In order to assist clients’ understanding of dealing procedures, we have outlined below some of the methods and tools that are used in this process.  As well as enhancing understanding, we hope that this section might help some clients to make better-informed decisions when placing orders and help cut through some of the jargon that often accompanies dealing.  Havelock Hunter Stockbrokers Ltd's dealing staff are always happy to explain terminology and current possible movement scenarios with clients when an order is placed.  The dealers are also available to talk to clients who might want some of the points outlined below explained in more detail.

Placing An Order

There are several ways in which a client can place an order with us.  Most orders are given over the telephone and the majority are executed within seconds.  Some clients may prefer to confirm orders in writing or by fax or email.

Apart from the medium through which an order is physically placed, there are also different ways in which an order can be left:-

Market Order (At Best)

Most orders executed are of this type. A market order is usually transacted immediately at the best price available at that particular time.  Some orders may require more careful execution because of size, trading volumes, adverse movements or large spreads. 

Close attention can certainly be required when a client wishes to deal in an amount of shares larger than the Normal Market Size.  In these instances, it may be necessary for a client to accept a lower price for a large quantity of shares that they are to sell, or ‘pay-up’ slightly for a large stake they are trying to acquire.  This price difference occurs because of the extra risk inherent to the market-maker when conducting the deal. 

Although any order executed at the prices shown on the Bid/Offer spread is executed at the best displayed price at that time, the dealers at Havelock Hunter Stockbrokers Ltd will always strive to improve on this price further.  By using the computer systems available to them, as well as market contacts, the dealers will try to find a willing buyer or seller to fulfil the opposing side of any bargain and improve upon the advertised Bid/Offer spread. 

Whatever the order, if a client requests advice, the dealers are happy to offer guidance as to the best way in which to transact the bargain to obtain the best possible prices.

Limit Order

A client may decide that they wish to buy or sell shares at a price which is not currently attainable.  In this instance, the client can leave instructions with the dealers to execute their transaction at their specific price (limit).  These orders are left on a ‘best endeavours basis’, meaning that, although the dealer will always strive to execute the bargain should the price reach this level, it is not guaranteed.  Unless stated otherwise, limit orders are good for that day only (GFD).  Clients need to provide settlement details (i.e. settlement period and type) when leaving limit orders.

Good Till Cancelled (GTC)

An extension on the Limit Order, insomuch as a client leaves instructions with us to transact an order on their behalf at a specific price until either it is dealt or the client cancels the order.  These orders are also left on a ‘best endeavours basis’.

A shorter version of this type of order is Good For the calendar Week.  (GFW)

Dealer Screen Terminology

The screens used by dealers when undertaking transactions contain an array of information that helps them to ensure the best prices for clients.  Although each of the various software providers may have slightly different layouts, the majority of the information contained within is similar.

The replication of the screen below has kindly been allowed by Proquote, who provide market information to professionals.  It shows a ‘snapshot’ of a company at a point in time on 26/08/04.

Show screen shot

The predominant feature of the screen is the ‘Yellow Strip’.  This banner represents the best Bid and Offer currently available from the competing market-makers.  It is also known as the ‘Touch’.

The bid price, which is to the left of the two prices on the Yellow Strip, is the price at which the best bidding market-maker is prepared to pay to buy stock; conversely the offer price is the cheapest price at which other market-makers are prepared to sell stock.  In the example above, these two opposing prices can be seen as 45p and 47p.  The price can be seen to be better supported on the offer than the bid, as two market-makers are prepared to offer stock at 47p, whereas only one would like to buy stock at 45p.  The difference between the bid and offer price is known as the spread.  Generally, spreads are wider on smaller companies or where trading volumes are thin.  This partly represents the additional risk a market-maker might undertake in performing the transaction.

The average of the bid and offer price is known as the middle-market price (mid).  This price can be seen on the screen above, located towards the top right hand side.

Prices quoted in newspapers will normally show the closing mid-price for the previous day’s trading. This should be used as a reference price and not a dealing price.  Below this price are the daily highs and lows calculated against the mid-price.  In this example, it can be seen that both the mid high and low are 46p.  This can be seen as being down 1/2p, or 1.1%, from the previous day’s closing price.

