8 ms·

Mini flash crash? Trading anomalies on manic Monday hit small investors

31 points by molecule 11y ago

jackgavigan 11y ago
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.
- growse 11y ago
  By definition, a 'wild swing' is a very short timeperiod event which typically doesn't affect prices too much on average. If I hold stock and it's down 50% on one day and recovers on the next, I don't really care because I'm not trying to make money off market events. What I actually care about is the stock's performance over months/years. For most retail investors, market blips, and thus their access to low latency are irrelevent because they don't really alter the month/year picture.
  - jackgavigan 11y ago
    > If I hold stock and it's down 50% on one day and recovers on the next, I don't really care... You do if you get stop-loss'd out of the position at an unrealistically low price.
    - mistermann 11y ago
      Which happened to me Monday morning, although not down 50%, and I had just two days before put that stop in place because earlier in the year I had lost a ton of $ on two different stocks by not having one. I think people like me are easy pickings for HFT algorithms.
      - kasey_junk 11y ago
        So you put in a stop loss order and didn't want it to trigger when the share went down? Perhaps it's not the correct hedging tactic for your trade? Maybe you should have been using options? If you don't understand proper hedging for your trade, you aren't easy pickings for HFT algorithms, you are easy pickings for everyone in the market.
        mistermann 11y ago
        My point is that stop loss orders, which exist because they are a prudent way to limit your losses, are highly susceptible to flash crashes, and depending on their actual implementation, possibly subject to exploitation. In retrospect, in this case I'd undoubtedly have been better served by options, but options are (or can be) complex, it is a whole new way to lose money. History has shown me that I shouldn't be trading individual securities!
        fredkbloggs 11y ago
        Based on your statements, you shouldn't be trading anything. If you don't know how to use the tools of the trade, you are all but guaranteed to lose. Not every trader is an options trader, but every trader should understand the fundamentals of options. Trading is a specialized business all its own, no less so than dentistry, chemical engineering, or lobstering. If you haven't attained the required expertise, the results are going to be awful. Non-traders would all be much wealthier if their brokers took away their Sell buttons.
        jackgavigan 11y ago
        I think that's unnecessarily harsh. If a retail investor had set a stop-loss on a stock like the RSP ETF [0] that got triggered at -50% because the price diverged hugely from the NAV, I think they have cause to feel hard done by.
- mcv 11y ago
  Why does trading have to happen at a millisecond timescale? Wouldn't it be much easier on everybody involved if trading followed a clock tick of one second or one minute or something?
  - snarfy 11y ago
    But then how would companies like Goldman siphon off everybody's money? HFT is just another name for front running at the millisecond scale. https://en.wikipedia.org/wiki/Front_running https://en.wikipedia.org/wiki/Front_running
    - Anderkent 11y ago
      There's a difference between knowing someone placed an order and using that to front-run, and guessing that someone will place an order and using that to HFT.
  - kasey_junk 11y ago
