
Mini flash crash? Trading anomalies on manic Monday hit small investors - molecule
http://www.washingtonpost.com/business/economy/mini-flash-crash-trading-anomalies-on-manic-monday-hit-small-investors/2015/08/26/6bdc57b0-4c22-11e5-bfb9-9736d04fc8e4_story.html
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jackgavigan
With the electronification of markets, I think retail investors are always
going to be at a disadvantage in volatile markets like Monday's. The speeds at
which the markets operate today is far beyond anyone's ability to keep up
with, even if they weren't at the end of a retail internet connection, with at
least one layer of abstraction (i.e. their broker) between them and the
market.

Fast human reaction times are on the order of 200ms, to which you need to add
network latency. The HFT firms operate at single-digit millisecond timescales.
By the time a retail investor sees a price on the screen, it's probably
already gone.

However, there are steps the exchanges could take to reduce volatility,
especially when liquidity is thin, which would help prevent the triggering of
stop-loss orders. For example, they could switch from continuous CLOB trading
to periodic auctions until the market stabilises. I reckon that would go a
long way towards reducing instances of wild swings like we saw on Monday.

~~~
tptacek
Would you rather be a retail investor in a fully automated market, with no
opportunity to compete on reaction time and uniformly terrible prospects for
day trading, or would you rather be a retail investor in the 1980s, paying
extremely high spreads set by colluding market makers?

~~~
jackgavigan
I'd rather the SEC mandated volatility interruptions with auctions to
stabilise volatile/illiquid markets in order to reduce the likelihood of big
price dips (or spikes, for that matter) that cause retail investors to get
stop-loss'd out of their positions.

~~~
gd1
You realize things keep happening while your volatility interrupt is in force
right? Everything else in the world keeps trading. There is no guarantee when
it starts trading again that it won't open 20% down. If you don't want a stop
loss to trigger, don't place one.

Imagine you have a stop loss, which doesn't trigger, then the market vol
interrupts, then the price opens 10% below your stop loss.

Oops, you'd be moaning about that instead.

~~~
jackgavigan
_> There is no guarantee when it starts trading again that it won't open 20%
down._

That's why I used the words "reduce the likelihood" instead of "eliminate".

As to the efficacy and benefits of volatility interruptions, research has been
carried out on this - 'Price Discovery in European Volatility Interruptions':
[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2365772](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2365772)

~~~
gd1
Monday saw the first ever limit down halts on major equity index futures
(YM/ES/NQ) on CME Globex. It was an unmitigated disaster. It happened at a
critical time (heading into the cash open), and caused chaos in the ETFs that
have these futures as the underlying. Market makers price and hedge ETFs like
SPY (the Spyder S&P 500 tracker) off the future. So being unable to do so
since the underlying was frozen, they did the only thing they could naturally
do and blew out their spreads and backed away. Even then, some unfortunate and
panicky people crossed those spreads and some SPY changed hands at -14%. There
is no legislating against stupidity.

Then when ES and the other futures did unfreeze, they promptly plunged to a
second limit down in extremely thin trade. Why so thin? Because when you stop
trading, everyone empties out of the orderbook, and they don't necessarily
dive straight back in once it unfreezes. Liquidity gradually comes back as
participants assess that the price is stable and they can start quoting again.

Monday was not a good day for your argument.

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chollida1
What Monday's trading indicates to me is two things:

1) the markets self correct much better than they used to. I think this is a
positive and

2) that stop order should almost never be used. During the crash of 1987 stop
orders were just coming into vogue as a sort of protection. The ides with them
is that they are sell or buy orders that are in the money but not entered onto
the CLOB(Continuous limit order book). Once the stock falls below their strike
price, they spring into action and become orders to sell (or buy if you are
stopping for short protection).

This has a downside of extending slides when markets go down because as
markets fall stops get hit which adds to the selling which means more stops
get hit, rinse and repeat.

Unfortunately this means that in a flash crash you'll get stopped out of your
position and when the market recovers you'll wonder where your shares went.

Stop orders, just say no. Even if you are watching the markets, you'll be too
slow to cancel them.

