This whole thing was triggered at opening. Why does the market even close these days? There is "after hours" trading going on for some people. Why shouldn't the computers be running 24/7? Is there some batch stuff that goes on after close? I've seen cases where transactions were unwound, but aren't we nearing real-time across the board?
It is perhaps a calming influence. Companies can release results after the close, and everyone gets to think on it overnight. In a logarithmic sense, the market's 33% uptime is quite close to 100%, and it allows for a rhythm, maintenance, and reflection that would be lost to continuous trading.
Most animals sleep, and we've even evolved the seven day week. Perhaps it's a good thing.
If you take the opposite view, someone will always trade with you after hours at the right price.
But deadlines also rush people, often into a frenzy (I.e. Auctions); and the uncertainty of what will happen overnight could cause crashes to be more severe. It may be that leaving markets open overnight would calm trading all day. I am not sure either way, but it seems that 24/7 trading would be worth a try.
Because being open (availability) spreads the same amount of liquidity across the clock. This decreases the available liquidity at any moment and thus generally increases volatility
A another solution would be a single auction a day, and everyone would get more fair but less timely trades. And a lot of the goofus mechanics around high speed continuous auction would disappear.
The US equity index futures opened for trading (as usual) at 5pm Chicago time on Sunday night. Two of the biggest US equity exchanges (NASDAQ and Arca) start trading in a pre-market session at 4am NYC time. The futures hit their own limit down band before the cash open, and I don't think the single-stock circuit breaker rules apply during the pre-market session for equities.
There was a ton of volume in both the futures and the pre-market, but it was still dwarfed by all the activity at and just after the open. Most people just don't want to trade until other people are trading, so there's this sort of feedback loop that drives volume to the open.
Another oft looked over featuer of the markets is price discovery. By compressing when all the participants participate, it allows all the buyers and sellers to come to an agreement on price with the most information participating. At least that's the theory. When looking at off-hours trading data, differences in opinion cause wild swings that then normalize during the 9:30-4 window.
Technically, there's no reason that the markets can't participate 24/7, but the Nasdaq operates from 4a to 8p, and the crash that occurs at 9:30 still occurred despite markets being available for participation between 4a to 9:30a.
The longer the markets stay open, the less liquidity you have. If you want stable and meaningful prices, having limited market hours is probably helping.
I don't see why this is down-voted as this is true and a disadvantage of having longer hours.
The problem is already somewhat apparent: During the trading day the volume changes and a lower volume increases price impact. It seems logical that longer days spread out the volume even more, thus increasing price impact of orders.
Continuous availability is good, but we also want markets to connect buyers and sellers of various sizes as efficiently as possible. Efficient not in the CS sense, but in the sense of paying the middlemen as little as possible.
Discrete markets are, under certain circumstances, more efficient at connecting buyers and sellers than continuous markets. It's similar to how an eBay auction is a more efficient way to get the best price for your rare item rather than having a continuously open market where you have to keep deciding whether or not to accept people's lowball bids.
Yet eBay has Buy It Now, because sometimes it's better for both the buyer and the seller to agree on a potentially lower/higher price than having to wait for the end of the auction.
Why do we want efficient transactions? If it's for the benefit of the buyers and sellers, why shouldn't they be given the choice? It's as if we were saying that the stock market is for less sophisticated users than eBay!
On the market you buy a fungible asset, so the auction can be batched up between multiple buyers and sellers. On eBay you can't batch the things sellers are selling because a key part of what buyers are supposed to be doing is things like checking an individual seller's feedback and weighing whether he low price is worth risking it, or carefully reading the description to make sure you aren't buying a cardboard cutout picture of the product, a product box, or a car that was sawed in half and photographed so that it could be sold to two people instead of one. Plus a lot of the products are used and have one-off descriptions of flaws.
EBay doesn't have the same kind of clearing houses and broker-dealer regulations that would make sold items be anything like stock shares, even if they were all brand new and retail packaged.
Largely, it's legacy in the United States. When human specialists were in control of the book for a stock, the market opened at 9:30, and closed at 16:00. It probably hasn't changed for nearly a century.
More algorithms are trading around the clock though, since markets are more interconnected than ever. To trade effectively, you need to be more aware of what has happened since market close as well. More explicitly, instruments have global presences.
