Market Orders Can Burn

A coworker passed along a blog post with an anecdote about the oft forgotten danger in placing a market order trade. Although the story is nearly a year old, it seems that this is a lesson worth repeating: the price on the quote does not necessarily mean that is the price that will get filled. The incident occurred when someone tried to sell some shares of Berkshire Hathaway’s B-shares (BRKB), and the quoted price on them at that time was $4,448 per share. Instead when the order was filled the price per share was a shocking 52% lower or $2,147 per share. You can read the original post about it here.

“This happened several times this morning; all told about 50 shares of BRK-B were sold at a 52% discount. The reason this happened is that somewhere a trader put in a limit-buy order for 50 shares at $2,147, with full knowledge that the trade would likely never get filled. These types of trades are usually protective measures to prevent paying too much for a stock or selling for too little. On the off chance, however, that the day’s sell orders burn through other, higher, limit orders, and the brokers aren’t actively trading, these ‘protective’ trades can become predatory, allowing someone to buy 50 shares at a 52% discount, making $115,050 over the course of a few minutes, simply by selling them back into the market at the higher, normalized price.”

We have republished the chart from the original blog post. If you think the market is too efficient to allow for arbitrate this case seems to suggest differently, and this is not just some no name penny stock. The trader who bought these shares made more than $100,000 at the expense of average Joe’s. Protect yourself against this sort of anomaly by using limit orders, especially on thinly traded stocks.

Berkshire Hathaway

Market Orders Can Burn

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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