I've recently started with the stock market and I've found a handy tool on the app that I'm using to trade (Commsec) called Depth which seems to show all the different buy and sell orders that people have.

Now I've noticed that for 'nice numbers' such as 10.500 there is a massive amount more buyer/seller volume as opposed to the surrounding values (10.510, 10.490, etc.) which I guess makes sense as people tend to prefer these nice round numbers.

My question is; is there a way to take advantage of the fact that a lot of investors prefer to buy or sell for a nice numbered price?

  • 2
    You've basically stumbled on to (just one aspect of) HFT. Yes, 1000s of ... mathematicians and game programmers and the like ... are involved in that type of thing. It's completely irrelevant to individual investors. Asking "how do I do that?" would be like asking, say, "Oh, I notice Ford make cars, how do I make cars?" – Fattie Oct 20 '16 at 13:22

You'd need millions of dollars to trade the number of shares it would take to profit from these penny variations. What you bring up here is the way high frequency firms front-run trades and profit on these pennies.

Say you have a trade commission of $5. Every time you buy you pay $5, every time you sell you pay $5. So you need a gain in excess of $10, a 10% gain on $100. Now if you wanted to trade on a penny movement from $100 to $100.01, you need to have bought 1,000 shares totaling $100,000 for the $0.01 price movement to cover your commission costs. If you had $1,000,000 to put at risk, that $0.01 price movement would net you $90 after commission, $10,000,000 would have made you $990. You need much larger gains at the retail level because commissions will equate to a significant percentage of the money you're investing.

Very large trading entities have much different arrangements and costs with the exchanges. They might not pay a fee on each transaction but something that more closely resembles a subscription fee, and costs something that more closely resembles a house.

Now to your point, catching these price movements and profiting. The way high frequency trading firms purportedly make money relates to having a very low latency network connection to a particular exchange. Their very low latency/very fast network connection lets them see orders and transact orders before other parties.

Say some stock has an ask at $101 x 1,000 shares. The next depth is $101.10. You see a market buy order come in for 1,000 shares and place a buy order for 1,000 shares at $101 which hits the exchange first, then immediately place a sell order at $101.09, changing the ask from $101.00 to $101.09 and selling in to the market order for a gain of $0.09 per share.

  • say I had millions of dollars, how would it work? – Aequitas Oct 20 '16 at 0:21
  • 3
    @Aequitas google hft and read a book like Flash Boys. – NuWin Oct 20 '16 at 0:39

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