- "Market On Close" Orders Can Be Dangerous.
- Auction Markets Require Other Side For Fill.
- Market Makers & Specialist Hedge Risk.
When entering the market to buy or sell a security investors look for as much pricing security as possible. As an auction market prices move around so the assurance of a specific price is difficult to secure. Fortunately, investor have some tools in the form of limits, stops, and in some cases more advanced trading tools that might provide some level of price assurance.
Last Friday someone placed a trade to sell a position in the IQ Hedged Multi-Strategy ETF (NYSEARCA:QAI) as a Market On Close order. This type of order attempts to have the order filled at the last price of the day. The problem with this order is it requires a buyer to be presentat that very moment in time. If nobody is ready to purchase the shares of a sell order as a Market On Close, then a Market Maker or Specialists can come in and fill the order. The opposite would be true if the order was to buy. However, since the Market Maker or Specialists has to take the shares into inventory to fill the trade (because there was nobody for the other side of the trade at that moment) they will do so at a price they feel hedges their exposure. The more exposure (volatility of underlying, market conditions, order size, time held in inventory, etc.) the more of a hedge they are going to look for as the seller of QAI on Friday, January 30th, found out. After trading for the day between a high of $29.59 and a low of $29.42, the last trade for QAI suddenly plunged by 1.5% to $29, a very uncharacteristic move for this ETF. QAI traded 239k shares on the day and has an NAV north of $1 Billion, so it is not an illiquid ETF. The Market On Close order was for around 14k shares.
This order could have been easily absorbed by the market if more time was provided. Or the seller could have settled for a partial fill by putting a limit on it and selling the rest on Monday when the price of QAI opened up around 1.5% to $29.42. This is a good reminder that a little planning can provide tremendous value when entering the market with a larger trade.
Disclosure: The author is long QAI.
Additional disclosure: No investment recommendations have been made in this article. Investing involves risk including the loss of capital. Conduct your own research before making any investment decision.