Running and maintaining systems, and trading 24/7 would be a major shift for a lot of institutions though. So, my guess is that it once an ATS can get approval to start trading continuously, outside human hours, the rest (including exchanges) will need to adapt.
The NYSE is only one of 11 registered US equity exchanges. There are other exchanges that open earlier and close later (for example the NYSE owned Arca exchange trades from 4am to 8pm Eastern).
I used to work for a forex broker (forex is 24h a day) and we had offices in different timezones (Toronto, New York, London, Singapore) so we would always have trader coverage without requiring night shifts.
And you had full 3rd level knowledge of all issues in all regions? Or key people in key regions who got woke up a lot? They should run these things for an hour a day 4 days a week. It's just a game, we don't need this.
You don't have to participate. But I don't see how it's your business if people want to trade equities 24h a day any more than if people want to open a 24h McDonald's.
"I don't see a reason for this, so you shouldn't be allowed to do it."
Not very good reasoning. It's not exactly on point, but I'm reminded of a quotation from G. K. Chesterton:
> In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”
I'm not saying you shouldn't be allowed to, I'm saying that even if it was permitted, it wouldn't be productive.
I mean, this is Hacker News. We discuss all day about what should or shouldn't be done. If you want action, go out and do it. Otherwise, we're just armchairing all of this.
It's not "my business" but it's my opinion that tech has enabled far more finance business to occur and that this is not "a good thing". Finance needs to be a means to an end not the end in and of itself.
If you're going to question market hours, you should ask why the market is open for so long. Why not just have one big print a day?
There's not actually so much new information coming out throughout the day that the market needs to update prices on a sub-second basis for hours and hours every workday.
Don't say that. Do I want to have to loose my opportunity to free up memory with a daily bounce? Do I want to have to support this stuff for even more hours? No!!!
"When irrational actors are at work (and let’s be clear, anyone selling RSP for half off isn’t being rational), the smartest thing to do, if you’re the actual human being watching RSP trade, is to simply step out for a cup of coffee". If you honestly believe that selling for 50% off is irrational, then you should not step out for coffee but put in bids and buy that ETF. That's the rational thing to do, conditional on your beliefs about valuation.
Thing is, most ETF liquidity is provided by high-speed market making algorithms. ETF pricing works through an arbitrage mechanism. To give a contrived example, imagine a ETF "Mega-Tech" (MGT) whose composition is 0.75 shares AAPL and 0.25 shares GOOG. At the close of trading, large arbitrageurs can exchange MGT shares in-kind with the ETF issuer for 0.75 shares AAPL and 0.25 shares GOOG or vice-versa. If the ETF is ever trading for more or less than 0.75AAPL + 0.25GOOG, you can make money going long the stocks and short the ETF or vice-versa.
So, knowing where AAPL and GOOG are trading, the ETF market-maker sets his bid and offer in MGT such that he can try to trade AAPL and GOOG at a better price to offset his risk and capture a small profit. Since this position is fully hedged, he gets special capital treatment and can accumulate large inventory in the ETF if there's a large imbalance between natural buyers and sellers.
Now, imagine AAPL is halted. The ETF market-maker can't hedge his risk or have confidence in what the ETF is worth. At first, he updates his pricing to assume the worst (remember, this is a dumb risk-averse computer, maybe AAPL is halted because it's the next Enron) and bids a lower price. He can't get the same capital treatment on MGT hedged with GOOG or some other ETF, and this is a much risker trade, more of a statistical arbitrage than a pure one, so as people keep selling MGT to him, he hits a risk or capital limit and pulls his bids completely.
Real ETFs can have 100s of components. Since this is a mechanical process, high-speed market-makers can charge a very low spread and be the best bid or offer in the market almost all the time. They just trade 100s of ETFs at once to make it up in volume. This drives humans out of the market-making business, since human traders who did the same thing are undercut by machines. Because of this, few well-capitalized human traders are sitting around waiting to pounce on ETFs trading at a massive discount since it rarely happens. They're all doing something else with their lives.
