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I have a theory that WSB are so bad at trading that they actually do manipulate stocks due to messing up every automated trading platform that assumes there'd b
by AnotherGoodName 7y ago
I have a theory that WSB are so bad at trading that they actually do manipulate stocks due to messing up every automated trading platform that assumes there'd be some logic to the trades being made.
Someone's just bought a $1000 call option on a stock that's currently $400? Automated trading systems will probably raise alerts on that stock since someone must know something for that to happen.
This appeared to happen when WSB were meme-ing on TSLA and a whole bunch of them bought $1000 call options when it was $400. Shortly afterwards TSLA skyrocketed in value.
- mixedbit 7y agoCan they be bad at trading? https://xkcd.com/2270/ https://xkcd.com/2270/
- chipperyman573 7y agoWow, I'm not sure if it was intentional but the alt text can be interpenetrated to be the same as GP's idea
- ipnon 7y agoI learned a new word today https://www.wordnik.com/words/interpenetrate https://www.wordnik.com/words/interpenetrate
- chipperyman573 7y agoHahaha I meant interpret
- rhizome 7y agoThere should be a sniglet for this situation.
- Majromax 7y agoWhile amusing as hell, the answer to the question posed by that XKCD is 'yes'. It's trivial to give away arbitrage opportunities, so the average expected loss – especially net of transaction fees – can be substantial.
- titanomachy 7y agoThat can't be done just by buying shares at market price, right? Would require some combination of options or short sells. Or setting stops on a highly volatile stock in a way that basically guarantees you lose money.
- Majromax 7y agoGiven buy/sell spreads, you can lose arbitrary amounts of money simply by buying and selling the same stock hundreds of times.
- zelly 7y agoI wonder why this wouldn't work. If 90% of retail traders lose money, then why doesn't Etrade and Robinhood bet against its worst performing customers? Is there some law against this?
- cameronh90 7y agoConsider that even if you're right 75% of the time, if you bet all your money each time, you're going to go broke pretty quickly. Their biggest losers are probably making essentially random bets in such a stupid way that they lose all their money.
- zelly 7y agoThe Kelly criterion provides the optimum bet size given the chance of winning. The adversarial brokerage could use the Kelly criterion and only make a wager commensurate with the likelihood of the trader's failure. It should be profitable. Suppose the brokerage just puts 5% of their cash toward this. It could be a nice profit center without risking everything.
- imtringued 7y agoThey could also just keep your money since you lost it on bad trades.
- lmm 7y agoIIRC there was a scandal not so long ago with a forex broker that was just not executing trades from dumb clients, sitting on the other side of them itself instead. I don't know if it's exactly illegal in a direct way, but it's a bad look, and I think there was a fine in this case.
- sireat 7y agoBasically a bucket shop: https://en.wikipedia.org/wiki/Bucket_shop_(stock_market) https://en.wikipedia.org/wiki/Bucket_shop_(stock_market) Those are considered illegal in US. CFD and like skirt the law here. The big problem with bucket shops is that they tend to not honor the bets once you start winning too much as Jesse Livermore found out in late 1890s. Still common today with all the fake forex exchanges. The rare winners have trouble getting money out.
- volkl48 7y agoThis was actually addressed in one of Levine's columns last week (scroll to the second heading, titled "Efficiency") https://www.bloomberg.com/amp/opinion/articles/2020-02-20/morgan-stanley-trades-trading-for-e-trade https://www.bloomberg.com/amp/opinion/articles/2020-02-20/mo... Worth a read. Short version is that a lot of the ways people lose money are hard to just do the inverse of.
- jayrot 7y agoThanks for this. That particular section was definitely apropos.
- shadowprofile77 7y agoI don't see how the weird corollary the comic mentions could work. if you were to pick stocks that consistently underperform the market and someone used your choices as a metric of what NOT to pick (with the idea of thus outperforming the market with their choices) they'd be much more likely to simply pick a majority of mediocre to average stocks instead of special winners, since the selection of stagnant or only modestly growing stocks is much bigger than either the selection of underperformers or major growth choices.
- dsfyu404ed 7y agoMost (theoretically all) automated trading is going through some sort of risk checking software to prevent it from doing just that. The broker dealers are only allowed by regulation (enacted after the flash crash) to allow the algorithm guys to respond so aggressively (the limit is usually an internally set one but you gotta be within it or the feds get on your case) to changes in the market.
- DennisP 7y agoSo your theory is that they're terrible traders, and your evidence is that they made huge profits on call options?
- martin_bech 7y agoNope his theory is that most trading is algos, and you can mess with algos, by doing crazy stuff.
