Fadi El-Eter

New traders are often not clear on how much time it takes an order to get filled. Sometimes an order is filled instantly, sometimes it takes hours. So what is the average fill time of an order?

While there’s no scientific data on this, I think it’s safe to say that most orders are executed instantly, or within seconds. It is important to note that the fill time of an order is directly related to the following:

- The liquidity of the stock (for example, C and BAC are very liquid, while low volume stocks are not that liquid at all): The more liquid the stock, the less time it takes for the order to be executed.

- The demand on the stock: Sometimes, when there is some important news about the stock or something related to the stock, there will be huge demand on both sides, and the system for processing the orders will get choked. I remember that my order took hours when I was trading HOUs (oil bullish ETFs) when there was some very important news about oil.

Why do traders need to care about the average fill time? Well, when I bought HOUs a few months ago and my order took hours to get processed, I remember thinking that I bought them at one price and the order was executed at another, higher price. I remember also the same scenario happening, I wanted to sell HOUs, and my order took hours, and then eventually they got sold at a lower price (I couldn’t even cancel the order). I do think that banks make millions out of this game, imagine the following scenario:

- There is a huge load on the system processing the orders, but your buy order goes through anyway
- The bank doesn’t tell you that your order went through
- If, in a few hours, the stock price goes up, then the bank will make it like that the order was processed at the higher price and take the difference between the two prices
- Now If the stock price goes down in a few hours, then the bank will tell you accurately that your order was processed a few hours ago
- And that’s how banks make money!

While checking an item on Amazon (NYSE:AMZN) this morning, I thought about its stock, is it overvalued? Since Amazon is a website, it’s easy to determine whether its overvalued or not by comparing its traffic for the last 12 months to its stock price over the last month as well.

Here’s the traffic (actually I went for 13 months that’s how the traffic chart is generated by default):

Now here’s the stock price over the past 13 months (from July 2010 until July 2011):

Let’s look at the above 2 charts: You can easily see that the traffic to Amazon’s website has increased by 10 million unique visitors year over year, which is around 14%. At best, the traffic to Amazon’s website has increased by 35% in December (which is normal, Christmas season).

As for the stock, it has increased by 82% from July 2010 to July 2011, which is more than double the December spike. The stock went from $122 to $222. Hmmm…. Well, let’s give the stock the benefit of the doubt, maybe it was really undervalued before now it has reached its normal price. But the stock is now trading at a P/E ratio of almost a 100, and this is a website for God’s sake! Let’s say this again, Amazon is a website!

Is Amazon overvalued? Definitely! By how much, well, let’s just say that the stock should be trading at 1/10^th of its current price, so it’s overvalued by almost 90%. But hey, how cares? Amazon is nearly identical to Netflix (a company that is worth much less than what it’s currently priced at) when it comes to being overvalued. I wonder which one will collapse first…

I have written before about Netflix, thinking the stock was way overvalued at $132 a share. Of course, whoever reads the article now will laugh, since the stock is now trading at $210!

Do I still stick to what I’ve said before? Absolutely, I think now that NFLX is a dangerous stock, that may pop any day now, regardless what all the analysts are saying. Why do I still think this way? Well, Netflix is very close to market saturation, and its P/E is as high as 53. Not to mention, of course, that competition will soon (maybe very soon) creep in.

Let us examine some numbers: Just over a year ago, when I’ve written the first article about Netlfix, the stock was trading at $132 and its customer base was 15 million subscribers. Today’s customer base is up 10 millions subscribers, to as high as 25 millions subscribers, in the United States, Canada, and Latin America (according to Netflix). This means that there was a 67% increase in the customer base. How does that reflect in the stock? Well, let’s see, 132 x 1.67 = $220, which means that investors, at this current moment, value Netflix less than what they used to value it a year ago, not by much, but enough to say that investors no longer anticipate huge growth potential in Netflix

Imagine if Netflix cannot add as many customers next year as it did this year, what will happen? Investors will definitely believe that Netflix has reached a point where it can no longer maintain the growth, and a point where its only aim is to maintain its current customers, maybe through better deals and reduced pricing, which, in its turn will reduce the profitability of the company, which in its turn reduce the price of the stock.

