The Season Of The Glitch (Or "Why Retail Investors Have No Chance")

Tyler Durden's picture

Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

Over the past two months, more than 90 Wall Street Journal articles have used the word “glitch”. A few choice selections below:

Bank of New York Mellon Corp.’s chief executive warned clients that his firm wouldn’t be able to solve all pricing problems caused by a computer glitch before markets open Monday.

– “BNY Mellon Races to Fix Pricing Glitches Before Markets Open Monday”, August 30, 2015


A computer glitch is preventing hundreds of mutual and exchange-traded funds from providing investors with the values of their holdings, complicating trading in some of the most widely held investments.

– “A New Computer Glitch is Rocking the Mutual Fund Industry”, August 26, 2015


Bank says data loss was due to software glitch.

– “Deutsche Bank Didn’t Archive Chats Used by Some Employees Tied to Libor Probe”, July 30, 2015


NYSE explanation confirms software glitch as cause, following initial fears of a cyberattack.

– “NYSE Says Wednesday Outage Caused by Software Update”, July 10, 2015


Some TD Ameritrade Holding Corp. customers experienced delays in placing orders Friday morning due to a software glitch, the brokerage said..

– “TD Ameritrade Experienced Order Routing, Messaging Problems”, July 10, 2015 

Thousands of investors with stop-loss orders on their ETFs saw those positions crushed in the first 30 minutes of trading last Monday, August 24th. Seeing a price blow right through your stop is perhaps the worst experience in all of investing because it seems like such a betrayal. “Hey, isn’t this what a smart investor is supposed to do? What do you mean there was no liquidity at my stop? What do you mean I got filled $5 below my stop? Wait… now the price is back above my stop! Is this for real?”  Welcome to the Big Leagues of Investing Pain.

What happened last Monday morning, when Apple was down 11% and the VIX couldn’t be priced and the CNBC anchors looked like they were going to vomit, was not a glitch. Yes, a flawed SunGard pricing platform was part of the proximate cause, but the structural problem here – and the reason this sort of dislocation WILL happen again, soon and more severely – is that a vast crowd of market participants – let’s call them Investors – are making a classic mistake. It’s what a statistics professor would call a “category error”, and it’s a heartbreaker.

Moreover, there’s a slightly less vast crowd of market participants – let’s call them Market Makers and The Sell Side – who are only too happy to perpetuate and encourage this category error. Not for nothing, but Virtu and Volant and other HFT “liquidity providers” had their most profitable day last Monday since … well, since the Flash Crash of 2010. So if you’re a Market Maker or you’re on The Sell Side or you’re one of their media apologists, you call last week’s price dislocations a “glitch” and misdirect everyone’s attention to total red herrings like supposed forced liquidations of risk parity strategies. Wash, rinse, repeat.

The category error made by most Investors today, from your retired father-in-law to the largest sovereign wealth fund, is to confuse an allocation for an investment. If you treat an allocation like an investment… if you think about buying and selling an ETF in the same way that you think about buying and selling stock in a real-life company with real-life cash flows… you’re making the same mistake that currency traders made earlier this year with the Swiss Franc (read “Ghost in the Machine” for more). You’re making a category error, and one day – maybe last Monday or maybe next Monday – that mistake will come back to haunt you.

The simple fact is that there’s precious little investing in markets today – understood as buying a fractional ownership position in the real-life cash flows of a real-life company – a casualty of policy-driven markets where real-life fundamentals mean next to nothing for market returns. Instead, it’s all portfolio positioning, all allocation, all the time. But most Investors still maintain the pleasant illusion that what they’re doing is some form of stock-picking, some form of their traditional understanding of what it means to be an Investor. It’s the story they tell themselves and each other to get through the day, and the people who hold the media cameras and microphones are only too happy to perpetuate this particular form of filtered reality.

Now there’s absolutely nothing wrong with allocating rather than investing. In fact, as my partners Lee Partridge and Rusty Guinn never tire of saying, smart allocation is going to be responsible for the vast majority of public market portfolio returns over time for almost all investors. But that’s not the mythology that exists around markets. You don't read Barron’s profiles about Great Allocators. No, you read about Great Investors, heroically making their stock-picking way in a sea of troubles. It’s 99% stochastics and probability distributions – really, it is – but since when did that make a myth less influential? So we gladly pay outrageous fees to the Great Investors who walk among us, even if most of us will never enjoy the outsized returns that won their reputations. So we search and search for the next Great Investor, even if the number of Great Investors in the world is exactly what enough random rolls of the dice would produce with Ordinary Investors. So we all aspire to be Great Investors, even if almost all of what we do – like buying an ETF – is allocating rather than investing.

