You Deserve an Honest Execution on Your Small Cap Stocks

Read this and don't forget it. When a you place a buy order at the offer price or a sell order at the bid price, the trader who receives that order is obligated to execute your order on a timely basis until that bid or offer no longer exists. That doesn't mean that you deserve an execution in a fast moving market for small caps or especially penny stocks. However, it does mean that the market maker is obligated to attempt to execute your order if you are selling at the bid price or buying at the offer price. Many times, you will have a stock that is quoted at, for example, $0.75 - $0.80. The stock may be thin (in trader's language, it doesn't have much volume) and if you are trying to sell the stock, you may see the quote move to $0.75 - $0.77 as soon as you place a sell order at $0.75. (The key is that your order is at the bid or if it was a buy the offer) There is a very good chance that the trader is now trying to work the order and so if someone buys 10,000 shares at $0.77, he makes $200 at your risk and you will probably get the execution at $0.75. The problem is that if that bid disappears when the offer is lowered and in many cases it does, his working the order hurt your ability to get a fair execution. If you hear "Working the Order", you are probably getting screwed and it's illegal. Let me repeat, it's illegal. Below is a snapshot of a Level II Screen. It's for a large cap screen but the example and the explanation will still hold true.



I'll explain based on a sell. The Level II screen is for CSCO. In the above example, Prudential is actually the bid on the stock. So for that moment in time, the quote that you should receive from your broker is 110 5/16 - 110 3/8.

Here's the problem. In the small cap and penny stock world, many traders will receive a sell order to sell the stock at 110 5/16 and he will actually try to sell your stock at 110 3/8. This is why you will have a delay in the execution of many small caps and many penny stocks. Here's what the trader is legally entitled to do.

He has the option to try to execute you on a timely basis at 110 5/16 and then try to sell the stock at 110 3/8 or higher and it is perfectly legal and it should be because he and his firm are taking the risk. However, it is illegal if a trader takes your order in and in this case to sell at the bid and offers the stock out at 110 3/8 (in trader language that means trying to sell at 110 3/8) without giving you the execution. It is illegal. If you complain, you will hear that "They were trying to work the order". Take a snapshot of a level II screen after you submit your order and watch what happens. This post is specifically targeted for investors that trade penny stocks. Take a snapshot of the Level II screen and if you have to, fax it in to a firm's compliance department. This practice described in this post is prevalent among many discount firms because margins are so thin. Trade successfully; don't get ripped off.