Now let’s think about Netlflix as a business model, will their business model survive in 10 years, 20 years, 53 years? I doubt it that the business model will survive in 10 years, with all the breakthroughs especially in the entertainment industry, and I’m confident that Netflix will cease to exist (at least in its current form) 20 years from now. So why is the market valuing it at a P/E ration of 53? No idea. Regardless of how many subscribers Netflix can add next year (or quarter), the company will not impress investors. Competition will be very fierce in that area, especially from Google (a company that wants to diversify its products) and Apple.

But how much is Netflix really worth as a company?

I don’t know for sure, but I would trade such a stock at a P/E of only 10 (the future is not as bright as the present for Netflix), which means that each stock should trade, in my opinion, at around $40. And since Netlfix has 52.54 million shares, this means that Netflix, as a company, is worth $2.10 billion, and nothing more. The $9 billion extra on its market cap are just pure hype, and you will see them quickly vanish the moment Netflix misses an estimate.

Will I short Netflix? Never, but I will never trade it either.

With all the current fever about gold, I was thinking, what if I bought a gold bar (those gold bars used in reserve banks that we see either on the news or in movies where thieves try to steal the chest at a federal bank) when gold used to trade at $200/troy ounce (troy ounce is different than an ounce, as it weighs slightly less, about 31.10 grams. When you see that gold is trading at, for example, $1,800/ounce, they mean troy ounce, not the ounce you use in the kitchen measurements) a decade ago. I thought the gold bar weighs one kilogram (or 2.2 pounds), and I did have more than $6,600 at that time (1 kg has about 32.15 troy ounces). However, I used to always think that the gold bar seems to be a bit large, and that the density of gold is 19.3, almost 20 times that of water. Which means what might look like 1 kg for water in gold, really weighs about 20 kilograms.

So, how much does a gold bar weigh? Well, according to all the resources I could find, the gold bar weighs 400 troy ounce, or 12.44 kg or 27.42 pounds. Now that we know how much it weighs, how much does a gold bar cost in this day and age. Well, at this very second, it costs (if you want to buy one) only $754,800 (Obviously I wasn’t able to afford it even a decade ago, as it used to cost $80,000, and not $7,000 as I thought!).

If you really want to know, the dimensions of the standard gold bar that is used as a reserve in the banks are: 17.78 cm x 9.21 cm x 4.45 cm or 7 inches x 3.625 inches x 1.75 inches.

In case you’re wondering, yes these movies where you see thieves having a big bag full of gold bars carrying it easily over their back are totally fake. These bags always seem to contain around 50 gold bars, which weigh slightly over 600 kg. I don’t think there exists, at least on this planet, someone who can carry 600 kg of gold over his back while running!

In my previous article clarifying how stocks prices are set, I have mentioned the term average fill price. So, what is the average fill price and how is it calculated?

When I first started trading, I used to only trade very liquid stocks such as BAC and C, and at very small quantities, so, when I used to submit an order, the order used to take a few seconds to get filled, and I used to always see something like the following (in the details of the order):

500 shares of BAC: Fill Price $15
Average Fill Price: $15

I thought that the average fill price used to be always equal to the price of the stock in the market, which, as I later discovered, is wrong.

