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White Paper On What The SEC Will Likely Recommend In Response To The Flash Crash
Themis trading has submitted a white paper suggesting what the four distinct steps the SEC may take as a response to a sudden surge in complaints against pervasive and uncontrollable HFT market manipulation. These are as follows: i) Alter the existing single stock circuit breaker to include a limit up/down feature; ii) Eliminate stop-loss market orders; iii) Eliminate stub quotes and allow one-sided quotes (a stub quote is basically a place holder that a market maker uses in order to provide a two-sided quote), iv) Increase market maker requirements, including a minimal time for market makers to quote on the NBBO. We believe option 4 would be the most applicable, yet most retail investors will likely be most interested by the elimination of the traditional stop loss option that has become a staple in retail investing. Themis describes this possibility as follows: "Many investors that lost money on May 6th did so because they thought they were protecting themselves with stop-loss market orders. As the market melted down, these orders were activated and chased prices down a vicious spiral. These orders were not the cause of the Flash Crash per se, but they resulted in enormous damage to many unsuspecting traditional investors. The SEC has indicated that it may require market order “collars,” effectively converting market orders into limit orders." Schapiro is expected to release her list of recommendations shortly, and we are confident the entire HFT lobby is currently waiting patiently in her lobby to lavish her with untold riches which serve one function and one alone: convincing her that HFT does nothing but provide liquidity and collapse bid/ask spreads. The fact that it also collapses the market may be conveniently left out.
Full Themis Trading white paper (link).
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ZERO HEDGE OWNS THIS ISSUE!
I may not agree with all - or even most - ZH readers on many issues, but ZH has completely persuaded me on HFT. It's a new market. The old market is dead and buried in an avalanche of computer-propagated "price information".
Bravo, Tyler Durden.
Yup! Kudos to Tyler/ZH, they were on this before anyone else.
If SEC manages to eliminate stop-loss market orders, we could conclude that SEC officially crazy
What they would likely do is, like NSA vis a vis the telcos, require the Algos' programmers to enable a back door so that SEC and Congressional Staff have unrestricted ability to front-run the front-runners. Then all would be copacetic by them.
Question:
Does the author believe - as I am coming to believe - that "flash crashes" are inherent in algo trading? I mean whether these monkeys want them or not, it seems to me that flash crashes are now a mathematical inevitability.
Isn't it almost this simple: too few players controlling too much of the market = inevitable crashes?
In times of fear or crisis, it is always the *BID* that is withdrawn, not the ask.
This principle applies whether you trade r e a l l y s l o w l y orreallyfast.
The author cites 4 "solutions":
1) force people to stop trading if prices go "too" far, "too" fast...however those arbitrary and caprcious terms are defined
2) force brokers not to accept stop-loss orders... to give the advantage to traders who have software which can do this for them and keep it running every minute the markets are open, and motivate more people to leave the market for good
3) remove force from one aspect of the markets today, namely requiring anyone who calls himself "market maker" to provide a bid and and offer... the impact of this depends on what government-granted benefits are given to "market makers". Do we really need to make this distinction in law??
4) Increase the use of force against market makers to force them to accept more risk, and this make some of them quit
None of these things can possibly address the root problem:
1) irredeemable fiat paper money based on debt
2) insane Fed committed to increasing debt at all costs
3) too big to fail and other moral hazards like FDIC
4) interest rates set by diktat
5) community reinvestment act
6) "open market" operations and other ways of monetizing debt
7) 100's more
So the market is way way overpriced, while the risks mount. The bid will be withdrawn again. Count on it, HFT or no HFT.
WTF does eliminating Stop-Loss orders have to do with this?
Investers lost money b/c some computer algo went nutzoid, whether accidental or on purpose is for history to decide, the stop-losses triggered were a symptom not a cause.
Talk about throwing the baby out with the bath water...
the stop-loss is arguably a fool's tool, as it merely triggers an order, rather than guaranteeing the safety-net implied buy the device name. it should really be called a 'hopefully minimize losses if i happen to get lucky' order
watch how well the average stop-loss works during a large pre-open drop in a stock, and you'll find that the so-called safety-net merely triggered your order at the bottom, while everyone else's lo-ball limit-buys pulls the price right back above the previous day's close... leaving you in friggin dust, licking your wounds... and out of the game. (not always the scenario, but i have far too many scars to prove the effect).
i believe the intended logic of such a suggestion is to remove the *perception* of a safety-net where none really exists - if there's no such order, there's no mechanism to mis-manage risk. consider how differently you might invest if you did not have the ability to put in such stops.
stop-losses do not *always* do what most folks think they do. that *is* a problem.
if someone let you tag on an insurance-like fee to guarantee your stop-loss price-point, then the intended effect would be delivered.
as bent as they are, options actually deliver the desired effect better. if options could be designed with a running expiry (you pick both the price and expire), then they would be a legitimate vehicle. right now, they are as bendable as the rest of the rubbish out there.
very well said.
