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Well, plenty of traders are out there selling without actually owning -- that's something market makers and only market makers are allowed to do, and it's certa

by dnadig 11y ago

Well, plenty of traders are out there selling without actually owning -- that's something market makers and only market makers are allowed to do, and it's certainly possible that market makers algos were selling too low along with high frequency traders. But regardless, when you have a derivatively priced security like RSP (which holds actual stocks -- it has some inherent worth at all times that's knowable) any selling at a discount is supposed to be arbitraged away. In these cases, it wasn't,because the trading windows were too short. (Hi, I'm the author of that blog post).

vasilipupkin 11y ago
right. So if you think selling is irrational and you don't already own it, you should buy, not walk away. If you are not buying, it means you don't believe that the discount is irrational.
wusatiuk 11y ago
a "too short trading window" means that no retail investor had the chance to buy within this 1 hour timeframe, because of the massive amount of order?
ddeck 11y ago
Well, plenty of traders are out there selling without actually owning -- that's something market makers and only market makers are allowed to do I assume you are referring to naked short selling. To be clear, anyone may borrow shares and then sell them. Although legal ownership does pass to the borrower, this is not what most people think of if told they must "own shares prior to selling them". In fact under SEC regulations, the borrow doesn't actually need to take place before the sale, so long as the broker has reasonable grounds to believe that the security can be borrowed to satisfy delivery for the sale. From the retail traders perspective, this is typically transparent. They simply enter a sell order in a security that they don't own, and their broker worries about locating it for delivery (or doesn't allow the trade if it believes it can't locate the shares).
- minimax 11y ago
  The morning of 8/24 was more complicated than that because lots of these stocks/etfs had hit their Reg SHO thresholds, which restricted the ability short sell into a resting bid. https://www.sec.gov/divisions/marketreg/rule201faq.htm https://www.sec.gov/divisions/marketreg/rule201faq.htm
  - mrchicity 11y ago
    And when market-makers lose an option for managing their risk (hitting bids in a related security), they'll naturally charge a wider spread to buy, further diminishing liquidity that would stabilize the market.
  - dnadig 11y ago
    SHO limits don't apply to bona fide market making, I'm nearly certain. But regardless, you would expect the inability to short by non-MMs would actually keep ETFs and Stocks from hitting their breakers, not making it worse. By definition, you remove sell-pressure. Until 10AM that day, the problem was zero buy-pressure. No bids at all to speak of. http://www.etf.com/sites/default/files/images/2_rspsurveyor.jpg http://www.etf.com/sites/default/files/images/2_rspsurveyor....
mrchicity 11y ago
If the constituent stocks are halted, the inherent value is unknowable. Additionally, there are limits to arbitrage such as capital/loss limits and counterparty risk. Also most high-frequency traders are market-makers or unofficially acting in that role. ISO orders are used by all executing brokers trying to sweep the best price, it's equally likely that the low sells were by funds executing stop loss orders through a brokerage or bank or wholesale market makers offsetting inventory at a loss after providing liquidity to retail stops.

by dnadig 11y ago

vasilipupkin 11y ago

right. So if you think selling is irrational and you don't already own it, you should buy, not walk away. If you are not buying, it means you don't believe that the discount is irrational.

wusatiuk 11y ago

a "too short trading window" means that no retail investor had the chance to buy within this 1 hour timeframe, because of the massive amount of order?

ddeck 11y ago

Well, plenty of traders are out there selling without actually owning -- that's something market makers and only market makers are allowed to do I assume you are referring to naked short selling. To be clear, anyone may borrow shares and then sell them. Although legal ownership does pass to the borrower, this is not what most people think of if told they must "own shares prior to selling them". In fact under SEC regulations, the borrow doesn't actually need to take place before the sale, so long as the broker has reasonable grounds to believe that the security can be borrowed to satisfy delivery for the sale. From the retail traders perspective, this is typically transparent. They simply enter a sell order in a security that they don't own, and their broker worries about locating it for delivery (or doesn't allow the trade if it believes it can't locate the shares).

minimax 11y ago
The morning of 8/24 was more complicated than that because lots of these stocks/etfs had hit their Reg SHO thresholds, which restricted the ability short sell into a resting bid. https://www.sec.gov/divisions/marketreg/rule201faq.htm https://www.sec.gov/divisions/marketreg/rule201faq.htm
- mrchicity 11y ago
  And when market-makers lose an option for managing their risk (hitting bids in a related security), they'll naturally charge a wider spread to buy, further diminishing liquidity that would stabilize the market.
- dnadig 11y ago
  SHO limits don't apply to bona fide market making, I'm nearly certain. But regardless, you would expect the inability to short by non-MMs would actually keep ETFs and Stocks from hitting their breakers, not making it worse. By definition, you remove sell-pressure. Until 10AM that day, the problem was zero buy-pressure. No bids at all to speak of. http://www.etf.com/sites/default/files/images/2_rspsurveyor.jpg http://www.etf.com/sites/default/files/images/2_rspsurveyor....

mrchicity 11y ago

If the constituent stocks are halted, the inherent value is unknowable. Additionally, there are limits to arbitrage such as capital/loss limits and counterparty risk. Also most high-frequency traders are market-makers or unofficially acting in that role. ISO orders are used by all executing brokers trying to sweep the best price, it's equally likely that the low sells were by funds executing stop loss orders through a brokerage or bank or wholesale market makers offsetting inventory at a loss after providing liquidity to retail stops.