At first, I didn’t care about the term a lot, but I started paying more attention when I began trading small cap stocks such as BIOS. I remember that BIOS was trading at around $4.30 a bit more than a year ago, when I submitted an order of 1,000 shares. Here’s what I saw (that order, as I recall, took a few minutes to get filled):

400 shares of BIOS: fill price $4.30
300 shares of BIOS: fill price $4.35
200 shares of BIOS: fill price $4.37
100 shares of BIOS: fill price $4.40
Average fill price: $4.34

I then understood, because the stock was not that liquid, and my order was relatively large, the order was looking for stocks to sell at a higher price, until it was completely filled. So, it started with 400 shares at $4.30 (which was the price that I wanted to buy at), and then it couldn’t find any shares at that price, and the shares to be sold with the closet price were 300 shares at $4.35. My order consisted of several transactions, and the average price/share at which my order was filled is called the average fill price. So, in my case, the average fill price was:

Average fill price = (400 x $4.30 + 300 x $4.35 + 200 x $4.37 + 100 x $4.40)/1000 = $4.34

Here’s the formula:

Average fill price = Σ(number of shares per transaction x fill price per transaction) / total number of shares per order

The average fill price is the price at which you bought (or sold) the stock. So, in case of a buy order, if the stock price goes above your average fill price, you will make money, otherwise, you will lose money (Note that I’m not taking commissions into consideration).

Note that it is not always the case to see the average fill price higher than the price of the original transaction in the order. In many cases, when the stock is experiencing a huge drop, the fill price of each subsequent transaction in the order will be lower than the price of the first transaction, and thus the average fill price will also be lower than the price of the original transaction.

Another note is that even if your order consists of several transactions, you will only be charged one transaction fee (for example, if your broker charges $10 a trade, and your order consisted of 5 transactions, you will only be charged for $10).

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

Many beginners in the stock market, as well as would be part-time stock traders, want to know who sets the price of stocks. They think that there’s an entity/organization who is responsible of setting the price of a stock. Now while stocks in the US are regulated by the SEC (Securities and Exchange Commission), the price of each individual stock is set by the investors. In short, the price of a stock is set by the price that one is willing to sell at, and another is willing to buy at. In shorter, the price of a stock is set by supply and demand. Here’s how:

Let’s say someone (Investor Y) wants to buy 10,000 shares of NFLX at the current price is $216. This means that there are some investors, owning Netlfix shares, who are willing to sell at that price. Here’s a breakdown of those investors (I’m only giving an example):

- Investor A: Owns 500 shares willing to sell at $216
- Investor B: Owns 1,000 shares willing to sell at $216
- Investor C: Owns 5,00 shares, also willing to sell at $216

When Investor Y executes the trade, his order will be immediately filled with 2,000 shares at $216. Now he still needs 8,000 shares for the order to be completely filled. There are some traders who are willing to sell, but a slightly higher price:

- Investor D: Owns 4,000 shares willing to sell at $217
- Investor E: Owns 4,000 shares willing to sell at $218

So, the order will then be automatically filled with shares that have the closest price to the previous trade, which are the above shares. The order now is filled with 10,000 shares: 2,000 at the price of $216, 4,000 shares at the price of $217, and 4,000 shares at the price of $218. The average fill price for the investor would be: $217.2 (I will discuss the average fill price in a later article).

At the end of the transaction, the price of the stock will be $218, up $2.

Now let’s look at this from the opposite perspective. Let’s say that Investor Y wants to sell 10,000 shares of NFLX, at the current price of $216. When the order is executed, the system will find the following:

- Investor I: willing to buy 4,000 shares at $216
- Investor J: willing to buy 2,000 shares at $215
- Investor K: willing to buy 4,000 shares at $212 (notice the drop of $3 from the above price)

The order will be filled with 4,000 shares at $216, 2,000 shares at $215, and another 4,000 shares at $212. The total sale will be for $2,142,000 and the average fill price will be $214.20. After the order is completely filled, NFLX will drop $4 to $212.

Now what will happen if nobody wants to sell or buy? Usually this situation doesn’t happen with stocks that have high liquidity, but it does happen with stocks that are not very liquid, especially when the number of shares requested (to sell or to buy) in one single order is relatively very large (when taking the average daily volume into consideration). In this situation, the stock price will keep going up (if it’s a buy transaction) or down (if it’s a sell transaction) until it finds someone who’s willing to sell or to buy. This is why so called small cap stocks are very volatile when compared to large cap (or blue chip) stocks.

