What You Need to Know

Investors, especially those that use an online broker, should know that during times of volatility, many firms implement procedures that are designed to decrease the exposure of the firm to extraordinary market risk. For example, in the past, some market-maker firms have temporarily discontinued normal automatic order executions and handled orders manually.

How securities are executed during times of volatile prices and high volume is also different in other ways. Here are some things you should be aware of:

* Delays - Volatile markets are associated with high volumes of trading, which may cause delays in execution. These high volumes may also cause executions to occur at prices that are significantly different from the market price quoted at the time the order was entered. Investors should ask firms to explain how market makers handle order executions when the market is volatile. With the advent of online trading, we have come to expect quick executions at prices at or near the quotes displayed on our computer screens. Take into account that this isn't always the case. (See Understanding Order Execution.)
* Website Mayhem - You may have difficulty executing your trades because of the limitations of a system's capacity. In addition, if you are trading online, you may have difficulty accessing your account due to high internet traffic. For these reasons, most online trading firms offer alternatives like telephone trades, talking to a broker over the phone and faxing your order.
* Incorrect Quotes -There can be significant price discrepancies between the quote you receive and the price at which your trade is executed. Remember, in a volatile market environment, even real-time quotes may be far behind what is currently happening in the market. In addition, the number of shares available at a certain price (known as the size of a quote) may change rapidly, affecting the likelihood of a quoted price being available to you.