A good solution would be not to allow market orders in ETFs when their component stocks are halted, or to halt trading in ETFs when the components are halted. Market stop orders should probably be banned in general. I can't think of any other business dealing where a person would walk into a store and say "I'll buy/sell this at any price", aside from buying lobster on a date.
No, stepping out for coffee is the rational thing. Seeing irrational behavior around you means your model of the world is either broken or not applicable to the situation, something worth chewing on for a while. "When you don't know who the sucker in the room is, the sucker is you".
> Seeing irrational behavior around you means your model of the world is either broken or not applicable to the situation
Or that people are actually, as has been demonstrated in any number of ways, irrational. The idea that perceiving irrationality means there is something wrong with your world view rather than that there is actual irrationality in the world is somewhat odd.
In a fictional world, an envelope costs $1, a piece of paper costs $0.50, and a stamp costs $0.50. In total, a full letter costs $2. You know that anyone on the street would be willing to buy each of those items at the component price. Would you not agree that seeing all 3 sold as a bundle for $1 would be irrational?
no. If someone has a model that tells them everything is about to get cheaper in the next 2 hours and will and cost 50 cents, then rushing in to sell the bundle for $1 is not irrational.
Since ETFs are derivatively priced, it's irrational on the face of it. If I sell you a bundle of 100 $1 bills for $50, it's irrational. ETFs are wrappers around stacks of stocks.
not unless the ETF leads the basket of stocks down. For example, futures often lead cash, why can't ETFs lead their constituents ? if stocks are about to go down 50%, there is nothing automatically irrational about ETFs on those stocks going down 50% first. But, as I said elsewhere, if you think it is irrational, then buy the ETF
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.
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).
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.
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.
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.
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.
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.
Stock opens at X, you buy at 0.5X, you sell at 0.9X, it goes back to X. Then the exchange breaks the 0.5x trade. Now you still have to deliver the order you sold at 0.9x, but you're buying it at X, so you've earned a neat loss.
The rational thing to do is to get a cup of coffee. Unless you enjoy losing tons of money, in which case your idea is great as well.
Yeah, this can't be overemphasized. When some widow or orphan (or more likely GS) is on the other side of the trade, then clearly it should be broken. Wouldn't want them to lose any money. /sarcasm
As you say, the rational action is not to play.
Other people have opined on this and said that, if the "clearly erroneous" rules are properly defined, then a trade should nevernevernever be broken. It should simply not be allowed to go thru. That makes more sense to me.
Edit: And for those who think this is merely hypothetical, or just whinging, you should read this: http://www.ft.com/cms/s/0/37fff9c6-0b36-11e3-bffc-00144feabd...
GS trades were broken. Hopefully the FT paywall won't block that link, it worked for me when I searched for the story. So who knows.
The rational action is not to attempt a short-term play. Having one side of your two-sided trade broken is a very bad outcome.
But if you're making a long-term play, that consideration is irrelevant. There's no "other side" of the trade for you to match up with. If you get an asset at 0.5X and then don't sell it and then the exchange breaks the trade, you get your money back and you're no worse off than when you started. But if you happen to grab an asset at 0.5X and the exchange doesn't break the trade, then you gained an asset for half of what it's worth. Now you've got a great asset in your portfolio, only you have twice as much as you should have been able to afford. That's a great move!
why are you selling at 0.9X? Why are you assuming everyone is a day-trader trying to immediately cash out?
If you believe the stock is worth a lot more than 0.5X and you're generally a buy-and-hold type investor, buy it at 0.5X and wait. If the exchange chooses to break the 0.5X trade it costs you only the opportunity cost of being able to buy something else at a good price during the next few days. And if they allow the trade, you got a great security for half price -- so you can be patient and sell at a later date, or hang on to the asset for whatever dividends it might pay out.
you are confusing various scenarios with the expectation. If you believe that a 50% decline is not justified rationally, meaning by expected future cashflows of this asset, then the asset is by definition underpriced and you should buy it. Or, stop claiming that the decline is irrational. Or, define better what you mean by irrational
> Be civil. Don't say things you wouldn't say in a face-to-face conversation. Avoid gratuitous negativity.
> When disagreeing, please reply to the argument instead of calling names. E.g. "That is idiotic; 1 + 1 is 2, not 3" can be shortened to "1 + 1 is 2, not 3."
