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Comment by tptacek | Hacker News Reader

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?

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Clearly, both outcomes are suboptimal and inefficient - for retail traders. Both are actually instances of phantom liquidity, where the tape doesn't match the actual price that is being executed.

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.

I'd rather the SEC mandated volatility interruptions with auctions to stabilise volatile/illiquid markets in order to reduce the likelihood of big price dips (or spikes, for that matter) that cause retail investors to get stop-loss'd out of their positions.

You realize things keep happening while your volatility interrupt is in force right? Everything else in the world keeps trading. There is no guarantee when it starts trading again that it won't open 20% down. If you don't want a stop loss to trigger, don't place one.

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.

> There is no guarantee when it starts trading again that it won't open 20% down.

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

Monday saw the first ever limit down halts on major equity index futures (YM/ES/NQ) on CME Globex. It was an unmitigated disaster. It happened at a critical time (heading into the cash open), and caused chaos in the ETFs that have these futures as the underlying. Market makers price and hedge ETFs like SPY (the Spyder S&P 500 tracker) off the future. So being unable to do so since the underlying was frozen, they did the only thing they could naturally do and blew out their spreads and backed away. Even then, some unfortunate and panicky people crossed those spreads and some SPY changed hands at -14%. There is no legislating against stupidity.

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.

As it currently stands I don't think there's any guarantee that your stop-loss will sell at the price you've set anyway, rather than 10% or 20% or even more below it. The only difference is that right now it could cause all your shares to be sold for less than you expected because of a temporary market blip that lasted seconds.

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