I used stop loss orders for about the first 3 months when I began trading. They worked well though...they executed the sale every time I used them
tnx - my stops have done exactly what i expected *most* of the time, but it only takes a flash-crash sort of day to undo a lot of successful risk management.
when i first started trading and learned about the 'stop-loss' function, i thought "wow - that is so cool - you simply cannot lose..."
i presume many folks continue to learn the ugly lesson, and many more will do so in the (near?) future...
cheers
+1
Ceerist, just ban selling.
I was always in favor of a 'downtick rule' to match the last short-selling 'uptick rule': the stock has to go down 1/4 dollar before you can buy. There is no way in an information-efficient market that a stock can change more than 5% a day.
halvord-
...er ... ? ... could you refresh your point a bit? ...?...
thanks,
- Ned
When does the new rule take effect that exempts the SEC from responding to FOIA requests?
It's pretty amusing listening to the SEC's proposals. I mean...you know they're not that stupid. They propose these new rules that will do virtually nothing to mitigate the current crisis in the equities market. HFT's being allowed to locate their computers literally on the exchange floor, the quote stuffing, naked short selling...the equity manipulation is never going away. There is too much money involved and no objective governing body that is willing to do anything about this problem. Are the exchanges going to do anything? Of course not, the money is to good. The SEC? They are part of the problem. A Lack of resources and lack of objectivity does not permit them to help. You think anyone with any authority at the SEC would do anything to alienate a potential future employer? They may be interviewing for a job at one of these firms tomorrow. Nope, we are stuck with this. Flash crashes..mini-crashes.
Question...
What would happen if they only rule they implemented was a minimum amount of time an order has to be valid before it was canceled. It'd probably eliminate the advantages the HFT's had and they'd go away...until they discovered a new way to manipulate the system.
Pay them only for successfully EXECUTED trades and CHARGE them for cancelled quotes!
The SEC will have to turn the needle abruptly in the other direction if it wants individual investors to come back into the market. The idea that 90% of orders get cancelled is mind boggling.
THE LATEST FROM UBIK
http://williambanzai7.blogspot.com/2010/09/ubik-quote-stuffing-technolog...
Why do we need an algo to provide fake liquidity? The exchanges in their quest for volume have now painted themselves into a corner. I'd rather have a very wide spread and a real market. A market with fake liquidity fails to be a market. Eliminate liquidity rebates.
Mandate a minimum order time of one second and charge an irrational amount for cancelled orders in the que for less than two seconds.
I'd gladly pay the real market commission.
How ignorant are they that they think stop loss orders are the problem?
I never thought I could wish for the days of open outcry.
That's a great question and one we never ask anymore. Why the bid and ask? If I want to sell at a price and someone wants to buy at that price...that's usually all we need. We just accept this anomaly as the norm. Why in the world do we need someone to "inject liquidity" into the market?
Why do we need someone to be "in the act of a bona-fide market making activity". I love that term. What in the world does that even mean? Could you be a little more vague?
The SEC's entire rationale for allowing MM's to naked short sale a stock is nothing more than a deliberate loophole to allow these "private, for profit, enterprises to screw investors. If someone wants to buy a stock at $2.80 a share, but no one wants to sell at that price, then there should be no transaction. Where the hell were the MM's when I bought my SUV?
+++ to both you guys.
you got the gears going on that one.
I wouldn't like to call it between Joe Saluzzi/Sol Arnuk and Tyler - Joe's also been talking about HFT and its effect for quite a while now, he's been a 'must watch' for me whenever he's been on Bloomberg TV (there are quite a few on YouTube).
DavidC
This sort of nonsense is why I've stopped trading stocks altogether. I can manage my risk *much* better using options, so that's all I trade. Like other commenters on this article, I've had my share of stops hit, only to see price continue in my original favorable direction.
Overnight gap risk? No problem. My risk is always limited and known ahead of time.
Flash crash? Same answer. In fact, a flash crash is actually a golden opportunity for an options trader who sells premium to panicked stock traders.
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