The market-makers operating in the stock can be found in the section below the Yellow Strip.  In this example there are five participants.  These are identified to the dealers by the mnemonic code.  It is the collection of the best prices available here that comprises the Yellow Strip.  To the right of each individual market-maker’s price is the size for which the market-maker is willing to honour his/her price.  In this example, all of the market-makers are happy to honour their own price in ten thousand shares (10x10).  However, sometimes these sizes differ and investors may find that one side of the strip has much larger dealing size capability that the other.  If you want to buy or sell more than the amount of shares the market-maker is quoting, then you may have to deal at a price less advantageous than that shown on the screen.  However, we will always strive to execute all transactions at the best possible prices and will advise where we are not able to execute a transaction at or within the Yellow Strip price.

Other information to be found on the screen sets out the 52-week high and low price for the shares (Middle LHS); the Dividend Yield, represented as a percentage of the current mid market price (Middle of screen); the price at which the last trade was conducted (Top LHS); the traded price high and low for the day (Top LHS) and the Normal Market Size (NMS) in which market-makers are obliged to make a price (Top Middle).  The total market volume for the day in terms of shares traded can be found on the LHS.  In this example, it is 77,002 shares comprising 10 trades.  (For further details of any of the transactions, the dealers can extract the details of each of the individual trades, including their timing).  The screens also provide charting and trend analysis, which can be useful graphical aids to assist clients.  The previous day's closing spread can be found in the blue bar at the top of the screen, along with the company name and EPIC (abbreviated company identification) code.  The currency in which the shares trade is also found in the blue bar on the RHS.

Other information found on the screen may be of less interest to most clients. This includes the Publication Limit, which is usually 6 x the NMS size (LHS) for non SETS stocks and shows the size of a trade above which a market-maker is allowed to delay the reporting of the transaction to the London Stock Exchange (trades usually need to be reported to the London Stock Exchange within three minutes of the transaction.  However, where a trade exceeds the publication limit, the market maker is allowed extra time before publishing his hand to the market, in which he/she might be able to offset his/her position); the Market Capitalisation of the company at the current price; the ISIN code – the identification code for the line of stock and the VWAP – The Volume Weighted Average Price for the day’s trading.

SETS Trading

The advent of the Stock Exchange Electronic Trading Service created a more competitive dimension in the market.  Unlike companies which are traded by a group of identified market-makers (as in the example above), the prices shown on the Yellow Strip for a SETS traded stock are anonymous.

The screen below shows a typical SETS dealing screen.  Again, this has been reproduced by kind permission of Proquote.

Show screen shot

Much of the same information as contained in the earlier example is shown on the SETS screen.  The main difference is the absence of named market makers, replaced instead by a list of volumes and prices.

A buyer of stock using SETS screen has two main options.  Firstly, they can choose to buy the shares advertised for sale on the ‘Offer’ side of the strip, or they can advertise themselves as a buyer by joining the ‘Bid’ side of the strip. 

In this example, the Yellow Strip price advertises a price of 127 1/2p–127 3/4p.  A buyer can either select to purchase the stock on offer at 127 3/4p, or can advertise themselves as a buyer by joining the other buyers on the bid side.  The buyer need not join the bid side at 1271/2p, but can position the order at a price suited to them.  Any new participants join the others at a position firstly determined by price, i.e. if you are willing to pay more than the other buyers and hence increase the bid, the new price will form the ‘top of the pile’.  If the buyer is only willing to match the other participants’ bids at 127 1/2p, then the new buyer would join the other participants bidding 127 1/2p in order of time (i.e. the bottom of the 127 1/2p group, but above any buyers only willing to pay 127 1/4p).  In this example the bid at 127 1/2 p with a size of 247,383 shares is comprised of 8 bidders. A new bid at the same price (say, 100,000 shares) would be included in this entry but above the 1,759,179 shares at 127 1/4p.

As prices move throughout the day, in accordance with supply and demand, investors trading on SETS may find that their bid or offer is no longer at the active trading range.  In these instances, investors may withdraw their orders and place them back at a more realistic level.  Alternatively, an investor whose price seemed far-fetched when joining the orders on SETS (say, a potential buyer on the bid at 80p) may find that their order has been ‘hit’ if a large movement has occurred.

Investors using SETS need to be wary, as such movements might occur very quickly.  Negative news might dramatically reduce the price of a company and such news could result in a far off bid being hit very quickly.  The same news might have changed the aspirations of the buyer whose bid was hit, but who might not have withdrawn their order in time!  Like other transactions conducted in the stock-market, all SETS orders are binding.  Not all companies are SETS tradable.  Securities traded on SETS include all the FTSE 100 constituents, the most liquid FTSE 250 securities, those with a LIFFE traded equity option and some euro-denominated Irish stocks.