December 16, 2006 - The week in review
COF Update
The most notable development was a notable decline in liquidity. The typical bid-ask spread observed during the day has widened from 1 cent to about 2 cents. However, the jumpiness of price moves has risen by more than this. The sharp price moves just after the open at 9:30 AM show the decline in liquidity most spectacularly.
For example, a stop order set at, e.g., 77.50 and trigered shortly after the open, could be executed as far as 20 cents away from the trigger level. The points to note are that,
- Stop orders are not normally executed outside of NYSE hours, as the stock price is not really well-defined (the bid-ask spread is very large). It is only in case of exceptional circumstances (an earnings release, for example), that the underlying risk that led to stop orders is sometimes hedged manually.
- The observation that the order was triggered after the open means that just before the open or around the opening time, the prices have not yet moved enough to trigger the stop. In other words, it is not the case that the execution of the order is delayed by the decision to not hedge prior to the open.
So, it is really the widened bid-ask spread or a very jumpy price behavior,
that lead to this exceptionally large slippage.
Throughout the past week, COF continued to trade in a range, and no exceptional price moves have taken place. The model-based estimate of the current realized volatility has remained at about 25-25.5%.