past five years, according to trading data compiled by Credit Suisse..
The opening 10 minutes accounted for almost 5% of volumes, according to the bank.
The practice worked against many mom-and-pop investors on the morning of August 24, when the Dow Jones Industrial Average fell more than 1,000 points in the first six minutes of trading before cutting about half of those losses. over the next half hour. . Equity price differentials also widened significantly during this period.
Professional fund managers prefer to stay on the sidelines when spreads are wide because they know they are more likely to get a better price for stocks when the spread narrows. But if a retail client insists, financial advisors often have no choice but to comply.
On the evening of Sunday, August 23, a client called Steven Podnos, managing director of investment adviser Wealth Care LLC, and told him to sell all of his shares. Mr Podnos, whose business oversees $250 million for about 120 families in Merritt Island, Florida, persuaded her to keep most of her investments but agreed to sell a handful of exchange-traded funds, or ETFs, investments that act like a mutual fund, but trade on the stock exchange like a stock.
He placed the orders early on Monday, August 24, in part fearing that a deeper selloff was brewing. One ETF, the iShares Core S&P Small Cap ETF, fell 30% before rebounding. He estimates that the plunge and comeback of ETFs cost the client several thousand dollars.
“I was sitting there watching it and I said, ‘Oh my god, that’s crazy’, but I had no idea it wasn’t going to get any worse,” Mr Podnos said.
ETFs have come under greater scrutiny in the weeks following the August 24 tumult, which hurt investors of all stripes and prompted closer scrutiny of securities. Many ETFs fell more than their underlying holdings that day. The securities are popular among individual investors.
Stock markets around the world fell as investors became more concerned about China’s slowdown and its impact on global growth. Adding to the uncertainty is the Federal Reserve, which may raise interest rates at a policy meeting this week. The Dow Jones Industrial Average slipped 62.13 points, or 0.4%, to 16,370.96 on Monday, bringing year-to-date losses to 8.1%.
On August 24, TD Ameritrade Holding Corp.
, one of the largest online retail brokers in the United States by trading activity, managed trading volumes four times the average, said Steven Quirk, group senior vice president trading at TD Ameritrade. In the first half hour, volumes were 10 times above average. Fidelity Investments also reported above-normal retail activity.
“Mondays will typically also be among your busiest market openings as you line up for orders over the weekend,” said Gregg Murphy, senior vice president of retail brokerage at Fidelity. “A large percentage of trading activity takes place within the first 30 minutes of the market opening.”
Chris Vorwald, investment associate at Cincinnati-based financial advisory firm Truepoint Wealth Counsel LLC, said he doesn’t like to trade early in the day. But sometimes it can’t avoid it due to customer demands. However, recent market ups and downs have illustrated the danger of early morning trading, and it’s a danger he has emphasized to his clients.
“In the morning, you tend to have a lot of overreaction to overnight news or news from other markets,” Vorwald said. He tells individual investors that they will likely fare better if they avoid making quick emotional decisions based on opening swings.
“When you have a day where the market is dropping hundreds of points, let the market calm down and get a better idea of where the real market is before you trade,” he said.
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