Fill Prices: 6 Steps Towards Fixing a Bad Execution From Your Brokerage
by Marc Lichtenfeld, Senior Analyst, Smart Profits Report
Friday, May 8, 2009: Issue #993
If you’re an active investor, you’ve no doubt had the experience of putting in a market order and seeing a confirmation that was, shall we say, less than optimal.
Another way of saying it is, “We got swindled.”
Bad fill price executions are a part of trading. Sometimes you’re looking right at a stable offer price and inexplicably it’ll get filled at a higher buy price. Other times, you get a sell executed lower than the lowest bid on your screen. It can be frustrating and costly.
Most people simply take a bad fill price and move on to the next trade, either getting over it or vowing to only use limit orders. It’s something that I’ve learned to live with – like paying taxes.
But occasionally I get a trade filled at such a bad price that I can’t take it lying down. Instead of taking my wrath out on my loved ones or the family pet, my broker gets to experience the full extent of my frustration. This is a problem that more of us need to communicate to the institutions we trust to handle our trades.
Here’s how you can combat – constructively – unreasonably mispriced trades.
Minimizing The Market Makers Bid/Ask Shenanigans
The “Bid” and “Ask” prices that you see on most stock prices indicate the prices at which market forces are dictating the price at which you sell (the bid), and the price you at which buy (the ask). The spread between these prices is what the market makers “earn” for every transaction.
When I was on a proprietary trading desk, we all hated the market makers – the guys who set the bid and ask prices on the Nasdaq.
They seemed to constantly pull shenanigans, such as not honoring their prices, or filling orders below the bid or above the ask. There were days where if a market maker ever walked into our office, I’m certain his health would have been in jeopardy.
I recently encountered a situation where a market maker clearly didn’t update his system when the market opened and I was given a terrible fill price as a result.
One second later, the quotes were in line with where it should have been trading, but I was given the lower price on the open. This was a problem, as it triggered my stop-loss – something that wouldn’t have happened if the quote was accurate when the market opened.
Possible reasons for a bad fill price include the brokerages’ quotes not updating in time – and even a slight delay could cause the discrepancy.
However, brokers have disclosure statements saying that they’re not responsible for bad quotes, since they obtain them from a third party provider.
So you’re stuck, right? Perhaps not…
How to Get Compensated For a Bad Fill Price Execution
There are a few things you can do when faced with bad fill price executions:
I use one of the online discount brokers. And because I’ve been a good customer for years, if I ever have any complaints, the company will usually look at my account and see that I’m someone they’d like to appease (and keep as a valued customer) if possible.
- When I’ve received fill prices that I believe are unfair, I call the 1-800 number and explain the situation. The representative will then take a look at the time and sales history, showing exactly what the bid and ask prices were at the time the order was routed.
- However, customer service representatives are usually powerless to do anything about the execution once it’s happened. And 99 times out of 100, though, they’ll insist it’s a valid trade.
- In this case, what I always do is complain a little more (just so they know how unhappy I am as a valued customer) and then ask for a few free commissions as a goodwill gesture.
While this might not make up the difference between the price you received and what you thought you should, the bottom line is that the trade isn’t going to get reversed. So there’s a good chance that the rep will be happy to give you a few free commissions. If they don’t, demand to speak to a supervisor.
But what about when you get a problem that is so severe that a few free commissions won’t be satisfactory?
Here’s how I tackled the situation with the delayed quote mentioned above:
- After calling my broker to complain, and having them tell me it was a valid quote (surprise, surprise), I escalated it to a supervisor, who said the same thing.
- Because the market maker didn’t update his quote when the market opened, I demanded that my broker fight for me and get the market maker to break (reverse) the trade because the stock had moved considerably since then. The person I was speaking to refused.
- I asked for the trading inquiry department. Another employee told me the same thing. Finally, the fourth person I spoke to called the market maker and got the trade broken.
The moral of the story is, if you know you’re right and you’ve been treated unfairly, fight for it. In this case, it saved me hundreds of dollars.
