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What we’re reading this week

Stop Orders

As of February 26th, 2016 The New York Stock Exchange will no longer accept stop orders. For the initiated, a stop order is when you place an order to automatically sell your security when the price drops below a certain dollar amount. In theory this sounds great but most retail investors should probably not sell their stocks when the price drops drastically. The NYSE position is that adding another sell order to the market when stock prices are falling only drives prices lower (because there aren’t people around to buy the security). This is especially salient in today’s world of computer-controlled markets. There was some grumbling from the public but I have to assume it was ceremonial as no one really uses stop orders any more anyway. This is however, further evidence that this isn’t your father’s stock market. We believe that the market is changing dramatically, in ways that are hard for retail investors to understand. 

How one retail investor did not understand the market    

Boy did Joe Campbell do something dumb. Joe, an investor in Arizona, sold 8400 shares of KaloBios short on news of the company going out of business. Selling short is basically sell shares of a stock you don’t own under the premise that you will buy them back later at a lower price. Clearly, one only does this when there is evidence a stock will be worth less in the future. Joe was really disappointed when biotech CEO Martin Shkreli bought more than half of KaloBios’ outstanding shares. This transaction sent the stock price up over 600% over night. What happens when you sell a stock you don’t own and the price goes up? You have to cover the difference. Now Joe owes eTrade over $100,000. So he lost the initial $37,000 he started with and is effectively negative $106,445.56. Until recently, Joe established a GoFundMe page to help him deal with the loss. He has since taken the page down, I assume, because of the overwhelmingly negative response from the public. The article is here, which thankfully includes the original GoFundMe plead for money.

Fiduciary vs. Suitability    

Matt Levine’s Money Stuff had a short note on the Department of Labor’s fiduciary duty rule and an article opposed to it. I quoted him here because he does a nice job of explaining how fiduciaries may appear more expensive but are not and why opponents to the rule think it will limit investor’s access to financial advice. 

“…here is a paper critical of the rule from the American Council for Capital Formation, and like most criticisms it focuses on the risk that a fiduciary rule will reduce people’s access to, or at least use of, financial advice. Fiduciary advisers with disclosed transparent fees will look more expensive than old-style non-fiduciary advisers who were paid through secret kickbacks, so people will avoid them and make terrible investing mistakes. Mistakes like buying high and selling low, or like just not investing at all. This seems intuitively plausible to me? But also sort of gross, obviously.”

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Categories: Industry Ideas, News