Note that the buying/selling/filling process is completely automated in this day and age, and hence, you can say that the price of a stock is determined by a computer!

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

I have previously explained wash trading, which is an illegal and prohibited practice for a long time now. However, there is a similar stock trading activity that is legal in some situations and practiced all the time, it is called a wash sale. A wash sale is the process by which someone sells his losing shares for tax deduction purpose, only to buy them back in the new year.

For example, let’s assume that someone bought a 1,000 shares of BAC at the beginning of the year when they were trading around $15. Assuming BAC closes the year 2011 at around $8, that individual will be left with a loss of $7,000. What that person does is that he sells these stocks at the end of the year, claiming an unrealized loss on his taxes, and then buys the 1,000 shares again in January, thinking that BAC will recover. As you probably would have guessed, a wash sale is the main reason behind the January effect. It is important to note that in the US, an investor cannot claim an unrealized loss from this transaction if he buys back the same securities in less than a month after he sells them. However, he’s able to add the loss, per share, to the price of each share he buys back. Let me explain, say the investor above buys back the stock at $9 in January of next year, if, at one point in 2012, the investor sells his BAC shares at $20 each, then he will only have to report gains (for tax purposes) based on the stock price of $16 ($9 price of the stock when he purchased it the second time plus $7 his loss from his first purchase). I know what most people will think right now, that a wash sale is essentially useless. Maybe, I wouldn’t care about doing it myself as I personally don’t see the point…

You can clearly see that a wash sale is completely different from a wash trade, where in the latter case, an investor buys and sells the same security in order to artificially inflate the volume and attract other investors.

More and more investors are suddenly finding the company they have shares in going private. What does that mean for the stock and the investors?

Before answering the question, let’s briefly discuss why companies go private. Companies go private for three reasons:

- They believe they have reached a certain level of prosperity that allows them to buy back the debt from the “little” investors so that “big” investors make a ridiculous amount of money.
- They have valid reasons to believe that their stock is being (negatively) manipulated in the public market.
- The main investor(s) want(s) to have full control over the company.

In all cases, going private is not a gesture of love and appreciation to small investors, it’s just a way that big investors can make a lot money.

Companies buy back shares from investors in the following ways:

- They buy them through the cash reserves they have and/or
- They buy them by getting a loan from a bank to finance the buyout of the shares.

When the company uses solely the second method, it generally means that the main investors in the company believe that the stock is negatively manipulated in the public market (otherwise what’s the point of getting a loan to pay back money that bears no interest, unless, of course, there is a plan for a scam), so they decide to get a loan from the bank and buy back the stock at a higher price either to limit their losses or to make some profit.

Now let’s answer the original question, what will happen to the stock and to the investors?

Here’s a step-by-step explanation of what will happen:

- The company decides to go private and decides on the price it will buy back the shares at, usually the company gives a premium of at least 20% over the price of the last trading day.
- Shareholders are given a few days to sell their shares through their broker at the specified price.
- After a few days, the stock will no longer trade on the public market (meaning that the company will delist itself).
- Once the stock is delisted, shareholders are no longer allowed to sell their shares through their broker. The company will then “buy them out” forcefully, which means that the company will contact them and send them a check/cash/wire totaling the price of their shares at the specified price.
- Large investors (those possessing at least 1% of the total shares) may enter into negotiations with the company to own a stake in the company.

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

Most people that don’t trade stocks, especially those with not-so-great-education or in developing countries, believe that stock trading a sin. They think it’s a form of gambling, because one has a chance of winning and has a chance of losing.

However, here’s why I don’t think it’s a form of gambling (or a sin):

- When you do anything in life that is worth doing, you’re taking a risk. When you’re doing a trade in the normal, non-stock world (for example, you’re buying and selling apples), there is a chance that you will make money, and there is also a chance that you lose (if, for example, the market is suddenly flooded with apples, then the price of the apples will be less than you bought them, and now you have to sell them at a loss). How come buying and selling apples is not a sin, while buying and selling stocks is?

