Introduction
Stuffing in stocks relates to brokers/dealers selling their undesirable securities to clients. Stuffing allows brokers to circumvent losses on the securities whose value is reducing. The act of stuffing allows brokers and dealers to undergo losses on assets that are anticipated to witness a value reduction. With stuffing, the clients will suffer losses. Stuffing is used as a quick way to raise cash at the times when securities lose their liquidity and become extremely unattractive to find a buyer in the market.
Understanding Stuffing
Stuffing is considered unethical as the customers fall prey for manipulation by the brokers. Even though the act of stuffing is considered unethical, there are not many laws to prevent or punish those indulging in the act. The act of stuffing can be considered as an act of passing one's possible losses to another. In the case of discretionary accounts, the brokers have the power to sell or buy with no requirement of consent. Hence, the customers and traders are advised to open only those accounts that need authorisation before placing any trade to avoid uninformed losses.
Stuffing sometimes refers to brokers suffering losses by quoting a wrong price and is committed to a party to acknowledge completion of a transaction to the price quote agreed earlier. Typically, the price of covering the transaction earlier is a disadvantage to the seller quoting it. Nevertheless, the cost of complying with the order is borne by the dealer or whoever is under the act of getting stuffed.
Quote stuffing is a strategy used by high-frequency traders in a bid to gain a pricing edge against their competitors.
Factors you must know about stuffing: 1. Dealers try selling illiquid securities. 2. Stuffing helps dealers minimise their losses. 3. Customers are advised to open only those accounts that need their approval for all transactions.