I especially liked this quote: "The equity market is set up to dampen small movements (market makers tend to buy when others are selling), to exacerbate mid-size movements (as market makers capitulate and stops get triggered), and to dampen large movements (as circuit breakers cut off trading and let algorithms catch their breath)."
From my layman's point of view, it seems like this sort of "system behavior" is a peculiar emergent property that derives from the rules of the system and the individual actions of the actors working under those rules.
Definitely. That's the world of market microstructure. You could certainly change the rules but there might be other unintended consequences. For example, removing circuit breakers could make people less confident in the market since a fat finger order or error could mean Game Over instead of a manageable but significant loss.
Equity markets have become so complex and convoluted. It seems like a silly game of people trying to fool each other through layers of abstraction:
How can we take the fundamentally abstract idea of a company, its products, its business model, and its future potential, abstract that one level to a claim for some "portion of the company" (one share of equity, or a stock), abstract that into an index that tracks a portfolio of companies based on some abstracted notion of how to weigh different companies to model some desired strategy that tracks a market, sector, or industry. Then we're going to build software in order to abstract the task of trading whatever residual is leftover from this process amongst ourselves using formulas and algorithms that we think will outperform or trick other formulas and algorithms.
It's fascinatingly complex, which is why I suspect so many people on HN are trying to figure out how things like an ETF flash crash could happen. But for the average retail investor, it's damn-near impossible to comprehend.
Agreed. But if retail investors are allowed to plow money into the stock market, then regulators need to understand it. Which I'm not sure is the case/is entirely possible with the complexity of modern finance.
The average consumer doesn't need to know anything about the drugs she takes. She just needs to know that the drugs are FDA approved and that she can trust the FDA.
I guess it comes down to how much you trust the SEC, FINRA, NYSE, etc. to stabilize and support markets. I have no idea if they're doing a good job or not. Any thoughts?
There are opinions on both sides. Some are quite insistent that the SEC etc are not doing enough: eg. Themis, Nanex, most of the ZeroHedge crowd. I think the "SEC is doing fine" crowd is less noisy, but probably the majority.
Of course, opinions can be influenced by whether the management of the markets is to your financial benefit, and perhaps that's why there seem to be a more people saying nothing: they're heads down, quietly making a fortune ...
It's worth noting (again) that the LULD circuit breakers were introduced after the 2010 flash crash, as an attempt by the regulators to "stabilize and support" markets. In some previous events, I think they've worked better than they did on Monday.
So, the take-home for me seems to be that there are weird regulations on these types of ETFs that block liquidity (like the "current single stock circuit breaker rule") and when you take that and combine that with preset orders (mainly stop loss orders) you have all you need to create a textbook chaotic system.
The single stock circuit breakers were put into effect after the 2010 "flash crash" and they're designed to "let cooler heads prevail" when stocks or ETFs go wonky. The problem is that in a real panicky freefall, it just makes the window where the stock is trading very very small (it halts for 5 minutes, opens, hits the next breaker, halts for another 5 minutes, etc.)
It happens both up AND down. This last monday was really the first time they'd been tested en mass.
I don't see that as a problem. The circuit breaker size is 10% (5% in some markets, I believe) for 5 minutes. It would take less than 2 hours to completely obliterate a single ticker, and each market participant gets the "same" amount of play time as before.
It might slightly favor HFTs if things do change across those 5 minute downtimes. Otherwise, your orders should be just as valid before the freeze as after, no?
>If you're buying stock for short term profit you deserve to be screwed by volatility and I have no sympathy for you
These people increase market liquidity, they too serve a purpose. If only long term investors were in the market, the exchanges would end up looking like ebay.
Because most people have things they'd rather do than playing trader when their expertise is in something else. Being able to trade in and out of assets at a fair price at any time is valuable. Would you rather have your net worth tied up in a liquid index ETF or illiquid startup equity?
why not use a stop limit order? It's kind of like setting a reserve price on ebay -- sell if you want to get out of a particular position, but not if the price gets to be too low.
A 'stop loss' order will sell once the share price falls below a threshold. It will sell using a market order, meaning whatever the current best price might be.
A 'stop limit' order will sell once the share prices falls below a threshold too, but will sell using a limit order, setting a minimum price that you're prepared to be paid.
