Mini flash crash? Trading anomalies on manic Monday hit small investors
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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.
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.
You do if you get stop-loss'd out of the position at an unrealistically low price.
If you don't understand proper hedging for your trade, you aren't easy pickings for HFT algorithms, you are easy pickings for everyone in the market.
History has shown me that I shouldn't be trading individual securities!
A trader will usually have many positions open, and successful traders have a plan for every position. Stops are one tool that a trader can use to execute that plan, usually to cut their losses on one of the many trades that they know will go against them. A loss on a particular position is not a disaster and every trade's plan accounts for the possibility of having to exit with a loss. This is much more important to traders than investors because traders make or lose money based on the behavior of the market; investors make or lose money based on the success or failure of the underlying businesses they own, so buying or selling an asset based on market behavior is not appropriate.
Traders are well aware of the risks of using stops: information leakage (stop-hunters), exposure to bad data, and bouts of illiquidity. Some of those risks can be mitigated by using stop-limit orders instead of the normal stop-market type, but not all, and stop-limit orders carry the risk of accumulating additional losses without exiting. Everyone knows all of these things; there are no surprises. Weep not for the unfortunate trader. He knows it's just part of the business.
HFT is just another name for front running at the millisecond scale.
First in an order book you have many different orders for many different prices and quantities on both the buy and sell side. At any given price, at any given time, in an order book you can have more buyers at a price than sellers (or vice versa). How do you decide tie breakers? One common way is to do FIFO matching, this means that the participant that had an order in the longest gets filled before someone who had one in a shorter amount of time. The higher your time resolution the less viable this gets.
Second, there is also a desire to get OUT of the market. So as you process new information you realize that your current orders are riskier than you anticipated, so you want to cancel them. The longer it takes you to cancel them the more risk you are exposed to. In the case of market makers this risk will get passed on to their customers in the form of higher spreads and less liquidity.
Third, there is no 1 place where trading happens. Trading happens in hundreds of venues around the world in just as many jurisdictions. They would all need to do distributed clock/queue sync for higher timescales to feasibly change anything. Global distributed clock/queue sync is a Hard Problem TM.
In short, it is much harder to do non-continuous time trading than the alternatives without obvious benefit and with lots of potential unintended consequences.
Imagine you have a stop loss, which doesn't trigger, then the market vol interrupts, then the price opens 10% below your stop loss.
Oops, you'd be moaning about that instead.
That's why I used the words "reduce the likelihood" instead of "eliminate".
As to the efficacy and benefits of volatility interruptions, research has been carried out on this - 'Price Discovery in European Volatility Interruptions': http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2365772
Then when ES and the other futures did unfreeze, they promptly plunged to a second limit down in extremely thin trade. Why so thin? Because when you stop trading, everyone empties out of the orderbook, and they don't necessarily dive straight back in once it unfreezes. Liquidity gradually comes back as participants assess that the price is stable and they can start quoting again.
Monday was not a good day for your argument.
One also has to keep in mind that retail traders are often matched with other retail traders in the same brokerage; their orders probably never make it as far as Getco, Citadel, etc
NYSE's concept of DMMs is not a bad compromise between the Wild West of full automation and the corrupt 80s fatso that takes a huge spread. Unfortunately, this solution doesn't scale well.
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.
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.
Retail investors buy and hold till retirement.
Not for frequent trading as a mechanism to proxy the market.
Trading and investing are completely different animals, which you as a trader know very well.
Typically a "retail investor" is thought of as someone who uses a retail broker. That is, as opposed to using an IBank's trading desk, an internal trading platform, bloomberg, etc.
http://lexicon.ft.com/Term?term=retail-investor
EDIT: This is the definition used by the FINRA (Financial Industry Regulatory Authority):
“Retail investor” means any person other than an institutional investor, regardless of whether the person has an account with a member. “Institutional investor” includes a bank, savings and loan association, insurance company, registered investment company, SEC or state registered investment adviser, natural person or entity with total assets of at least $50M, government entity, certain employee benefit plans with at least 100 participants (but not any participant of such plans), FINRA members and their registered persons, and any person acting solely on behalf of an institutional investor.