- geneticswag 7y agoCase and point, just five years ago Redditors figured that out that by upvoting a post of image of a potato titled "Gaming Console. If you upvote this potato it will show up on Google Images when people search for Gaming Console." It even borked their news algorithm - https://i.imgur.com/A0zLPSR.png https://i.imgur.com/A0zLPSR.png
- asavadatti 7y agoNot trying to be a jerk but the phrase is "Case in point".
- reaperducer 7y agoIt's fine, for all intensive purposes. (This is what happens when a society stops reading books.)
- mrandish 7y agoBy in large, you are correct.
- misterprime 7y agoI really could care less.
- deleted 7y ago
- pnako 7y agoA lot of automated trading is arbitrage and market making, where such a trade would not really be an issue. Regardless, option trading tends to have human traders behind the wheel, and they're trained to figure out what's going on (trading options is similar to playing poker).
- totalZero 7y agoA reasonably sized trade of wing options (far-OTM calls or puts) should be expected to move the volatility implied in the prices of options at and around that strike. I would call this "vol impact" or "skew impact." Go buy 5k AAPL Jul 250P tomorrow morning, and see what happens to the implied volatility of the offer on that contract by the time the market closes that same day. Market makers are sensitive to wing trades, precisely because pricing skew is more of an art than a science. Trading away from spot can have a substantial impact on the way the implied volatility surface looks. And this can affect trades of other maturities and strikes. Trading options, for me, is nothing like playing poker. Poker doesn't have an underlying storyline the way companies do. Nor are there catalyst dates in poker.
- pnako 7y agoIt can make a big visible bump in a volatility surface, but experienced option traders are trained not to react like robots, but think instead of following blindly (otherwise it would be very easy to fool them, since it's a relatively illiquid market in which anyone can have a lot of leverage). In that sense it's similar to poker; you don't have all the information to analyze what other players do. In this particular case, is it an informed trader or a noise trader?
- deleted 7y ago[deleted]
- hnews_account_1 7y ago5k contracts is a massive trade my dude. At a multiplier of 100, that's a notional volume of 500k shares. That ought to move anything. Even AAPL as market makers balance their books. But I mean, generally these are one leg of a 4 leg option trade strategy. So it won't actually be a big net notional exposure in most cases (apart from having trades on the underlying to hedge themselves out).
- 101404 7y agoHm... trading bot trolling.
- zozbot234 7y ago> Someone's just bought a $1000 call option on a stock that's currently $400? Automated trading systems will probably raise alerts on that stock since someone must know something for that to happen. People buy far out-of-the-money calls all the time, they're actually overvalued compared to fair returns. Setting the strike price that high just makes the option more and more of a lotto ticket: the vast majority of the time it's just going to expire worthless, but that small chance of being "in the money" when the option expires is your jackpot. A fitting choice for that whole WSB attitude.
- totalZero 7y agoSome of this can also be a totally legitimate result of putting dealers short gamma. When options dealers are short contracts, their delta hedging activity (ie, their effort to reduce first-order risk to the share price by buying or selling a commensurate amount of stock) contributes to the momentum of a large move, because dealers' hedges chase the stock. If this explanation is unsatisfactory, look up "short gamma" on google. In other words, demand for volatility via buying options can actually beget volatility in the movement of the stock price.
- hrdwdmrbl 7y agoI love finding comments like this where I understand very little. (I am not being sarcastic). Excellent for learning.
- deleted 7y ago[deleted]
- goldmanballsack 7y agoIt's a bunch of mumbo jumbo from someone that takes the academic side of finance too seriously (LTCM anyone?). In plain English: Options are basically a contract, with a time limit, that states the holder can buy a certain amount of stock at a certain price. "Options dealers" are the people who wrote the contract and sold it to another party. They are on the "hook" for fulfilling the terms, if the buying party wishes to "exercise" an option and buy their promised stock at the promised price. Options dealers are automatically "short" all of the contracts they sell, because that's literally the definition of "shorting" -- selling something you don't own. Options dealers technically do not own the stock they're promising to sell to the buyer, but will have to once the buyer "exercises" the options contract. Delta is basically the difference in velocity of the price of the options contract vs. the price of the stock it's representing. So, if the option is selling for $10, and has a delta of 1 (100%), then a $5 increase in the stock price will increase the option contracts price by $5 to $15. If the delta is 0 (0%), the price of the contract will not change. Actually, I was wrong. The GP was correct to use the vocabulary he did -- because what I wrote isn't even the full explanation I was planning. However, three paragraphs in, I realized it would take much more to completely explain it. Basically, options dealers hedge by buying the stock they issue options contracts for, and this can cause the price to move up.
