Tags: Carr | Markets | Rigged | Limit | Order

If Markets Are Rigged, Limit Orders Unrig Them

By    |   Tuesday, 08 Apr 2014 06:03 PM

Michael Lewis has generated a great deal of publicity for his book by claiming markets are rigged. Basically, he suggests that high frequency trading (HFT) firms raise the price for a stock when individual investors enter a buy order. If Lewis is correct, then HFT firms are behaving the way economists expect them to.

When demand rises, prices will generally rise. An order to buy a stock increases the demand for that stock and you would expect the price to go up. Someone in the market must sell the stock if I am going to buy it and the HFT firms are providing the liquidity the market needs to fill my order. 

HFT firms are being demonized for increasing the price an individual might by as much as a couple of cents per share. Avoiding the question of whether HFT is good or bad, the costs of trading can be lowered with limit orders.

When you submit an order to buy a stock, you are telling your broker to get you shares at any price. From this perspective, it is easy to see why HFT firms would flourish. With technology, they can see your order coming and they know they have a guaranteed buyer if they can get the shares before you do.

Instead of using a market order, you could submit orders with limit prices. The limit price is the most you are willing to pay for a stock. HFT firms will still see your order but they will not be able to force you to pay any more than the limit price you set.

The markets might very well be rigged, but a limit order will ensure no one benefits unfairly from your trades.

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MichaelCarr
Avoiding the question of whether high-frequency trading is good or bad, the costs of trading can be lowered with limit orders.
Carr,Markets,Rigged,Limit,Order
286
2014-03-08
Tuesday, 08 Apr 2014 06:03 PM
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