At the end of the day these terms largely are undefined and used loosely. Is a day trader with a TT terminal in their home a "retail investor"? If so, some of the biggest movers in options markets in the world are "retail investors".
The needs of that person vs someone who trades a couple of times a month via Robinhood are clearly much different.
http://lexicon.ft.com/Term?term=proprietary-trading
I don't see why an individual day trader (even if he has a TT terminal, whatever that might be, at home) wouldn't be considered a "retail investor".
Again, these terms are loosely defined in the industry and the only reason it is important is because of the behavioral expectations.
If you trade all day, whether with your own money or someone else's, on professional trading platforms (which TT or trading technologies is a very commonly used example) you should be held to different standards than someone who occasionally buys and sells shares via etrade. It is your job at that point to understand precisely how stop loss orders work and no one should give you sympathy when you do your job poorly.
If we aren't going to use "retail investor" to distinguish between those 2 use cases thats fine, but we need a new terminology in that case.
Google's own definition:
"A retail investor is an individual who purchases securities for his or her own personal account rather than for an organization. Retail investors typically trade in much smaller amounts than institutional investors such as mutual funds, pensions, or university endowments."
FINRA clearly has a different definition than google. The google definition doesn't seem to hold for high volume professional traders. You yourself said "you're a professional when you're investing other people's money."
Largely it quite simply doesn't matter what definition you describe, but when people say things like "HFT is bad for retail investors" or "Flash crashes on Monday really hurt retail investors" it is important to understand the nuance.
It is also important to understand the context. When you are sitting in an options arcade and a trader says retail investor, they are quite simply NOT referring to themselves, even though by several definitions they are retail investors. When FINRA uses retail investor in their documents they also mean something different than the google definition.
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.
When price drops from 100 to 90, there may be a few people that have stops at 89.90. Someone with firepower could go short at 90 (which is not so risky if you know the order book), go down the 10 ct, trigger the stops and cover your short when you see the orders are getting filled.
I read about much more sophisticated variants out there, e.g., the market maker selling order book information for high prices or selling high-speed access to this information but I'd have to search for it.
I don't understand your trade at all. Could you explain it precisely with the orders someone would put in to take advantage of that trade?
Basically, you don't know the stops are there; you make an educated guess.
In 2015, at most exchanges dealing in US equities, the "market maker" is reading the same tape as everyone else hooked up to the exchange. Your scenario is literally selling access to the outdated output of an API to which non-outdated output is available for the usual subscription fee. This sounds far-fetched. I also think anyone who believes this scenario to be plausible has an idea of what "order book information" contains which is likely not an accurate representation of what they actually expose over the wire. (It's like folks who think Facebook sells customer data to advertisers. Seriously -- where's the API you can hit that does that? That needs to be a thing that exists in the world for this claim to be true.)
Using this information is generally possible for any intermediary (bank, broker, ..)
To be clear, I am not saying everybody does it but I think that they can, they want to and regulatory oversight in the past could not even keep track of the total stock of a broker (see MF Global).
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?
However, even then you might have bad luck such as in this case (which admittedly doesn't happen very often)
http://www.bloomberg.com/news/articles/2010-10-18/nyse-euron...
If I put in a limit order to buy some stock at 20% discount, yes I'm announcing my intention to buy. Is my order for crumbs going to provide the floor on the price because I 'announced my intention'? I feel it's more likely in a moment of volatility like this, that I pick up some bargain. What bad thing may happen except actual bugs with limit orders, which shouldn't really happen?
The interesting bit is that the decision to cancel the trades seems very arbitrary, at the very least to me.
But stops probably more important that limits because they can be used to "buy cheaper" or "sell more expensive"
So a acting "spontaneously" instead of having orders waiting is probably preferable when mean-reverting.
Maybe you sit at the bid, maybe the midpoint, maybe hit the ask, but it for sure won't be a market order.
Check this: http://i.imgur.com/4VWtko0.png