- LiquidSky 7y agoThis sounds like the plot to an old comedy film, just with new technology. Like some schmuck somehow gets into a fancy Wall Street party and everyone he talks to assume his idiot ramblings are genius financial advice.
- plouffy 7y ago"Automated trading systems will probably raise alerts on that stock since someone must know something for that to happen." Unlikely. Automatic trading systems will not see their trades. Most (if not all) of WSB trades are done through the Robinhood app. Robinhood users are not charged transaction fees executing their trades, they can do this because they sell their flow (these orders) to HFT firms. HFT firms are willing to pay for Robinhood's flow (trades) because the average user is not an insider, has no idea what he's doing and is most likely gambling. If you're an HFT you'd rather trade with a common person, then an informed investor because maybe they know something you don't.
- vasco 7y agoSo you start by saying automatic systems won't see their trades and finish by saying automatic trading systems are in fact seeing their trades and playing against them?
- scythe 7y ago>Most (if not all) of WSB trades are done through the Robinhood app. Robinhood users are not charged transaction fees executing their trades, they can do this because they sell their flow (these orders) to HFT firms. Doesn't this make it more likely, rather than less likely, that HFT algos are affected by WSB madness?
- is0tope 7y agoI'm guessing that they are implying that the HFTs already know that these trades came from robinhood (because of order flow feed) , and therefore would discount them heavily on having inside knowledge.
- anthm1988 7y agoThis all sounds really good.
- vxNsr 7y ago> TSLA It's still at $780, so whether they were the effect or not it's held some permanence.
- zelly 7y agoThere is no way Wall Street is using trades by retail traders as a signal (except maybe to counter-trade them). Also btw Wall Street can easily differentiate trades made by big players versus hordes of retail traders, because the banks and HFT firms are who executes the trades from retail brokerages. Retail brokerages like Robinhood don't have the authority to execute trades. They subcontract to a HFT firm who then uses the order flow to seek alpha (i.e., countertrade and run circles around clueless retail traders).
- vehementi 7y agoThis is not true of Interactive Brokers, right?
- sitzkrieg 7y agoThey run their own exchange and I'm sure they do order flow rebates so not really, but its not detrimental to retails
- hnews_account_1 7y agoYou contradicted your sentences. I do know Robinhood gives zero commission trades by selling order flow data to hft and market making hedge funds but I don't think those funds execute the orders themselves. The orders still go to brokerages I think (may be wrong about this) or just hit Prime Services from non hft hedge fund books. Either way, those hft firms definitely like retail order flow data. My guess is they're easier to "pick nickels in front of steamroller" kinda trades than institutional money which may cause extended one way moves that hits high frequency balanced traders adversely. I'm also entirely talking out of my ass in the last paragraph. I don't actually know that any of what I said is true. Just speculation.
- kgwgk 7y ago> selling order flow data to hft and market making hedge funds but I don't think those funds execute the orders themselves The order flow data is worthless (because the orders come from uninformed traders) the value is in filling them without the risk of being shortchanged (because the orders come from uninformed traders).
- oh_sigh 7y agoNo automated system is going to go haywire because someone put a few ten or hundred thousand on a far out of the money call option
- Drakar1903 7y agoSo it's the "best swordsman does not fear second best swordsman, no, he fears a total novice, for he is unpredictable to him" kind of scenario
- maayank 7y ago> Someone's just bought a $1000 call option on a stock that's currently $400? Automated trading systems will probably raise alerts on that stock since someone must know something for that to happen. The trading system and its operators deserve whatever fate results from such a decision.
- pergadad 7y agoBut they make money anyway, it's the customers (pension funds) that lose...
- kortilla 7y agoNo, that’s not how any of this works. Pension funds aren’t sitting in HFT systems.
- jacobush 7y agoIn Sweden someone was convicted for triggering such bots to do stupid things. Morale: if you are big player, you file a lawsuit. If you are a small player, you get convicted. If your bots do "stupid things".
- marvin 7y agoHuh. In Norway they were acquitted. Same story. Seems like a significant difference in the law tradition.
- lorenzfx 7y agoDo you have more details?
- jacobush 7y agoAnother case but similar: https://www.fokus.se/2016/02/robotdodaren/ https://www.fokus.se/2016/02/robotdodaren/
- deleted 7y ago[deleted]
- Scirra_Tom 7y ago> Someone's just bought a $1000 call option on a stock that's currently $400? Automated trading systems will probably raise alerts on that stock since someone must know something for that to happen. Not an expert but I'd be surprised if one trade like that triggered anything, could easily be a hedge.