(6) Floor rumors
The more things change, the more they stay the same. Although news has evolved to become nearly instantaneous, especially with Twitter, traders on the Stock Exchange floor still hear rumors first. When news hits the internet, brokerages have already acted upon it—in fact, it’s typically the institutional traders’ actions that spur stories. And by the time the
individual investor purchases a stock that is trending upward, floor traders have typically already begun to sell it again. The late Philip Fisher referred to these rumors as “scuttlebutt” and found it to be some of the most valuable knowledge available.
(7) Insider Trading
Every year the SEC vows to redouble efforts to curb insider trading, and every year high-profile cases continue like clockwork. And those are just the ones you hear about. Last month, employees of Dell Computer, Advanced Micro Devices and Apple Inc. were collared for receiving nearly half a million dollars in exchange for proprietary sales and product information. Not only do insiders’ own investments benefit, but their activity typically affects the stock price at the expense of the retail investor. The kicker? Nearly half of those given jail sentences for insider trading over the last eight years never served a day of the sentence.
(8) Time-Zone Arbitrage
Stock prices are set for the day when an exchange closes. Investors can buy a given stock in after-hours trading at its set price and then sell the stock in an exchange in another time zone that is still open, where the closing price has not yet been established. This technique is referred to as Time-Zone Arbitrage, and institutional traders are more equipped to take advantage than individuals. With more resources and personnel on hand, institutional investors are better able to monitor dozens of stock prices in exchanges worldwide.
(9) Flash Orders
Institutional investors sometimes “flash” orders that they don’t expect to fill in their entirety to exclusive member networks. This allows them to see if another party wishes to fill the other side of a given order. They have stirred a fair amount of controversy—notably from Sen. Charles Schumer last year, who demanded they be banned – because of the fact that member networks are seeing a price offering before it is displayed to the public. The member networks have as much as 500 milliseconds to fill the order before it is shown in market centers, which is plenty enough time to get in front of an unsuspecting, and therefore disadvantaged, individual investor.
(10) Sub-penny Trading
Sub-penny trading allows investors to buy and sell stocks in increments of less than a penny. This allows them to get their orders in front of other investors even though their bids are only fractions of cents larger, a seemingly insignificant difference. Many view it as a clever way for professional investors to game the system, especially considering that individual investors are not allowed to place sub-penny orders on stocks valued above$1.00 according to SEC Rule 612.
–Jack Campbell