In a crashing market, stop loss orders can result in you selling stocks for pennies, regardless of their rational worth. Stop limit orders protect you from excessive price drops.
The regulations aren't "weird" and they aren't based on etfs. There are well documented trading halt conditions regulated at the country level that restrict all the equities exchanges that want to be public venues.
The weird part is that they presumably exist to reduce volatility, but if everyone has to put their order in for 2 seconds every five minutes it just makes the volatility much much worse.
If they really feel that a circuit breaker serves does something useful here (and I'm skeptical this is the case) they should stop trading for longer periods of time and allow a larger window between haltings in order to allow all trade participants put in an order and not just a few of the fastest HFT engines.
Everyone has an HFT engine. Five minutes is intended to be long enough for a human to have a think and then put their orders into their engine - then there's an opening auction and theoretically the price stabilises as the humans will have reached some kind of consensus. The circuit breakers only tripped again because they hadn't - which suggests that either there really was disagreement between market actors (and the volatility was in some sense correct), or that some participants were trading poorly - whether that's automated systems, human traders, or brokers executing retail orders.
I don't see what you think extending the circuit breaker time would accomplish? "Allowing a larger window between haltings" would defeat the whole point - if the price moves by more than 10% immediately after the re-opening auction, the circuit breaker goes off, as it's supposed to, for all the reasons it goes off whenever there's a sudden >10% price move.
So your thesis is that this circuit breaker was effective at reducing volatility for the ETF described in the top article? (I don't know how to counter your arguments, since your claims seem to contradict the empirical evidence from the original post)
No, I'm objecting to your second paragraph. I don't think the circuit breaker was particularly effective; I think the problems are fundamental and having a longer time on the circuit breaker wouldn't make any difference.
The linked article interpretation is really good as a long format, but as a very short format in EE-ish math-ish terms HN readers will likely understand, market prices are not fractal and are occasionally very noisy on small scale.
They aren't fractal in that they are strongly scale sensitive, and at a small scale over a short enough time period on an unusual day you're basically looking at noise.
As per innumerable statistical analysis given enough noise samples all possible values (of price) are eventually, however temporarily, touched.
"Lastly, if we’re concerned about protecting individual investors, we need better education and controls around the most dangerous tool in the ETF investor’s toolbox: the market order."
Seriously, those things should just be banned from retail investment and retail investment education.
> Seriously, those things should just be banned from retail investment and retail investment education.
What? That's absurd, you want to ban "buy/sell now" at the market price? There is no justification for wanting to ban the most basic and most ordinary transaction type.
Thing is, that's rarely someone's intent. You wouldn't sell all your stocks for a penny if there were no bids in the market. That's why we have things like circuit breakers and price limits.
It's not though. You and I may understand the complexity that is actually hidden in a market order and what it means for our execution risk but for many many participants it is closer to "hmmmm, goog is at $630.36? I'd take some of that. Market Order sent. I got filled at 630.45? WTF the markets are rigged, HFTs are front running me".
So I wouldn't argue for banning market orders, but I'd probably stop using them as the defaults for people. Making people set limit order prices seems like it would encourage more people to understand the market dynamics.
Do people really care about a 0.04% difference in price on stock orders? When I make a market order, I'm investing, not trading. As long as my order is within a percentage point of the quote I got when I opened the trade window, I really don't care. My intention is to make tens or hundreds of percentage points on my investment over years.
Were I trading, I might think differently, but traders should be expected to know about limit orders.
I picked those numbers to be a bit ridiculous. That said, even as a long term buy and hold participant there is some number where you don't think your investment choice makes sense.
If you encode that value into your order you are protected from flashes and guaranteed to get your order for up to that price (assuming the liquidity exists to support your order).
Then they'd just complain about partial fills and failed orders and still blame HFT, I don't see that changing the default would solve anything at all.
I suspect folks will blame HFT for ever, that isn't really my point. Having to think about price limits and partial fills is good for anyone who is attempting to make a transaction as it removes an abstraction that is dangerous in many cases.
I understand your point, I just don't think that's what would happen. The aren't going to think about those things anymore than they think about slippage with a market order. Whatever you give them, it won't match their ideal of fill me now at X price with no errors and they're going to complain either way and they're not going to think about it beforehand regardless of the default.
