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VXF -- crazy bid-ask spread. Any ideas?
Old 12-16-2015, 12:26 AM   #1
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VXF -- crazy bid-ask spread. Any ideas?

Hi, all. I went to place a market order on VXF tonight through our TD Ameritrade brokerage account and saw the following bid-ask spread:

Bid: $73.30
Ask: $175.23

Any ideas about why it's this level of crazy? I normally see bid-ask spreads of a couple of dollars, at most.

Luckily, I saw this spread and hit "cancel" instead of "confirm." Yikes!
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Old 12-16-2015, 01:19 AM   #2
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Never place a market order.
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Old 12-16-2015, 10:05 AM   #3
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You said "tonight" - so you were attempting to trade after hours? I would never try to buy or sell an ETF after hours without limits - you never know what you'll get.

Try again today while the markets are open

It's fine to do that with mutual funds as they are only traded once a day at the market close, and there is no spread.
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Old 12-16-2015, 10:30 AM   #4
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audreyh1 is right. The quotes that one gets when the market is closed are simply bogus.

It is generally unwise to place orders for stocks and ETFs when the market is closed. And that even goes for limit orders.

OTOH, the way the stock exchanges work is that market orders submitted before the market opens are all transacted at the "opening cross" which is where all the orders are lumped together and a "fair price" is set by some algorithms so in effect there is no bid/ask spread at the opening cross.

But price discovery is also limited and the spreads may be relatively large in the seconds after the opening cross. The prices can move quite a bit away from the opening cross, too. Some days one can "win" and some days one can lose.

Search the web for "opening cross" for more info.

And here is a screen capture of the opening cross for the etf IJS from last Friday:



1400 shares changed hands at 9:30:00 the opening cross.
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Old 12-16-2015, 11:02 AM   #5
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There is low volume on this ETF, only 82,271 today. If you are trying to trade options on it, low ball the limit price you're willing to enter and let it sit for a while. Often the market makers will come to you if you are the only trade out there.
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Old 12-16-2015, 12:31 PM   #6
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VXF goes ex-dividend on 12/17 tomorrow. The dividend is $0.398 per share and only 68% of that is expected to be qualified.

Volume is not particularly low with about half the average daily volume traded about halfway through today's market session and before the FOMC announcement.

Full disclosure: I own lots of shares in a tax-advantaged account as noted in this post: LOL!'s Market Timing Newsletter, but will sell them all in the next 2 days.
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Old 12-16-2015, 04:28 PM   #7
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Quote:
Originally Posted by LOL! View Post

It is generally unwise to place orders for stocks and ETFs when the market is closed. And that even goes for limit orders.
Thanks to last night, I now have a valuable and unforgettable education about why market orders after hours are not a great plan. However, I'm curious abot your thoughts on limit orders.

The upside for an after-hours limit order for me is that I can get my order in when I have time to make a purchase (days are tough for me). What's the downside?

We make a monthly purchase and hold long-term (years at least), if that helps.

Thanks!
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Old 12-16-2015, 04:56 PM   #8
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What do you set for your limit price the night before?

Without price discovery, your limit price to buy could be way too high and you will pay too much for shares. Or it could be way too low and you will not get an execution.

At least a market order is guaranteed to execute at the opening cross.

If you truly want a fair price and do monthly buys, then I would suggest you use a mutual fund and not an ETF for this asset class. You also would not have to figure out how many shares to buy.
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Old 12-16-2015, 05:02 PM   #9
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I usually use the day's average as my limit for the next day (when I set limit orders... which will be all the time from now on).

We have an ETF for this asset class as an artifact of our TD Ameritrade account -- before we decided to become Vanguard Index Fund Kool-Aid drinkers, we wanted the flexibility to buy individual stocks. However, TD charges expensive mutual fund trading fees, so we used ETFs to get around that.

The need for non-Vanguard funds no longer holds for us, so it may be time to roll our tax-advantaged IRAs over to Vanguard. If so, we'll do that after the end of the year. This would also help streamline our financial accounts management -- we have a taxable and my 403(b) already at Vanguard.

But I'm still wondering -- what drives huge bid-ask spreads in stocks? Where did that monstrous $173 ask price come from? Ideas?
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Old 12-16-2015, 05:38 PM   #10
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I do not trade that much....

But don't you have to indicate if you are going to buy after hours

IOW, if the OP had not noticed the bid asked spread, would his trade happen? I think not....


IIRC, I used to get a message that the market was closed etc. etc....
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Old 12-16-2015, 05:47 PM   #11
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Quote:
Originally Posted by Urchina View Post
I usually use the day's average as my limit for the next day (when I set limit orders... which will be all the time from now on).

We have an ETF for this asset class as an artifact of our TD Ameritrade account -- before we decided to become Vanguard Index Fund Kool-Aid drinkers, we wanted the flexibility to buy individual stocks. However, TD charges expensive mutual fund trading fees, so we used ETFs to get around that.

The need for non-Vanguard funds no longer holds for us, so it may be time to roll our tax-advantaged IRAs over to Vanguard. If so, we'll do that after the end of the year. This would also help streamline our financial accounts management -- we have a taxable and my 403(b) already at Vanguard.

But I'm still wondering -- what drives huge bid-ask spreads in stocks? Where did that monstrous $173 ask price come from? Ideas?
I use TDAmeritrade for Vanguard ETFs as well as non-Vanguard ETFs and really like them quite a lot.

However, if you are going to switch, you might as well do it before year-end. That way, you can get any and all tax information soon thereafter and will not have get any more statements or forms long after your account is inactive. That will be a plus when you think ahead to April 2017.

The bid-ask spreads are because of stub quotes that computers submit to the exchanges as a place holder, so that software expecting a quote can get a number other than 0.00 or infinity.

As TexasProud writes, the order would not have executed after hours anyways and you would have gotten the opening cross price. I wonder why you hadn't noticed these bogus quotes before. At TDAmeritrade, you could submit an after-hours or before-hours order that could be executed, but TDAmeritrade will require a limit order for trading outside of normal hours.
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Old 12-16-2015, 06:09 PM   #12
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The big bid/ask spread is just guys fishing for stray market orders. You could put in buy orders at $75 and sell orders at $175 and be a market maker after hours.

Entering a limit order after the market closes you won't know what the market open will look like the next day. Sometimes I'm OK with that, when I have a desired price I'm trying to hit and the market is getting close to it.

On the other hand, you might issue a sell order, see the market futures or pre-market trades looking much higher, and then when the market opens someone picks up your shares early at your low price. Then an hour later everything stabilizes with a narrow bid/ask spread that's 1% higher than you asked for.

Usually it is best to wait until the bid/ask spread has narrowed down, well after the market open and well before the market close. Unless you want to set your limit outside the spread and see if someone might bite when the spread widens.
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