The key letter in an ETF is the F. It’s a Fund, with exactly the same meaning of the word as applied to a mutual fund. It’s an allocation to a basket of securities with some sort of common attribute or factor that you want represented in your overall portfolio, not a fractional piece of an asset that you want to directly own. Yes, unlike a mutual fund you CAN buy and sell an ETF just like a single name stock, but that doesn’t mean you SHOULD. Like so many things in our modern world, the exchange traded nature of the ETF is a benefit for the few (Market Makers and The Sell Side) that has been sold falsely as a benefit for the many (Investors). It’s not a benefit for Investors. On the contrary, it’s a detriment. Investors who would never in a million years consider trading in and out of a mutual fund do it all the time with an exchange traded fund, and as a result their thoughtful ETF allocation becomes just another chip in the stock market casino. This isn’t a feature. It’s a bug.

What we saw last Monday morning was a specific manifestation of the behavioral fallacy of a category error, one that cost a lot of Investors a lot of money. Investors routinely put stop-loss orders on their ETFs. Why? Because… you know, this is what Great Investors do. They let their winners run and they limit their losses. Everyone knows this. It’s part of our accepted mythology, the Common Knowledge of investing. But here’s the truth. If you’re an Investor with a capital I (as opposed to a Trader with a capital T), there’s no good reason to put a stop-loss on an ETF or any other allocation instrument. I know. Crazy. And I’m sure I’ll get 100 irate unsubscribe notices from true-believing Investors for this heresy. So be it.

Think of it this way… what is the meaning of an allocation? Answer: it’s a return stream with a certain set of qualities that for whatever reason – maybe diversification, maybe sheer greed, maybe something else – you believe that your portfolio should possess. Now ask yourself this: what does price have to do with this meaning of an allocation? Answer: very little, at least in and of itself. Are those return stream qualities that you prize in your portfolio significantly altered just because the per-share price of a representation of this return stream is now just below some arbitrary price line that you set? Of course not. More generally, those return stream qualities can only be understood… should only be understood… in the context of what else is in your portfolio. I’m not saying that the price of this desired return stream means nothing. I’m saying that it means nothing in and of itself. An allocation has contingent meaning, not absolute meaning, and it should be evaluated on its relative merits, including price. There’s nothing contingent about a stop-loss order. It’s entirely specific to that security… I want it at this price and I don’t want it at that price, and that’s not the right way to think about an allocation.

One of my very first Epsilon Theory notes, “The Tao of Portfolio Management,” was on this distinction between investing (what I called stock-picking in that note) and allocation (what I called top-down portfolio construction), and the ecological fallacy that drives category errors and a whole host of other market mistakes. It wasn’t a particularly popular note then, and this note probably won’t be, either. But I think it’s one of the most important things I’ve got to say.

Why do I think it’s important? Because this category error goes way beyond whether or not you put stop-loss orders on ETFs. It enshrines myopic price considerations as the end-all and be-all for portfolio allocation decisions, and it accelerates the casino-fication of modern capital markets, both of which I think are absolute tragedies. For Investors, anyway. It’s a wash for Traders… just gives them a bigger playground. And it’s the gift that keeps on giving for Market Makers and The Sell Side. 

Why do I think it’s important? Because there are so many Investors making this category error and they are going to continue to be, at best, scared out of their minds and, at worst, totally run over by the Traders who are dominating these casino games. This isn’t the time or the place to dive into gamma trading or volatility skew hedges or liquidity replenishment points. But let me say this. If you don’t already understand what, say, a gamma hedge is, then you have ZERO chance of successfully trading your portfolio in reaction to the daily “news”. You’re going to be whipsawed mercilessly by these Hollow Markets, especially now that the Fed and the PBOC are playing a giant game of Chicken and are no longer working in unison to pump up global asset prices.

One of the best pieces of advice I ever got as an Investor was to take what the market gives you. Right now the market isn’t giving us much, at least not the sort of stock-picking opportunities that most Investors want. Or think they want. That’s okay. This, too, shall pass. Eventually. Maybe. But what’s not okay is to confuse what the market IS giving us, which is the opportunity to make long-term portfolio allocation decisions, for the sort of active trading opportunity that fits our market mythology. It’s easy to confuse the two, particularly when there are powerful interests that profit from the confusion and the mythology. Market Makers and The Sell Side want to speed us up, both in the pace of our decision making and in the securities we use to implement those decisions, and if anything goes awry … well, it must have been a glitch. In truth, it’s time to slow down, both in our process and in the nature of the securities we buy and sell. And you might want to turn off the TV while you’re at it.  

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LetThemEatRand's picture

"Welcome to the Big Leagues of Investing Pain."

Most people could accept losing in the big league.  But Yellen has a league of her own, and it's rigged.  There's no crying foul in rigged baseball.

kaiserhoff's picture

This is one of a thousand reasons,

  god invented options.