It buys at the current market price, which during the filling of the oder may slip as liquidity slips; that's the entire point, fill this order now no matter what. To not have such an order means having your entries and exits fail or partially fill which means you'll just have to reinvent the market order yourself to continue pushing through your order. To ban a market order is to tell me I'm not allowed to enter/exit a position in a single order, that's non-sense. If you don't want slippage, don't use a market order but that comes with the side effect of failed/partially filled orders.
>To ban a market order is to tell me I'm not allowed to enter/exit a position in a single order, that's non-sense.
You could carry on trading as you currently are. If a stock is trading $100/$100.1 and you want to buy it ('now' as you say), then just set your limit to $1000.
Of course, you will have no one to blame but yourself if, during the ~50 milliseconds it takes for the order to reach the exchange, the market makers have switched off and you end up crossing a massive spread and buying the only available offer at $600 or something. An incredibly unlikely scenario, but it can happen.
So I imagine you'll set your limit to something sensible, like $101. It'll still get filled 'now' 99.9999% of the time. But you won't be taking the risk of doing something epically stupid. There, that wasn't so hard now was it?
> So I imagine you'll set your limit to something sensible, like $101. It'll still get filled 'now' 99.9999% of the time. But you won't be taking the risk of doing something epically stupid.
Your scenario doesn't handle the case a market order does, i.e. close my position now. In a fast moving market, using limit orders for stops or exits is just going to result in partial fills or failed orders. If I want out, I want out, I don't only want out if I lose between X and Y, I want out period; that's what market orders are for, for that convenience, you accept slippage as a reality.
> There, that wasn't so hard now was it?
No, it's easy to do things that don't work, I can pump my order into /dev/null, that's easy too, and it's just as useful as a limit order for stops.
>Your scenario doesn't handle the case a market order does, i.e. close my position now.
I covered that. If you really, truly, want to sell at any price(and I can't imagine why, that is terrible trading), then you set your limit to zero.
That's all a market order is - a special case of a marketable limit order (immediate or cancel/fill and kill/etc) with the limit set to zero (in the case of a sell) or infinity (in the case of buy).
Banning vanilla market orders just forces people to acknowledge that fact, which is a good thing.
> I covered that. If you really, truly, want to sell at any price(and I can't imagine why, that is terrible trading), then you set your limit to zero.
Perhaps to avoid a margin call; your imagination is limited, you seem to forget you also have to buy/sell to exit a position when holding on is not an option. Terrible trading is holding on until you get margin called; when your risk management says get out, you get out. A stop loss isn't a stop loss if it can fail to fill or only get partially filled, a market order is exactly what one desires in a stop loss.
> That's all a market order is - a special case of a marketable limit order (immediate or cancel/fill and kill/etc) with the limit set to zero (in the case of a sell) or infinity (in the case of buy).
Yes, and thus no need to ban it.
> Banning vanilla market orders just forces people to acknowledge that fact, which is a good thing.
You can't force people to acknowledge details they don't care to know about. Ban this, ban that; it's all non-sense from people who think they can force the ignorant to learn, you can't. Banning market orders achieves nothing.
Technically, it's unknowable. Most times, you can expect it to be about what it was 5 seconds before. Out of the total number of regular trading hours in the year, in how many seconds are major ETFs transacting outside 1% above or below a quote from 5 seconds earlier? How about when you exclude periods in which the market is volatile in a newsworthy way?
"Seriously, those things should just be banned from retail investment and retail investment education."
The problem is we aren't just talking about ETFs...there were similar effects happening in individual stocks where they were down much, much greater than this ETF. We should just ban stocks for retail investors?
What's wrong with people learning about things before they throw money into something they don't understand? Banning this and banning that blindly just makes people more dependent on someone else doing their homework for them. People need to take responsibility for their own actions and read up on stuff before dumping money into something.
I think you're right but people need to learn before they do stuff....you can't walk around life being dependent on regulations protecting you. I can't even remember the last time I placed a market order.
Most people are thoroughly dependent on regulations - they're what let you e.g. walk into an unknown shop and buy food there and be confident it won't poison you.
