Ishares ETFs look Flash Crashy

[ERD50]

I wonder if we'll hear any stories from the other side? Anyone here get taken out with a Stop Loss order on the dip in any of the these ETFs?

I'll say it again, the exception to my 'never say never' guidepost:

NEVER set a stop loss order!​

-ERD50

 

[NW-Bound]

And I did not have Internet access yesterday until coming into town after market close. Darn!

It pays to watch the market, even if you don't intend to trade.

If you snooze, you lose. Well, perhaps you do not really lose, but don't win. And I want to win, to scoop up bargains. But I have to be able to see it first.

 

[ESRwannabe]

Maybe I need to start keeping some excess cash around with open limit buy orders.

Every time these market anomalies happen I'm broke.

 

[Fermion]

I have been digging around in the dusty corners of my trading accounts, looking for some more cash to put together. I have a tiny loss in 1000 shares of VXUS I could harvest...that ETF has been pretty horrible since I bought it like 2 years ago? I wish our house was already sold. I would be flush with cash then since it is paid off. I could have made a mint on something like this Ishares glitch.

 

[NW-Bound]

Maxing out your margin account yet, my friend?

 

[Fermion]

Maxing out your margin account yet, my friend?

I haven't touched margin, but do you know how incredibly hard it is to look at my Optionshouse account and see that available margin figure (I think it is like $400,000 margin available) when there are bargains like sub $95 Apple? I need the house sold. Then I can have a few hundred k to play with and a few hundred k for living expenses for the next 5 years. Would not have to sell a single stock during a 5 year decline.

 

[FUEGO]

Maxing out your margin account yet, my friend?

I almost decided to go on margin yesterday to pick up even more of the ishares. Couldn't stomach more than 1 lot of the two ishares etfs I picked up. Didn't want to blow up my ER in case things went sideways.

Luckily DW reminded me of blowing up on margin back in 2000 or so during the dot com bust. $10,000 or so lost, cheap tuition.

 

[NW-Bound]

The most I have gone on margin was one time in 2010, and it was only for 2% of portfolio. I had cash, but it was in places like I-bonds and stable value funds that I did not want to transfer out to cover what should have been a short-term play.

This trade dragged out for a few months. I did make some money, but the margin interest rate at my brokers was high and ate significantly into my profit.

I have not been on margin since, nor before that. I believe in not betting what I am not prepared to lose.

 

[imoldernu]

Can't get shot for having an opinion, so here's my thinking on the stock market today. Sometimes it's a good thing to see what the minority is thinking.
So: HFT, ETFs, Algorithms... and the Black Box

A Millisecond = One one thousandth of a second.

As well as being the cause of market instability, possibly the single most efficient tool for changing the balance of wealth in the US.

Bumping this, as I watch Fox Business with Mark Cuban ranting on this very point. No holds barred he discussed the many programmed algorithms working in tandem... We don't usually see this open anger. I lost about fifty dollars, but I imagine Mark lost a bit more.

Really fun to watch the spin on this.

Brings the question... "Do you believe that your trading happens in real time, or are the market controls inadequate?"

Where are the trillions of dollars lost in the market going? Do they just disappear?

Just asking.

 

[MichaelB]

Where are the trillions of dollars lost in the market going? Do they just disappear?

It's not a loss of money, it is a change in value. Just like when the price of a gallon of gasoline declines from $4 to $2.50, there is not any less gasoline.

 

[NW-Bound]

Where are the trillions of dollars lost in the market going? Do they just disappear?

Yes, stock market values appear out of thin air, and can disappear into the same place.

On a typical day, only 1% of even a liquid stock like Apple changes hand. If that 1% of shares goes up $10 according to the price agreed to by buyers and sellers, the owners of the remaining 99% shares all feel richer though they take no part in the transaction. If the %1 of shares is changing hand at a price $10 lower, the other 99% of share owners all feel poorer.

Stock values are ethereal, to borrow from Alan Greenspan. I just hope they hold until I need to convert them to consumables like bread and steak.

PS. So why do I own stocks? Because everything else is also ethereal. Bonds, cash, paper money, gold, real estate. Nothing is permanent. We do not have eternal life either. So, it does not matter that much.

 

[bingybear]

I wonder if we'll hear any stories from the other side? Anyone here get taken out with a Stop Loss order on the dip in any of the these ETFs?

