How The Buyout Announcement Screwed Over Retail Traders Inc. STMP shares jumped 63.7% on Friday after the company announced a $6 billion buyout by private equity firm Thoma Bravo.

On Benzinga PreMarket Prep, co-host Dennis Dick discussed why the current rules surrounding trading halts and takeover announcements puts retail traders at a huge disadvantage to institutional firms and high-frequency algorithms.

3-Second Head Start: The press release announcing the buyout came out at exactly 7:30:00 a.m. on Friday morning on Benzinga Pro and other financial newswires. Unfortunately, the Nasdaq exchange officially halted trading in at 7:30:03 a.m.

“The whole point of the halt is to allow the news to disseminate so that everyone can trade on it fairly,” Dick said. “When you halt the stock after the press release, that means you’ve given a three-second lead to every high-frequency trader out there to pick off anyone who is in the book.”

Dick showed viewers a screenshot of the tape of between 7:30:00 a.m. and 7:30:03 a.m. and highlighted dozens of small, presumably retail trading orders that were filled during that three-second interval. Altogether, more than 6,000 shares changed hands during the 3-second window.

“It looks like the majority of those trades on the tape are at least $100 below where it was taken out. You’re talking about $600,000 that was just transferred from individual traders to high-frequency algorithmic traders that have the ability to trade on the news,” Dick said.

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Simple Fix: The problem would be an easy fix for regulators.

“You’ve got to halt the stock before the press release. You’ve got to make it mandatory,” he said.

In a 2021 climate in which many retail traders are attempting to fight back against what they see as unfair practices on the part of hedge funds and institutions, Dick said this type of delay is egregiously unfair to the average trader.

“The communication between the exchanges and the companies is where the failure is. I’m not sure if the exchange was slow to halt or if the press release jumped the gun, but we need to get the stocks halted before the press release comes out,” Dick said.

Dick said regulators should make it mandatory for companies issuing a takeover press release to contact the exchanges to halt the stock five minutes prior to the news hitting the wires. He pointed out that Apple, Inc. AAPL used to halt its stock five minutes prior to the earnings release, which eliminated any possibility whatsoever of shenanigans surrounding the timing of the release.

“It’s a simple fix," Dick said. "Have it halted five minutes before--news coming. Then the headline comes five minutes later and nobody gets picked off.”

Listen to Dennis' full rant at 4:35 in the clip below.

PreMarket Prep is a daily trading show hosted by prop trader Dennis Dick and former floor trader Joel Elconin. You can watch PreMarket Prep live every day from 8-9 a.m. ET Benzinga's YouTube channel, and the podcast is on SpotifyiTunesGoogle PlaySoundcloudStitcher and Tunein.

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