There will never be liquidity in a panic.

bid the soldiers shoot's picture

'god invented options'


I think you got your divinities upside down


bid the soldiers shoot's picture


Don't it always seem to go
That you don't know what you've got
Till it's gone.

Joni M.

RaceToTheBottom's picture

Replace the word markets with computer programs every time it occurs in this article and it MIGHT be worth reading.

Oracle of Kypseli's picture

Retail investors can not view stops or aks/bids below the latest. Not a fair fight

Larry Dallas's picture

Stops will continue to be blown through. Again.

Omen IV's picture

a stop limit prevents this eventuality - but doesnt protect if there is no recovery  on a  major downslide 

BadDog's picture

0 hedge and 0 stop.

One And Only's picture

During the flash crash of 2010 I was short and tried to cover...nope. So, oddly enough to protect profits I figured I'd "hedge" by buying puts...nope. I couldn't buy-to-cover, I couldn't sell, I couldn't buy options.

Albeit I was able to close my position and this situation didn't last very long but it was bizarre...I remember thinking to myself this is so bizaree that I can't buy.

Something is wrong with the market as zerohedge has been saying.

The crash on August 24th....I couldn't buy either. I wasn't even getting quotes...I was one of those TD Ameritrade clients where nothing was working.

I'll make a note that I've never had these problems when the market melts up day after day after day. I'm convinced the market is rigged against me and I am not trading anymore, it's simply not worth it.

Caviar Emptor's picture

During 2010 flash crash I was long puts. Needless to say those puts roared. I tried to sell to close near the bottom. Nothing. For 24 minutes no response until the market turned around. THEN my offer was hit. Although I made some nice dough I got cheated out of a HUGE gain. That was not allowed.

I took it to the management of the online broker. No tears, no dice.
I took my data to the exchange level (the phila actually). They actually found not only my trades, they also had data on my offer that never was allowed to be hit near the bottom of the crash. Want to hear the excuse? Sorry, all trades were frozen at that time and there's no appeal possible.

In other words, arbitrarily, the exchanges (and broker buddies) decide who can win and lose. At their discretion. Undoubtedly, the sell-side dude taking the other side of my trade had some juice with the exchanges and had the trades "frozen". Convenient.

Loismustdie's picture

Wait, we all agree that these flash crashes are overall a bad thing and not indicative of a healthy market yet you are upset you can't figure a way to max profit from said unhealthy movement?

I will have to think about what to call that mindset. Hypocritical doesn't seem to fit.

algol_dog's picture

"I remember thinking to myself this is so bizarre that I can't buy. Something is wrong with the market as zerohedge has been saying."


Think of it this way. If the market wasn't fucked up to begin with, you'd never had the chance to cover at those levels in the first place. So because the market is fucked, you had a one in a million shot at crazy returns, but the fucked up market said, "fuck off, I'm fucked up and you can't get your money". It's a wash really ~

khnum's picture

when the elephants dance the mice get squished...'glitch'

kevinearick's picture

Anonymous Cash, is the only money supply, the name, which matters. Take a look for your self.


So, we peel the scabs off, layer by layer, so the critters don’t forget, and CSS/CPS will be the last, and most painful, for the majority. 

Whether the bear or the empire is in the corner, who is hunting who, is a matter of perspective.

Bet on GAFA some more.

buzzsaw99's picture

there's nothing wrong with the big long only, low expense ratio etfs (and other similar funds). the biggest mistake i see is so many people buy stuff they don't understand like 3X short funds and other crap like that.

Ralph Spoilsport's picture

Do you know of any average Joe investor that made money on a 3X fund, short or long? I know a few who got burned though. Another "product" nobody needs.

buzzsaw99's picture

agreud. levered funds, options, derivatives, swaps, high expense hedge funds employing various fake ass systems. so many average joes, charities, endowments, pension funds, et al buy that crap and pay and pay and pay based on notional gains that evaporate the day they go to cash out. either that or the decay rate eats them alive over time. keep it simple. anything over a 0.25% management fee is usurious in a zirp world and will end in tears. the only ones getting rich off those schemes are the maggots.

Loismustdie's picture

I'm up 300% this year alone.

But I am not an investor. I am a trader. The products you are talking about are not meant to be investments, not meant to be held for long periods of time. They are meant to track and take advantage of short term movements in X, and if you are right, can be a very good tool.

My best advice is don't get greedy. I try and make 4 to 7% per trade in NUGT or DUST and quite literally that's all I trade. In, out, rinse and repeat. In IRAs, in, out, wait for settlement (HUGE!) and then rinse and repeat, depending on which way I think miners will go.

It's not easy money. It's nerve racking, but it's doable.

But again, not for investors.