I'll say it again, the exception to my 'never say never' guidepost:

NEVER set a stop loss order!​

-ERD50

Sorry, not the other side. I remember looking yahoo finance early monday and notice some of my watch list was down 16% to 32% but the market was down 4% or so. It wasn't all of them. So what was different with these? PWV, PKW, DVY, SDY, SCHG... few others too? Finally dawned on me... liquidity (or lack there of). Stop loss order or market order at the beginning of the day. And there were probably a fair number of market orders that day ... just as bad as stop loss.

When I buy or sell.. I use a limit order, full stop. A market order is dangerous if there are not enough orders on the other side... I always use a limit to prevent paying way to much or selling for way too low. OK, I may miss it if the limit is too tight.... but I'm not getting 30% less than I thought it would be.

 

[audreyh1]

I also was imagining all those folks getting the stop loss orders filled - way under the specified price. With no liquidity there is a big whoosh.

 

[Fermion]

I use limit orders too but that is one thing that kept me from getting a better deal on Monday. The stock I was trying to buy kept increasing past my limit buy order before I could hit the send button. I would then increase the limit buy by $0.20 and before I could click send it was up $0.30 more. I guess that is how a flash crash and flash recovery works.

 

[NW-Bound]

I also was imagining all those folks getting the stop loss orders filled - way under the specified price. With no liquidity there is a big whoosh.

One can use a stop-limit order, also called stop-limit-on-quote order, which is a stop order that turns into a limit order when the stop is triggered. Of course, it may not get executed, and if a seller is desperate to get out then that does not work for him.

 

[imoldernu]

Originally Posted by imoldernu View Post
Where are the trillions of dollars lost in the market going? Do they just disappear?

Michael said:

It's not a loss of money, it is a change in value. Just like when the price of a gallon of gasoline declines from $4 to $2.50, there is not any less gasoline.

...................................
Yes... an interesting philosophical question.

Does that apply to hedge funds? Two sides to every trade. Leveraged buys... long and short on a trade,

And for the gasoline... Less income for the dealers and producers, but the gain goes to the users, and eventually to other parts of the economy.

For the entire market... assuming it to be a US entity... a loss of trillions of dollars affects the international balance of wealth... not so obvious in today's' fixation with the Chinese economy, but on a worldwide basis, changes in national wealth.

If I burn a dollar bill, it is a loss of value to me, but as that dollar bill is backed by the debt of the Us... it becomes a reduction in that debt.

Based on that, I'd suggest that value doesn't disappear... it changes hands.

 

[Fermion]

True enough. Those that had no position in a stock on Monday, bought and sold it the same day for a profit definitely have tangible cash now that came from somewhere.

 

[NW-Bound]

Some gains and losses really change hand between the buyers and sellers of the 1% of stock. But it's not the trillions that the media talks about, only a fraction of it. The rest is on paper.

The other 99% bystanders still have the same stocks they did, yet they feel poorer or richer based on the price of the transacted 1% of the shares. The trillions of dollars are computed on the total number of shares, including the 99% inactive ones.

Here's another example. You have 10 houses on a street, all similar. The estimated price of a home is $200K. One day, Mr. Smith sells his home to a newcomer into town. He gets $250K. Mr. Smith's 9 neighbors suddenly feel $50K richer, although they play no part in the transaction. One can say that the neighborhood collective net worth has gone up a total of $50K x 10 houses = $500K. Everybody is happy.

There's no money going to or from the neighbors. But if they feel rich, they may go out and get a new TV or go on vacation. Then, the next neighbor may want $270K when it is his turn to sell. The new buyer is willing to pay that price because the neighborhood looks so happy and friendly. And it goes up and up. Riches are created on paper, yet it is still the same house.

 

[FUEGO]

I use limit orders too but that is one thing that kept me from getting a better deal on Monday. The stock I was trying to buy kept increasing past my limit buy order before I could hit the send button. I would then increase the limit buy by $0.20 and before I could click send it was up $0.30 more. I guess that is how a flash crash and flash recovery works.

I set my bid almost a buck above the ask price to guarantee I got an execution (as much as "guarantees" operate during a flash crash). I ended up getting an execution between the bid and the ask shown when I submitted (a few dollars cheaper than my bid). I just wanted the thing at 20-25% off, didn't want to get greedy over a few bucks (x100 shares).

 

[Totoro]

There's no money going to or from the neighbors. But if they feel rich, they may go out and get a new TV or go on vacation. Then, the next neighbor may want $270K when it is his turn to sell. The new buyer is willing to pay that price because the neighborhood looks so happy and friendly. And it goes up and up. Riches are created on paper, yet it is still the same house.

They may even get the bank to reappraise their home and get a HELOC.