- Most investors pick stocks after doing their due diligence. They study the company, the trend of the stock, and other technical details before deciding on a stock. Compare that with gambling, where picking numbers is completely random, and luck is heavily involved.

- At one point, most people make money with their stocks, if they are patient and they don’t panic and they’re not greedy. Not selling at the right time is the reason why most people lose money on a stock. Compare that with gambling, where either you win or lose.

- Stock movement is not controlled by luck, it is controlled by known factors (such as company news, technical details of the stock, political news, economical news). Gambling consists of pure luck, bluffing, and some intelligence.

Can stock trading turn into gambling? Yes it can, this usually happens when someone does not accept loss as part of the game, this person starts doing the same thing over and over again in hope that one day he will make money, but instead, keeps losing and losing money. I’ll give you an example of this: Someone buys 1,000 shares of BAC at the current price of $7.25 in hope that the stock will reach the $10 level again in a few days. The stock drops to $6 early next week. The person panics and gets out of the stock. The stock then moves up to $10 2 weeks after, the person buys a thousand shares again, at $10,000, thinking that the stock will go up again. Immediately after he buys the stock drops to $8 because BofA was penalized for another mortgage related scandal. The guys sells again, and then buys, and then sells – all at a loss. That person is no longer trading, he’s gambling, he’s obsessed with making money just to satisfy his ego, just to demonstrate (to himself maybe) that he was right the first time. In stock trading there is no right or wrong, there is something called learning from your mistakes. Losing is part of the game… Note that the SEC admits that stock trading can become gambling on its website (I can’t find the link right now, but I remember that line “if you’re gambling in our markets…”).

Note that in many countries where gambling is not allowed, stock trading is allowed and encouraged…

I have written this article on one of my other financial websites. Since I have now decided to deprecate the other website, I thought the article can be of good use here.

Wash trading is an illegal practice where an investor buys and sells the same stocks simultaneously in order to inflate the stock price. According to the SEC, “a wash trade is a securities transaction which involves no change in the beneficial ownership of the security.”

How It Works

Wash trading is about creating hype. The most common (and obvious) technique of wash trading is selling stocks from a company through a brokerage firm, and buying the same stocks of the same company through another brokerage firm. This will inflate the volume and will draw the attention of other investors, who will look into buying the stock, thinking the high movements are real. This usually drives the price of the stock up.

An Example of Wash Trading

BIOS is a stock with typically a low volume. An investor buys 10,000 shares of BIOS, he then sells them in a few minutes, and then buys them, and then sells them (every 5 minutes). We know that the trading day starts at 9:30 and ends at 4:00, so he can do this buy-sell strategy 66 times, which means that investor alone will inflate the volume by 660,000 shares, making the daily volume 3 times of what the average is (average volume on BIOS is around 330,000 shares/day). At one point, other investors will start noticing the extraordinary volume on the stock, and will start getting into the game (e.g. buying the stock), thinking that someone knows something they don’t. When the real activity start happening, the stock price will go up in a natural way, and this is how the investor that started the wash trading process makes money.

Why Is Wash Trading Illegal?

Wash trading is illegal because it’s misleading and artificially inflates the price of the stock when there is no concrete reason for the stock price to go up. Wash trading, when discovered, can easily corrupt the image of the involved company (from an investor’s point of view), even if the company is not involved in the wash trade activity. Additionally, whoever initiated the wash trade usually has the intention to sell all the stock back, at a higher inflated price, leaving other investors who were duped into buying the stock, with an inflated stock worth less than what they paid for.

When Was Wash Trading Declared To Be Illegal?

Wash trading was declared to be illegal in 1997, after the Farni wash trading activities with the Angeion stock was uncovered, which moved the stock price to a high of $10.375 in March of 1991. The stock then fell to a low of $2.75 in July of 1991.

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.