SillySalesmanQuestion's picture

Mom and Pop, retail and institutional investors are the "low hanging fruit and fresh meat" for the HFT's and algos...It's like Alcorn St. vs Alabama in football. you can't beat their speed.

Ralph Spoilsport's picture

"Hey Maw, do you know what "Gamma Hedging" is?"

"I added it to Firefox yesterday Harry. Quit stalling and call T D Ameritrade!"

tc06rtw's picture

 “… Gamma Hedging’s  married to  Gampa Hedging!

Whatta's picture

I don't know Gamma and Gampa Hedging, but I have met their Uncle Dell Tuh Hedging. He's been a real mover and shaker in this loose-azzed market.

Amy G. Dala's picture

I think most people would be better off if they changed their personal definition of "investment" to:

"I made what I thought was a good trade, and now it has gone bad.  My best hope is to get some of my money back."

Investments are trades gone bad.

New_Meat's picture

"It’s what a statistics professor would call a “category error”, and it’s a heartbreaker."

It's what mature software engineers call a "DEFECT".  And it's your heart that is breaking, not Wall Street's.

- Ned

{dang, I did not intend to imply that Wall Street or anyone there has a heart.}

Winston Smith 2009's picture

As long as HFTs are allowed, the answer is not "day trading," but "bubble trading". Invest in huge, highly diversified index funds at each bottom and sell as close as possible to the top, buy again at the bottom, etc. 

Redart's picture

Retail traders use stops, professionals double down "martingaling"

Ban KKiller's picture

How many billions have come out of hedge funds THIS WEEK? I'll bet it was the biggest ratio for the year. Any Batemans know? "Bateman? He's in the bathroom doing blow."

Whatta's picture

"We're from Virtu, and we're here to help"

BouncingCat's picture

No, no, no, no NO! Only idiots use stop-loss orders or market orders or buy or sell. A stop-limit order perhaps, but all orders should be limit orders.

highwaytoserfdom's picture
Sunguard has always been a crony capital FED sponsored deal there is no way any of the Seven should  be able to assign the debt to Fidelity.  The FED has done this in other 2005 deals including Toys R Us...   These are the worst of the worst look at KKR and Petraeus, Goldman, Bain Blackstone all have inside track to  credit,   The danger is these guys are Competition eliminators and globalist that have caused destruction with refuges from CFR criminal policy...    Look at Blackston's Fink inventing MBS  having AIG insure the mess...  These people are directly responsible for destroying any form of Marshal plan trust with this insane Carter, Regan (Bush after they tried to wack him) Bush (worst) Clinton (even worse) Bush(Chaney Baby bush had a Liberty university lobotomy) Don't even want to comment on the Peace prize winner..    These clowns won't be happy until police authoritarian, militarized, common core obedient workers get every cent stolen   on there pensions and they deserve it...  non enforcement trust, monopolies....    and every city state bond...   broke list unless they start putting these Banksters and political hacks in jail.... under threat  unless enforcement is done..   THE WORST PART IS THESE FASCIST HAD 4000 LAWYERS WORKING ON SECRET DEALS UN ACCOUNTABLE... Your solution is not some second generation Bankruptcy Hotel luxury foreign globalist builder... Check it out, less people from Mexico are coming here..  The wall is to keep us in and freeze capx for everyone except the oligarchs...  They don't care about you or people anywhere  just more for them....  Wake up

The seven investors — led by Silver Lake Partners and including TPG, Blackstone, Bain Capital, Providence, KKR and Goldman Sachs’ private equity unit — filed in June to sell SunGard via an initial public offering, but opted for a trade sale because FIS offered greater certainty, according to Mr Norcross. It is rare for private equity groups to hold investments for more than five years, given the 10-year life cycle of most of their funds.

"Everything is Rigged"   Matt Taibbi


tangent's picture

This is why I 1) don't have a stop price except in my own computer system that will put in the order 2) always put the order in at the last trading price and 3) never do a market price order.

silverserfer's picture

might as well play some slots with the grandmas at your local indian casino. the odds are actually slightly better there. 

GreatUncle's picture

No glitch ... the new normal.

The larger the moves in the market the more small investors are not able to ride these waves they need to get out.

It is that simple.

In reality this is what happened in China where those middle income people lost everything the market move is bigger than their worth.

NoIdea's picture

It's not a glitch, it's a feature of the system.

overmedicatedundersexed's picture

don't ask about 2008, that's when the man behind the curtain got exposed..end of this week had a position in srty..premarket wanted to take a profit so put a sell in below the bid- immediately the bid dropped below my sell, 3 times they dropped the bid as I adjusted my sell lower. was there a bid at the higher price? only on my stock order system I these markets..we are nuts. It's a big club and we ain't in it.

yogibear's picture

Marjor players want to take out those stops. Mine them.