Sure, it would be best if every retail investor learnt the market before participating - but that doesn't make it bad to take steps to protect those who don't (assuming those steps aren't particularly costly). If you can't remember the last time you placed a market order, surely it would be no big loss to you if they were banned entirely?
I'm not saying get RID of all regulations but clearly there's a limit to how much regulation....if someone can't be bothered to google "market order vs limit order" then they deserve to get their a handed to them when they decide to panic sell on one of the worst times to sell. They clearly aren't cut out for this if they are panic selling in the first place. I made money during this time partly b/c I took 2 minutes out of my day many, many years ago and learned the difference between a market and a limit order. Literally, 2 minutes! Next thing you're gonna tell me is that if someone sells at a loss (nevermind it being a "panic" or not) they should be compensated by the gains I made from their stupidity.
Let's say a regulation was passed that didn't allow market orders. Retail investors would feel "safer" b/c they think the government is protecting them. They will then be more inclined to not bother researching the companies they own, etc because, well, the government has got their back. Why not dump all our money into stocks if the government is gonna protect us, right? The problem is that there are a million ways to lose money in investing....chief among them is not spending time to do the research on the companies in which you are invested.
The best protection is to be well-informed of what is going on. Certainly, we can't know everything (such as how our food was prepared, quality of it, etc) but every investor putting money into stocks should know something as basic as a market order vs a limit order....that is NOT too much to ask.
> Retail investors would feel "safer" b/c they think the government is protecting them. They will then be more inclined to not bother researching the companies they own, etc because, well, the government has got their back.
Why would this be the case?
A regulation prohibiting market orders doesn't even in theory serve to protect against poor-quality securities that will decline in value, it protects against poor quality market price information and/or order execution that results in an order being executed at a substantially different price than expected.
It might reduce the degree to which retail investors research information on order execution between different entities through which they might trade securities, but the jump from there to it reducing the degree to which they research the underlying securities seems unwarranted (if anything, it would seem more likely to focus their research more on the securities themselves.)
But, the thing is, its not like retail investors are bothering to research and understand the issues it would address now much at all, so its not like it would actually change anything except the degree to which they get bitten by them. (And, conversely, the degree to which counterparties benefit from them getting bitten by them.)
> Let's say a regulation was passed that didn't allow market orders. Retail investors would feel "safer" b/c they think the government is protecting them. They will then be more inclined to not bother researching the companies they own, etc because, well, the government has got their back. Why not dump all our money into stocks if the government is gonna protect us, right?
I think you're greatly overestimating this effect. The government already regulates the stock market a lot. One more regulation isn't going to make retail investors suddenly start taking much bigger risks.
> Sleeping-stops kill...If you had a stop to sell if RSP crossed under $70, say, right after the open, your order became a market order, and you could have been executed anywhere in the line of terrible trades.
Is there another mechanism that serves the same purpose as a market order, but that isn't quite so vulnerable to these flash panics? Maybe something like "sell if it stays below $X for more than an hour"? Though I guess that wouldn't save you if the crash really was because of bad news.
I used to work on the algo-trading desk of a big brokerage firm (so writing trading algorithms that execute other people's orders for them), and I have to say almost always if someone sends a market order, it would be safer for them if they sent the same thing as an aggressive IOC ("Immediate or Cancel") limit order. The IOC flag gives similar semantics to a market order (in that no portion of your order is going to stay on the book if it's unfilled), but you are guaranteed to execute no worse than the limit you have set. This is clearly way better in situations where the market has big dislocations.
The problem with the IOC order is that you have execution risk. I.e. quite possibly your order isn't filled. Then if your favorite stock were to go down and stay down, you would still be holding it.
In short there is no perfect "stop loss" order. There is either price risk or execution risk - pick your poison.
That said, unlimited price risk and zero execution risk is probably NOT the optimal point to be at.
Yes, completely agree. And in fact for my own trading I don't use stops because they introduce downside that isn't there in many other situations. On the quant trading analyses that I have done, adding stops frequently makes performance strictly worse while not helping that much when things get really extremely bad, because of course there is no guarantee of liquidity at your stop level if the market is dropping like a stone.