~~~
jrockway
Have to agree here. You hear people say "buy low, sell high" all the time, but
they never seem to do this with the stock market. They sell low because the
ultra-short-term trend is downward, and then buy high "because the stock
market looks solid now". Then they lose a ton of money and wonder why.

I dump a few thousand dollars into a total stock market index fund every few
months. Monday was a non-event for me. I didn't even look at my positions. The
stock market is for long-term goals, not intraday interaction.

~~~
lbaskin
I generally agree, but Monday didn't have to be a complete non-event. If the
market has just gone down sharply, that looks like a buying opportunity to me
- even if it continues to decline for some time afterwards.

~~~
jrockway
Exactly. I was hoping for a downturn so I could invest more in the stock
market. But sadly there was no downturn.

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frgewut
Someone with a stop-loss order doesn't seem like a retail investor to me.

Retail investors buy and hold till retirement.

~~~
ssanders82
I'm not sure where you get this definition from. I'm a "retail" investor in
that I use a broker (IB) instead of directly connecting to exchanges. Yet I
day- and swing-trade for a living.

~~~
fredkbloggs
If you trade for a living, you are not an investor; you are a trader. Whether
retail or wholesale is irrelevant.

Trading and investing are completely different animals, which you as a trader
know very well.

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gnaritas
Traders are investors with shorter time horizons; they are not different
animals. Buying a stock because you think the company is a good value and will
grow over time is not different than buying a stock because you think it's
going to have positive earnings out tomorrow and the price is going to bounce;
both buyers are investors and both are trading, simply on different time
horizons.

~~~
fredkbloggs
If you don't think that relying on market behavior for profits makes a
fundamental difference, we'll have to agree to disagree.

~~~
gnaritas
No one said it wasn't different, I said they're both still investors. It's
wrong to claim trading isn't investing, it most certainly is.

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dmichulke
Today, setting limit orders is a bad idea because algos will go for runs to
trigger these orders and use them to their own ends.

In a sense, you just publicly announce your intentions which is never a good
idea when trading or negotiating in a non-cooperative way.

Of course, this means you can only use "buy and hold" or, if you know you
still have access to your trading service in volatile hours, mean reversion
strategies.

~~~
ant6n
Can you clarify this?

To me it would seem that If I put in a limit order to buy something at 20%
below yesterday's price, if some HFT triggers that order that's most likely a
positive for me.

Or do you mean the different kinds of stop limit orders?

~~~
dmichulke
I think you should do that if you take the risk of publicly announcing your
position, and it is probably better than plain stops (which reinforce the
current trend)

However, even then you might have bad luck such as in this case (which
admittedly doesn't happen very often)

[http://www.bloomberg.com/news/articles/2010-10-18/nyse-
euron...](http://www.bloomberg.com/news/articles/2010-10-18/nyse-euronext-
cancels-trades-of-s-p-500-etf-at-9-6-below-opening-price?cmpid=yhoo)

~~~
ant6n
I don't get you point, or how your link reinforces your point.

If I put in a limit order to buy some stock at 20% discount, yes I'm
announcing my intention to buy. Is my order for crumbs going to provide the
floor on the price because I 'announced my intention'? I feel it's more likely
in a moment of volatility like this, that I pick up some bargain. What bad
thing may happen except actual bugs with limit orders, which shouldn't really
happen?

~~~
dmichulke
The link shows that there were several people that bet on mean reversion and
their trades were cancelled.

The interesting bit is that the decision to cancel the trades seems very
arbitrary, at the very least to me.

~~~
ant6n
So during moments of high volatility orders got cancelled, but that may happen
regardless of whether the orders had been sitting around for a month or a
second. Certainly doesn't seem to be related to leaving orders sitting around
'showing one's hand'.

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mkultra
Apparently Virtu (only HF to claim to have made money on monday) and their HFT
setup.

Check this: [http://i.imgur.com/4VWtko0.png](http://i.imgur.com/4VWtko0.png)

