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Dealing Before Breakfast Can Damage Your Wealth

By David Kuo (TMFDragon)
April 23, 2002

Early birds may well catch the worm but early morning share traders could get a rude awakening if they rely on the previous day's closing price as a guide to the next day's opening level.

The problem is that the closing price from the previous day's trading is not a valid indicator as far as the markets are concerned. Share trading is a now a twenty-four hour industry and as London starts to wind down, New York is opening up for business. When the US finally closes, the markets in Sydney, Tokyo and Hong Kong step in to take over. Then it's back over to Europe again and the cycle goes on.

Between the time that London closes and the next day's opening, the flow of news continues. For example, trading statements and results from US companies, released during the night, can have a significant impact on the shares of London companies. Similarly, economic indicators released in many of the key financial markets might influence the way London shares trade the next day. The market needs to digest all this newsfolw before it can get on with the job of pricing shares.

During the first few minutes of normal trading, which commences at 8:00am, the London Stock Exchange runs an uncrossing algorithm for the shares of the largest companies. These are traded on the Stock Exchange Electronic Trading Service (SETS). This procedure arrives at a single share price that will execute the largest volume of buy and sell orders on the books. So the unsuspecting investor who phones up his broker to deal on an "at best" basis, just prior to opening, could be in for a nasty shock. This problem can be overcome by placing a 'limit' on the order.

On non-SETS shares, the small number of shares being traded in the first hour of the day can result in volatile prices and wide bid-offer spreads, especially when the company has released information like its latest results. Sometimes it can take a while before investors can run through all the details of these statements, which are often dozens of pages long.

Given all this it might be better to concentrate on a hearty breakfast first, digest all that news and let the prices calm down before you deal. In addittion, trading during the last half hour of the day before the market closes at 4:30pm can also be quite unpredicatable. So you might want to settle down with a nice cup of tea at that time too!

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