So I've seen things like having a trigger in an order manager that at a certain price will place an aggressive IOC limit order to unwind something. In normal conditions that will behave exactly like an at-market stop loss order, except that in the case of really extreme disruption you won't get filled before your limit. So the hope is in those cases the market will bounce. You don't want to get unwound at any cost on your stop if the market is going to rapidly recover afterwards. It also means there's no information leakage if you're worried about your broker taking advantage of the information in your stop (paranoid, but yes...).
I'm not sure about that. If the market is moving in an orderly fashion, and you're trading in a very liquid asset, market orders remove a psychological impediment to trading. For someone who trades 3-5 times a year, doing a limit order requires additional consideration (making sure you're doing the right limit, setting a limit price, etc.) If you just want to buy or sell some stock for reasons totally unrelated to trading, It's rational to accept a tiny risk that the market is going to have a shit fit between when you hit submit and when your order is filled 2 seconds later when the news is quiet.
Certainly, I would never put in a market order when the market is operating under circuit-breakers and things are unstable. When things are stable, it can be a reasonable choice for someone transacting in stock who just wants it done so they can get on with other things they have to do.
But what benefit does that actually have? People aren't going to remember this interaction or learn anything, they're just to be annoyed at having to come up with that number. They might even put off the transaction.
I would be in favor of restricting the use of market orders by non-professionals during any time a market special rule is in place (circuit breakers, Rule 48, etc.) However, I think allowing them during normal market operation makes transacting easier for investors, which is also a good thing.
The whole point of a stop-loss order like that is to fire immediately, because it's meant to protect you against crashes. If RSP were to crash down to zero, then an hour after it hit $70 it would be at zero or close to it - the idea is to sell at $70 on the way down before it goes to zero.
Really you should buy the thing you actually want - a down-and-in put option struck at $70. But that would cost money, whereas you can do a stop-loss order "for free", so people prefer to do that.
IMO these stop-loss orders are bad for the market, people trying to get something for nothing, and if the increasing prevalence of flash crashes gets people to stop using them that will be do bad thing.
> The whole point of a stop-loss order like that is to fire immediately, because it's meant to protect you against crashes.
Stop losses are meant to exit you from a position, not just protect you from a crash, so it's not at all equivalent to getting a put. People use stops for profit taken when the trade is over or for cutting losses when the trade didn't go their way. It has nothing to do with getting something for free.
Your question is a touch confused. Are you asking about an alternative to stop orders or to market orders?
Stops are overused as a hedging strategy but there aren't really many alternative order types (stop limits are generally less vulnerable but not by much). If you are using stops it should because you've evaluated all your other hedging choices (options, futures, etc) and know they are right even in the face of flashes.
As for market orders the generally better choice is a fill or kill order that crosses the book.
A lot of people think of stop orders as a risk mitigation method but I think in today's markets, stop orders are a bad idea. The only "normal" investors I know who have been hurt by flash crashes are people who use stops.
A stop with a limit is perfectly fine. It's essentially saying "If the stock trades below X, sell it, but not unless its above Y." So if you bought at 80, its now at 100, and you want to make sure you make some profit, you could put in a stop loss that was at, say, 90/85. So you sell if it goes below 90, but only at better than 85.
The issue there is that in a fast moving market, you might not get filled. When the stop triggers, the order "becomes" another limit order in the limit order book, and if the market's already moved bellow your limit, you dont execute.
Also, Market Orders are ALWAYS executed before limit orders, even if the limit makes it executable. That's just the priority system of the market.
What i don´t understand is - there are arbitrage players, who calculate "real value" of the single stocks in each ETF. Aren´t they liquid enough? Because if they were, the price would not drop that much, would it?
Yeah. A human can probably spot the difference between a flash crash and a true crash, at least after making a few phone calls - but by that point the opportunity has probably gone.
Are you suggesting a market actor was manipulating the market so that no one could trade? Can you come up with a scenario where someone could make money doing that?
One scenario would be to gum up the market during a volatile time - eg to retain "value" while investors are panicking.
But I would lean towards the halts being an unintentional (as in: not well thought through) consequences of all the layers of regulation and counter-regulation.
I'm not sure. The halt is broadly applied across over the counter and exchange markets and introduces additional opacity into the system over a 5 minute window which seems like it could be useful to someone.