    It is a distributed systems problem. First in an order book you have many different orders for many different prices and quantities on both the buy and sell side. At any given price, at any given time, in an order book you can have more buyers at a price than sellers (or vice versa). How do you decide tie breakers? One common way is to do FIFO matching, this means that the participant that had an order in the longest gets filled before someone who had one in a shorter amount of time. The higher your time resolution the less viable this gets. Second, there is also a desire to get OUT of the market. So as you process new information you realize that your current orders are riskier than you anticipated, so you want to cancel them. The longer it takes you to cancel them the more risk you are exposed to. In the case of market makers this risk will get passed on to their customers in the form of higher spreads and less liquidity. Third, there is no 1 place where trading happens. Trading happens in hundreds of venues around the world in just as many jurisdictions. They would all need to do distributed clock/queue sync for higher timescales to feasibly change anything. Global distributed clock/queue sync is a Hard Problem TM. In short, it is much harder to do non-continuous time trading than the alternatives without obvious benefit and with lots of potential unintended consequences.
- tptacek 11y ago
  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 11y ago
    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 11y ago
      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 11y ago
        > 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 11y ago
        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.
dmichulke 11y ago
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.
- tptacek 11y ago
  Can you explain this in more detail? What is the trading strategy in which an algo uses your tiny limit order for its own ends? And aren't these retail orders just going to internalizers like Citadel anyways? Do they even hit the exchange order books?
  - dmichulke 11y ago
    An example would be your market maker knowing all stops. When price drops from 100 to 90, there may be a few people that have stops at 89.90. Someone with firepower could go short at 90 (which is not so risky if you know the order book), go down the 10 ct, trigger the stops and cover your short when you see the orders are getting filled. I read about much more sophisticated variants out there, e.g., the market maker selling order book information for high prices or selling high-speed access to this information but I'd have to search for it.
    - kasey_junk 11y ago
      I'm not an expert on all the various orders that are in play at every exchange, but in the venues I traded in you don't actually see stops in an order book feed. They are orders that do not appear in the book until the stop has been hit at which point they appear (or fill) as regular orders. Someone with more knowledge of equities platforms could chime in if I am wrong about those venues. I don't understand your trade at all. Could you explain it precisely with the orders someone would put in to take advantage of that trade?
      - 11y ago
frgewut 11y ago
Someone with a stop-loss order doesn't seem like a retail investor to me. Retail investors buy and hold till retirement.
- Frqy3 11y ago
  That's meant to be the main purpose for the ETFs. As an easy way for retail investors to buy into the market with regular purchases to take advantage of cost averaging. Not for frequent trading as a mechanism to proxy the market.
- devonkim 11y ago
  I've put in stop loss orders on my employee stock plan's shares before because I expected the stock to tank even outside a bear market - it did and saved a lot of money because of it.
  - deleted 11y ago
    [deleted]
- ssanders82 11y ago
  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 11y ago
    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.
    - gnaritas 11y ago
      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.
mkultra 11y ago
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
chollida1 11y ago
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 11y ago
  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 11y ago
    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 11y ago
      Exactly. I was hoping for a downturn so I could invest more in the stock market. But sadly there was no downturn.