But this isn’t something you want to do on a weekly or even monthly basis. If you do, you could lose your status as a “valued customer.”
Six Steps For Tackling Your Broker’s Bad Fill Price
Here are six tips for dealing with your broker and getting compensated for errors caused by poor execution or bad fill prices…
- Don’t be a constant complainer: Be selective about cases where you received poor service, otherwise your broker will think you are crying wolf and will stop giving you freebies. They may not even try very hard to solve your problems when a real one arises.
- Be calm and professional: Explain your issue in a succinct and courteous manner. If you yell and scream, use profanity or act in any other undignified way, the chances of getting what you want are much lower. But if you’re rational, you sound like you know what you’re talking about.
- Be prepared: It’s good to know the facts of any trade and the details on its execution before you start making requests. In addition, ask yourself what your optimal outcomes will be. Will you stop at accepting some free trades, or is this error severe enough to warrant elevating your concerns?
- Tell the broker what you want: After you’ve explained the problem, if they can’t fix it, inform them how you wish to be compensated. Usually free commissions are the answer, since they won’t put money back into your account.
- Demand to speak to a supervisor: If you can’t get a situation resolved to your satisfaction initially, keep going up the chain of command.
- Write to the CEO: In several instances where I’ve received an unsatisfactory outcome, I’ve written to/emailed the brokerage’s CEO directly. In every instance, I got a response very quickly and received some resolution to my problem.
In short, you don’t have to take mistreatment from a broker or market maker lying down. By standing up for yourself after a bad fill price, you could save yourself thousands over the life of your portfolio.
Good investing,
Marc Lichtenfeld
Editor’s Note: Marc Lichtenfeld is one of the smartest healthcare analysts we know. His insight and experience as a trader is invaluable to readers and subscribers of his biotech service. If you’d like to get more information on Mark, and the cancer breakthrough he’s excited about right now, consider subscribing to Xcelerated Profits Report.
This article was republished with the consent of Smart Profits Report, the original article can be found here.
Today’s Investment U Crib Sheet
The Bid/Ask Spread is the difference between the price at which you sell (the bid), and the price at which you buy (the ask). The spread between these two numbers can tell you how volatile a stock trades or how thinly traded it is.
An asset that is traded very little will generally have a larger spread than one with large volume. In these trades, your value can be significantly in the negative as soon as you purchase. It’s like driving a new car off the dealer’s lot.
Stocks that are gyrating up and down will also exhibit a large bid/ask spread. It’s because the market makers want to have a big margin of error if they get caught on the wrong side of a trade.
A market maker’s job is to facilitate the buying and selling of listed securities. A market maker can be a bank or securities firm, and there can be a number of market markets for heavily traded stocks. They buy and sell a particular security to keep an orderly “market” in that asset. As they receive no commission for doing this, they take the difference between the bid and the ask.
- Legging Into a Spread: An Option Strategy That Makes The Market Pay You
- Using a Put Selling Strategy: A Step-By-Step Lesson On Selling Options
- E*Trade Forgotten Profit Center
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2 Responses to “Fill Prices: 6 Steps Towards Fixing a Bad Execution From Your Brokerage”
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May 8th, 2009 at 9:30 am
Very timely. This happened to me a few days ago when an option that I was adjusting my stops on, as it kept rising, suddenly stopped out at a ridiculously low price. The stop was at 3.20 and I was sold out at 0.47! This was first thing in the A.M. which is probably why it happened as it did. In any event I immediately called my on-line service and after explaining what happened the broker was able to get the market maker to bust the trade. I followed your advice before knowing about it but it did work.
Michael F.
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May 8th, 2009 at 9:36 am
Remarkable coincidence re: bad fill on orders
Yesterday, the Canadian Montreal Options exchange marketmaker decided to “bust ” my sell of options
due to their inaccurate pricing. I did follow your steps Marc only to be stonewalled by my discount Canadian broker. Not their problem , eh ?
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