A tag is a “trade” initiated by an exchange. A tag is a handy tool for brokers who trade foreign stocks in Japan.
The reason for a tag is to get each exchange member to follow the rules and regulations set forth by their governing body. These rules would be things such as margin requirements, slippage, etc. They may also be used to track history on trades or members that have been caught breaking the rules somehow. In this case, you can lose your trading privileges either temporarily or forever.
Where did tagging originate?
Tagging has been around since forex began trading life online in 1998 at the EBS (Electronic Broking Services). The original purpose of tagging was not only as a tool to protect traders from errant market makers but also to ensure fair play, among other things.
As time went on, more and more people became aware of the benefits of trading forex, which seems to have been around since the 1980s by some accounts. Just as gold grew from a small range of currencies into a market that could trade dozens if not hundreds of instruments, so too did forex grow from a few major currency pairs to many, many others. Soon this new market was worth over USD 1 Trillion, but with growth came issues.
As you can imagine, it isn’t easy for a broker or liquidity provider (LP) to control every single trader out there! This is why tagging exists now, at least in part. One may also speculate that it has something to do with monitoring traders’ activity and possibly blacklisting them if they break specific rules or seem involved in some market manipulation.
What does a tag look like?
Typically a tag will look like this: TAG:12345 and is placed at the end of the order (buy/sell) when trading stocks, forex, futures etc. The number used for the tag may vary, but 12345 seems to be standard these days.
For example, you want to buy EURUSD @ 1.2078 and place a stop loss just below the low of the current candle pattern… The order might appear as such: BUY 20 X TAG:12345 LSTP 1.2079 SL 1.2074 TP1 1.2100 TP2 1.2125
The pros and cons of tagging in stock trading
For several years, traders have been using tags to analyse the stock market. While some people are for this modern trading method, others are against it. Traders who support this type of trading believe that it can increase their profit margins by making better decisions regarding the stocks they buy and sell.
Critics of tagging think that investors can lose more money on a single trade if they use this method rather than picking stocks randomly or based on experience with similar market conditions.
Traders who tag often assign symbols to companies that offer products or services that they know will appeal to specific groups of people, such as teenagers or working professionals. Once they tag a company, investing in them becomes easier because the brand-tagging process sorts the companies into related groups.
For example, someone might designate American Airlines as “AA” because they frequently fly with this airline. The next time the trader is searching for a company to buy or sell, he will see that American Airlines is part of a group and will have a better estimate of its value than he would if he had just seen a single stock on a list that did not have an identifier.
Critics of tagging claim that some investors lose money when they tag companies rather than simply picking stocks at random or based on their experience with similar market conditions. They say that many traders use tags to force connections between different companies for the sake of finding new information on more obscure companies. In these cases, tagging can lead investors astray, and they might purchase a stock based on their tag without any objective evidence to support its price.
For example, many investors like to use tags for companies in the technology sector because the stocks tend to fluctuate rapidly over short periods. These traders may tag Apple Inc. (AAPL) with “techie” and then tag Tesla Motors (TSLA) with “innovative.” Even though these two brands have nothing in common and should not be part of the same grouping, an investor might see that these two companies both belong to his techie category and buy shares of Tesla simply because it is also tagged as a techie.
The connection between these two companies was artificially created by the trader instead of naturally occurring through the similarity of product or service.
Finally, the critics say that the tag list can be confusing and misleading if it is not created carefully with investors’ needs in mind. The symbols assigned to each company may not reflect what they truly represent, which means an investor who relies on his tags might purchase a stock without knowing its actual value.
For example, an investor may use the abbreviation “RIMM” as a tag for Research In Motion (RIM) because “RIM” reminds him of the email system called “Blackberry.” However, he does not know anything about RIM’s financial situation and thinks that other traders will see his connection between RIM and Blackberry when they view his list.