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It's not the day trader losses we're worried about. It's the average investor who had trailing loss orders in on P&G (just an example) who had to sell their po

It's not the day trader losses we're worried about. It's the average investor who had trailing loss orders in on P&G (just an example) who had to sell their positions at steep losses only to see the market rebound immediately leaving them with zilch. This attitude of "If day traders lost money, who cares" is missing the forest for the trees. Lots and lots of people got screwed by the flash crash and that starts to cause credibility issues.

javert 14y ago
That is a very good point. I know the exchange can automatically put a halt to the trading of an asset, and that seems (to me) like a good tool in this case. e.g. if there is a certain pre-defined amount of volatility in a certain time. Do you think that would address this concern?
- runako 14y ago
  No. The exchanges had similar circuit breakers in place during the flash crash. They even cancelled some orders after the fact. But the flash crash still caused real investors (not professionals) to lose real money for the reasons outlined.
  - javert 14y ago
    But the flash crash still caused real investors (not professionals) to lose real money for the reasons outlined. Alternatively, the exchange's failure to tune the circuit breakers correctly caused real investors to lose real money?
    - runako 14y ago
      Definitely an avenue for exploration. I'd argue that the exchanges have been doing this over time, but that market manipulators will always move faster than the exchanges can tune circuit breakers and other mechanisms to prevent manipulation. Folks who stand to benefit from the type of volatility embodied in the flash crash will always be able to outrun these sorts of changes. Oh, also don't forget that the exchanges are subject to regulatory capture from the firms who benefit from real investors losing money to market manipulators. It's not like Goldman Sachs is going to be pounding the table for the NYSE to make it harder for HFT desks to manipulate markets.
nradov 14y ago
Oh come on. Anyone who understands even the basics of equity trading should know that trailing loss orders are no real protection. That's been well understood since at least Black Monday 1987.
beambot 14y ago
Serious question: Aren't stop-loss just another form of algorithmic trade? I understand their purpose (in principle), but perhaps its not an intelligent move for a long-term investor...? (Or to put it another way, perhaps the risk mitigation aspects of stop-loss trades are not properly valued.)
skorgu 14y ago
That's what a stop loss order does, it gets you out of your position regardless of the price. When P&G was dropping like a stone there was no way to know if the market was going to go straight back up or straight down. If it hadn't been a 'flash' crash but a straight up crash, if at that moment North Korea had invaded someone those average investors would be thanking their lucky stars they got out at only a 20% loss. You can't have it both ways, either you set hard limits for your position and take the hit when you guess wrong or you let your position ride and risk losing everything. The crazy prices were busted after the fact anyway so if you had a stop loss further out than 60% of the pre-nonsense price your trade never happened.

javert 14y ago

That is a very good point. I know the exchange can automatically put a halt to the trading of an asset, and that seems (to me) like a good tool in this case. e.g. if there is a certain pre-defined amount of volatility in a certain time. Do you think that would address this concern?

runako 14y ago
No. The exchanges had similar circuit breakers in place during the flash crash. They even cancelled some orders after the fact. But the flash crash still caused real investors (not professionals) to lose real money for the reasons outlined.
- javert 14y ago
  But the flash crash still caused real investors (not professionals) to lose real money for the reasons outlined. Alternatively, the exchange's failure to tune the circuit breakers correctly caused real investors to lose real money?
  - runako 14y ago
    Definitely an avenue for exploration. I'd argue that the exchanges have been doing this over time, but that market manipulators will always move faster than the exchanges can tune circuit breakers and other mechanisms to prevent manipulation. Folks who stand to benefit from the type of volatility embodied in the flash crash will always be able to outrun these sorts of changes. Oh, also don't forget that the exchanges are subject to regulatory capture from the firms who benefit from real investors losing money to market manipulators. It's not like Goldman Sachs is going to be pounding the table for the NYSE to make it harder for HFT desks to manipulate markets.

nradov 14y ago

Oh come on. Anyone who understands even the basics of equity trading should know that trailing loss orders are no real protection. That's been well understood since at least Black Monday 1987.

beambot 14y ago

Serious question: Aren't stop-loss just another form of algorithmic trade? I understand their purpose (in principle), but perhaps its not an intelligent move for a long-term investor...? (Or to put it another way, perhaps the risk mitigation aspects of stop-loss trades are not properly valued.)

skorgu 14y ago

That's what a stop loss order does, it gets you out of your position regardless of the price. When P&G was dropping like a stone there was no way to know if the market was going to go straight back up or straight down. If it hadn't been a 'flash' crash but a straight up crash, if at that moment North Korea had invaded someone those average investors would be thanking their lucky stars they got out at only a 20% loss. You can't have it both ways, either you set hard limits for your position and take the hit when you guess wrong or you let your position ride and risk losing everything. The crazy prices were busted after the fact anyway so if you had a stop loss further out than 60% of the pre-nonsense price your trade never happened.