With the electronification of markets, I think retail investors are always going to be at a disadvantage in volatile markets like Monday's. The speeds at which the markets operate today is far beyond anyone's ability to keep up with, even if they weren't at the end of a retail internet connection, with at least one layer of abstraction (i.e. their broker) between them and the market.
Fast human reaction times are on the order of 200ms, to which you need to add network latency. The HFT firms operate at single-digit millisecond timescales. By the time a retail investor sees a price on the screen, it's probably already gone.
However, there are steps the exchanges could take to reduce volatility, especially when liquidity is thin, which would help prevent the triggering of stop-loss orders. For example, they could switch from continuous CLOB trading to periodic auctions until the market stabilises. I reckon that would go a long way towards reducing instances of wild swings like we saw on Monday.
Would you rather be a retail investor in a fully automated market, with no opportunity to compete on reaction time and uniformly terrible prospects for day trading, or would you rather be a retail investor in the 1980s, paying extremely high spreads set by colluding market makers?
By definition, a 'wild swing' is a very short timeperiod event which typically doesn't affect prices too much on average. If I hold stock and it's down 50% on one day and recovers on the next, I don't really care because I'm not trying to make money off market events. What I actually care about is the stock's performance over months/years.
For most retail investors, market blips, and thus their access to low latency are irrelevent because they don't really alter the month/year picture.
Why does trading have to happen at a millisecond timescale? Wouldn't it be much easier on everybody involved if trading followed a clock tick of one second or one minute or something?
What Monday's trading indicates to me is two things:
1) the markets self correct much better than they used to. I think this is a positive and
2) that stop order should almost never be used. During the crash of 1987 stop orders were just coming into vogue as a sort of protection. The ides with them is that they are sell or buy orders that are in the money but not entered onto the CLOB(Continuous limit order book). Once the stock falls below their strike price, they spring into action and become orders to sell (or buy if you are stopping for short protection).
This has a downside of extending slides when markets go down because as markets fall stops get hit which adds to the selling which means more stops get hit, rinse and repeat.
Unfortunately this means that in a flash crash you'll get stopped out of your position and when the market recovers you'll wonder where your shares went.
Stop orders, just say no. Even if you are watching the markets, you'll be too slow to cancel them.
Have to agree here. You hear people say "buy low, sell high" all the time, but they never seem to do this with the stock market. They sell low because the ultra-short-term trend is downward, and then buy high "because the stock market looks solid now". Then they lose a ton of money and wonder why.
I dump a few thousand dollars into a total stock market index fund every few months. Monday was a non-event for me. I didn't even look at my positions. The stock market is for long-term goals, not intraday interaction.
That's meant to be the main purpose for the ETFs. As an easy way for retail investors to buy into the market with regular purchases to take advantage of cost averaging.
Not for frequent trading as a mechanism to proxy the market.
I'm not sure where you get this definition from. I'm a "retail" investor in that I use a broker (IB) instead of directly connecting to exchanges. Yet I day- and swing-trade for a living.
I've put in stop loss orders on my employee stock plan's shares before because I expected the stock to tank even outside a bear market - it did and saved a lot of money because of it.
Today, setting limit orders is a bad idea because algos will go for runs to trigger these orders and use them to their own ends.
In a sense, you just publicly announce your intentions which is never a good idea when trading or negotiating in a non-cooperative way.
Of course, this means you can only use "buy and hold" or, if you know you still have access to your trading service in volatile hours, mean reversion strategies.
Can you explain this in more detail? What is the trading strategy in which an algo uses your tiny limit order for its own ends? And aren't these retail orders just going to internalizers like Citadel anyways? Do they even hit the exchange order books?
To me it would seem that If I put in a limit order to buy something at 20% below yesterday's price, if some HFT triggers that order that's most likely a positive for me.
Or do you mean the different kinds of stop limit orders?
[+] [-] jackgavigan|10 years ago|reply
Fast human reaction times are on the order of 200ms, to which you need to add network latency. The HFT firms operate at single-digit millisecond timescales. By the time a retail investor sees a price on the screen, it's probably already gone.
However, there are steps the exchanges could take to reduce volatility, especially when liquidity is thin, which would help prevent the triggering of stop-loss orders. For example, they could switch from continuous CLOB trading to periodic auctions until the market stabilises. I reckon that would go a long way towards reducing instances of wild swings like we saw on Monday.
[+] [-] tptacek|10 years ago|reply
[+] [-] growse|10 years ago|reply
For most retail investors, market blips, and thus their access to low latency are irrelevent because they don't really alter the month/year picture.
[+] [-] mcv|10 years ago|reply
[+] [-] chollida1|10 years ago|reply
1) the markets self correct much better than they used to. I think this is a positive and
2) that stop order should almost never be used. During the crash of 1987 stop orders were just coming into vogue as a sort of protection. The ides with them is that they are sell or buy orders that are in the money but not entered onto the CLOB(Continuous limit order book). Once the stock falls below their strike price, they spring into action and become orders to sell (or buy if you are stopping for short protection).
This has a downside of extending slides when markets go down because as markets fall stops get hit which adds to the selling which means more stops get hit, rinse and repeat.
Unfortunately this means that in a flash crash you'll get stopped out of your position and when the market recovers you'll wonder where your shares went.
Stop orders, just say no. Even if you are watching the markets, you'll be too slow to cancel them.
[+] [-] jrockway|10 years ago|reply
I dump a few thousand dollars into a total stock market index fund every few months. Monday was a non-event for me. I didn't even look at my positions. The stock market is for long-term goals, not intraday interaction.
[+] [-] frgewut|10 years ago|reply
Retail investors buy and hold till retirement.
[+] [-] Frqy3|10 years ago|reply
Not for frequent trading as a mechanism to proxy the market.
[+] [-] ssanders82|10 years ago|reply
[+] [-] devonkim|10 years ago|reply
[+] [-] gnaritas|10 years ago|reply
[+] [-] dmichulke|10 years ago|reply
In a sense, you just publicly announce your intentions which is never a good idea when trading or negotiating in a non-cooperative way.
Of course, this means you can only use "buy and hold" or, if you know you still have access to your trading service in volatile hours, mean reversion strategies.
[+] [-] tptacek|10 years ago|reply
[+] [-] ant6n|10 years ago|reply
To me it would seem that If I put in a limit order to buy something at 20% below yesterday's price, if some HFT triggers that order that's most likely a positive for me.
Or do you mean the different kinds of stop limit orders?
[+] [-] ssanders82|10 years ago|reply
[+] [-] mkultra|10 years ago|reply
Check this: http://i.imgur.com/4VWtko0.png