08 August 2022
Undoubtedly, the Internet has created a very different environment for execution-only traders compared to the pre-Internet days. Many trade execution experts use Twitter, Facebook and other social media sites, as well as stock bulletin boards, to wax lyrical about their personal trades(without giving advice). Ultimately, information and knowledge are invaluable; therefore, there is nothing wrong with following several different traders.
Sometimes they can give you a different angle, techniques and ways of thinking, but other times they can show you how not to do it!
As a broker, there are regulations protecting clients from what is known as "front running", whereby a broker may buy stock for their clients ahead of a research note. When looking at execution-only trading, where the investor takes responsibility without advice, this would appear irrelevant – even if following a trader. However, if you look at some well-known traders posting their views and trading histories, there is often a thin line.
Unless you are Warren Buffett, one trader recommending the likes of Apple or a large FTSE 100 company would have no impact on the share price. Even if they had hundreds or thousands of followers, let's not forget that these markets are incredibly liquid, and it is unlikely they would even register. However, might things be a little different when considering trade execution in medium to small-sized companies?
As an execution-only trader looking for a short-term profit, do you want your favourite trader to give their view on a stock or put their money where their mouth is? Trade execution is the key to any genuine recommendation, the decision to invest your own money and put this at risk. However, if the trader was to buy the stock before announcing their positive views, could this impact the price you might pay?
Even if you have the best low latency execution-only dealing platform in the world, you will struggle if a market is illiquid. As soon as there is any interest, market makers will reduce the buying size, and the stock could be squeezed higher. However, if you time it correctly and sell just before execution-only trader interest starts to wane, you may get out at a reasonable price and in decent size.
Alternatively, if you hang on for that last few pennies, the market turns, and the sellers begin to unwind their positions, you may be stuck. While most medium-sized companies will have a relatively liquid market, it is not always the case for smaller companies. Be careful!
A low latency execution-only trading service is one where the time between passing your order electronically and trading is relatively low. Here at Global Investment Strategy, we continually invest in new technology allowing electronic low latency trade execution. This is especially important for those looking at relatively short-term trades or even day traders where literally every tick and every second counts.
Most of our trading clients will stick to relatively liquid stocks, which can be traded on low latency execution-onlytrading platforms. While there is access to less liquid stocks, as discussed above, these can sometimes carry an added risk.
We all have our favourite traders, those we follow, reading their research and views with great anticipation. While information and knowledge are invaluable, it is essential to note that active trading gurus will have bought and sold a particular stock before releasing the appropriate announcement to their followers. There is nothing wrong with this – if followers are told - but execution only short-term/day traders need to be aware of the potential dangers with less liquid stocks.
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