Then use that money to buy a second home in the neighborhood they know so well as an investment. Up and up it goes.

Until the day by accident of nature five other houses go on the market at once, and two of them have to sell because they need the cash for healthcare expenses. Discounts start to appear, confidence is lost, buyers wait for the price to stabilize. Flashcrash ..

down & down it goes .. and still it's the same house

 

[photoguy]

I set my bid almost a buck above the ask price to guarantee I got an execution (as much as "guarantees" operate during a flash crash).

I really wonder who was on the other side (sell side) of all those trades. Retail investors with stop loss? large fund managers? algorithmic traders? and if they were algorithms why didn't they identify the large discrepancy with the value of underlying assets or that the low price was likely spurious.

Anyway thanks for posting your trade experience. I've thought in the past about trying to capitalize on flash crashes but was too lazy to set anything up. I can live vicariously through your trading.

 

[45th Birthday]

I bought a bunch of SDY and RSP when I saw trades being printed down 30%. I just tossed orders in somewhere between what I saw was bid/ask. Ended up getting filled at even better prices. Full service broker paid off.

 

[FUEGO]

I really wonder who was on the other side (sell side) of all those trades. Retail investors with stop loss? large fund managers? algorithmic traders? and if they were algorithms why didn't they identify the large discrepancy with the value of underlying assets or that the low price was likely spurious.

Anyway thanks for posting your trade experience. I've thought in the past about trying to capitalize on flash crashes but was too lazy to set anything up. I can live vicariously through your trading.

I'm pretty sure it was a mix of market participants. Retail investors with standing stop loss orders. HFT/algo traders that didn't have the logic quite right (like don't buy if the market price deviates more than x times the average price/NAV ratio).

One guy, a money manager who was interviewed for a WSJ article*, said he had some standing stop loss orders on IUSV (ishares large cap value core ETF) that triggered at $108, and then they sold much lower. That's probably my counterparty on my $101 trades. Why set the stop loss 20% below the previous closing value? Got me. Er, him I guess.

Stop loss triggers at $108 on the way down, and then it becomes a market order with no limit price. Once liquidity appeared, he probably got executed somewhere in the $88-102 range I assume (I saw bids that low during early trading). For IUSV, a sale price of $88 = 27-30% of what the NAV probably was. Ouchy.

I've contacted the guy to interview him for my Monday blog post on the mini flash crash. He said he'd be glad to help. It'll be interesting to see the experience from my counterparty's point of view.

* WSJ Article: Stock-Market Tumult Exposes Flaws in Modern Markets - WSJ - behind the paywall, so google the headline and click on the first story if you want to read for free.

Large fund managers might have been on the sell side, too. In my research on the previous flash crash, there was apparently a large fund manager possibly involved in causing it by placing an automated trade to slowly sell positions at a rate of 9% of trading volume in the previous minute (to avoid market impact costs by buying up the whole front of the book). Trading volumes blew up as HFTs smelled blood in the water and so the trade velocity from the real mutual fund seller picked up rapidly too. So it looked like someone was dumping $4 billion in sales even though it was supposed to be slow and measured (and therefore not very noteworthy). I wouldn't be surprised if some fund managers or institutional money just wanted to offload stuff quickly at market prices and didn't realize they were getting gouged with a 20-40% discount to NAV. "Sell it low NOW before it goes even lower".

 

[photoguy]

One guy, a money manager who was interviewed for a WSJ article*, said he had some standing stop loss orders on IUSV (ishares large cap value core ETF) that triggered at $108, and then they sold much lower.

Very curious that the manager would use a stop-loss order given that flash-crashes have been known for some time to be a risk.

 

[NW-Bound]

Large fund managers might have been on the sell side, too. In my research on the previous flash crash, there was apparently a large fund manager possibly involved in causing it by placing an automated trade to slowly sell positions at a rate of 9% of trading volume in the previous minute (to avoid market impact costs by buying up the whole front of the book). Trading volumes blew up as HFTs smelled blood in the water and so the trade velocity from the real mutual fund seller picked up rapidly too. So it looked like someone was dumping $4 billion in sales even though it was supposed to be slow and measured (and therefore not very noteworthy). I wouldn't be surprised if some fund managers or institutional money just wanted to offload stuff quickly at market prices and didn't realize they were getting gouged with a 20-40% discount to NAV. "Sell it low NOW before it goes even lower".

Computers are not smarter than the guys who program them, usually a lot simpler and dumber. What a computer has is speed, and speed can compound a problem very fast, while a human can recognize something unusual and stop.