31 points by molecule 11y ago

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.

growse 11y ago
By definition, a 'wild swing' is a very short timeperiod event which typically doesn't affect prices too much on average. If I hold stock and it's down 50% on one day and recovers on the next, I don't really care because I'm not trying to make money off market events. What I actually care about is the stock's performance over months/years. For most retail investors, market blips, and thus their access to low latency are irrelevent because they don't really alter the month/year picture.
- jackgavigan 11y ago
  > If I hold stock and it's down 50% on one day and recovers on the next, I don't really care... You do if you get stop-loss'd out of the position at an unrealistically low price.
  - mistermann 11y ago
    Which happened to me Monday morning, although not down 50%, and I had just two days before put that stop in place because earlier in the year I had lost a ton of $ on two different stocks by not having one. I think people like me are easy pickings for HFT algorithms.
    - kasey_junk 11y ago
      So you put in a stop loss order and didn't want it to trigger when the share went down? Perhaps it's not the correct hedging tactic for your trade? Maybe you should have been using options? If you don't understand proper hedging for your trade, you aren't easy pickings for HFT algorithms, you are easy pickings for everyone in the market.
      - mistermann 11y ago
        My point is that stop loss orders, which exist because they are a prudent way to limit your losses, are highly susceptible to flash crashes, and depending on their actual implementation, possibly subject to exploitation. In retrospect, in this case I'd undoubtedly have been better served by options, but options are (or can be) complex, it is a whole new way to lose money. History has shown me that I shouldn't be trading individual securities!
        fredkbloggs 11y ago
        Based on your statements, you shouldn't be trading anything. If you don't know how to use the tools of the trade, you are all but guaranteed to lose. Not every trader is an options trader, but every trader should understand the fundamentals of options. Trading is a specialized business all its own, no less so than dentistry, chemical engineering, or lobstering. If you haven't attained the required expertise, the results are going to be awful. Non-traders would all be much wealthier if their brokers took away their Sell buttons.
      - jackgavigan 11y ago
        I think that's unnecessarily harsh. If a retail investor had set a stop-loss on a stock like the RSP ETF [0] that got triggered at -50% because the price diverged hugely from the NAV, I think they have cause to feel hard done by.
mcv 11y ago
Why does trading have to happen at a millisecond timescale? Wouldn't it be much easier on everybody involved if trading followed a clock tick of one second or one minute or something?
- snarfy 11y ago
  But then how would companies like Goldman siphon off everybody's money? HFT is just another name for front running at the millisecond scale. https://en.wikipedia.org/wiki/Front_running https://en.wikipedia.org/wiki/Front_running
  - Anderkent 11y ago
    There's a difference between knowing someone placed an order and using that to front-run, and guessing that someone will place an order and using that to HFT.
- kasey_junk 11y ago
  It is a distributed systems problem. First in an order book you have many different orders for many different prices and quantities on both the buy and sell side. At any given price, at any given time, in an order book you can have more buyers at a price than sellers (or vice versa). How do you decide tie breakers? One common way is to do FIFO matching, this means that the participant that had an order in the longest gets filled before someone who had one in a shorter amount of time. The higher your time resolution the less viable this gets. Second, there is also a desire to get OUT of the market. So as you process new information you realize that your current orders are riskier than you anticipated, so you want to cancel them. The longer it takes you to cancel them the more risk you are exposed to. In the case of market makers this risk will get passed on to their customers in the form of higher spreads and less liquidity. Third, there is no 1 place where trading happens. Trading happens in hundreds of venues around the world in just as many jurisdictions. They would all need to do distributed clock/queue sync for higher timescales to feasibly change anything. Global distributed clock/queue sync is a Hard Problem TM. In short, it is much harder to do non-continuous time trading than the alternatives without obvious benefit and with lots of potential unintended consequences.
tptacek 11y ago
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 11y ago
  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 11y ago
    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 11y ago
      > 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 11y ago
        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.

dmichulke 11y ago

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.

tptacek 11y ago
Can you explain this in more detail? What is the trading strategy in which an algo uses your tiny limit order for its own ends? And aren't these retail orders just going to internalizers like Citadel anyways? Do they even hit the exchange order books?
- dmichulke 11y ago
  An example would be your market maker knowing all stops. When price drops from 100 to 90, there may be a few people that have stops at 89.90. Someone with firepower could go short at 90 (which is not so risky if you know the order book), go down the 10 ct, trigger the stops and cover your short when you see the orders are getting filled. I read about much more sophisticated variants out there, e.g., the market maker selling order book information for high prices or selling high-speed access to this information but I'd have to search for it.
  - kasey_junk 11y ago
    I'm not an expert on all the various orders that are in play at every exchange, but in the venues I traded in you don't actually see stops in an order book feed. They are orders that do not appear in the book until the stop has been hit at which point they appear (or fill) as regular orders. Someone with more knowledge of equities platforms could chime in if I am wrong about those venues. I don't understand your trade at all. Could you explain it precisely with the orders someone would put in to take advantage of that trade?
    - 11y ago

frgewut 11y ago

Someone with a stop-loss order doesn't seem like a retail investor to me. Retail investors buy and hold till retirement.

Frqy3 11y ago
That's meant to be the main purpose for the ETFs. As an easy way for retail investors to buy into the market with regular purchases to take advantage of cost averaging. Not for frequent trading as a mechanism to proxy the market.
devonkim 11y ago
I've put in stop loss orders on my employee stock plan's shares before because I expected the stock to tank even outside a bear market - it did and saved a lot of money because of it.
- deleted 11y ago
  [deleted]
ssanders82 11y ago
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 11y ago
  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.
  - gnaritas 11y ago
    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.

mkultra 11y ago

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

chollida1 11y ago

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 11y ago
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 11y ago
  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 11y ago
    Exactly. I was hoping for a downturn so I could invest more in the stock market. But sadly there was no downturn.