"Something Disturbing Happened" - A Futures Trader Has Some Words Of Warning

Two days after we posted a note by a commodity trader according to whom "What Is Happening Has Absolutely No Reasonable Explanation" late last night we received another warning from a futures trader, one which is applicable to everyone who also trades futures and may be unfamiliar with the recent changes in Nymex and Globex "price banding."  This is what he said yesterday.

Hi, I'm a daytrader and I read your site almost every day. Something disturbing happened this morning. I bought a nymex copper contract with an attached stop limit and take profit. My stop got rejected by the exchange. I think it was in pending mode. I ignored it and when the market moved up, i moved the stop up. Then the exchange accepted it. My take profit order got hit instead. Then, I shorted an ES. Again, the market rejected my stop limit.


Luckily the market went down so I was able to play around with the stop to see what worked - i moved it within 4 points of the market, the exchange accepted it, and when it reversed, the stop got filled.


I have been attaching stop limits to all my trades forever. They are always initially placed the same percentage away from the entry trade. I did not change anything today. There has never been a problem. Apparently, Globex & Nymex have introduced something called 'price banding' and on ES, the band for stop limits is now only 6 points.


That is not far enough away for me and I'm sure it's the same for many other traders.


The price bands are also apparently dynamic, so if the price moves, the stop which was accepted by the exchange could now become invalid and will not get filled on a reversal. This has major implications, I don't think I need to explain them to you.

Not to us, but certainly to all those other daytraders who see a sudden spike or dip in the market (or any given commodity), only to have their tight stop threshold triggered and be forced out of the original trade, even as the market immediately returns to its original, pre-momentum ignition level, leading many to scream in powerless fury at their computer screens over a loss that was the result of what may appear to have been a senseless move.

Some additional words of warning from us: whether trading futures or plain vanilla securities with attached stops, all the data is ultimately sold by either internalizers or exchanges to HFTs who pay lots of money to find the critical "pin" points that inflict the most pain and force the biggest market squeezes, either to the up or downside. While this may not be a major issue for long-term investors, day traders should beware as this is the activity that tends to result in violent algo-generated intraday spikes that stop out the most traders - there is nothing more that algos love than market orders, and right after that, converting a limit order into a market order - are then accelerate the direction move by covering their trade, allowing HFTs to pocket the incremental spread. 

This is also why increasingly more trading is shifting to dark pools (where HFTs also dominate activity), and why lit market liquidity has collapsed over the past few years, as HFTs are directionally unbiased, but will promptly frontrun any "whale" order - most of these are upward biased - and will just as violently cause a market "stop out" any time there is a critical mass of stop orders at key levels.