April 1st?

Discussion in 'Retail Brokers' started by hardrightedge, Jul 9, 2001.

  1. I'm posting this here at ET because I know you folks will enjoy this (and because I believe there are IB folk here). Over at SI, we are speechless:

    This is from a recent posting at Interactive Brokers, in answer to an email. Thought it was pretty entertaining.

    Q: Dear IB Management, When will IB get with the program and give us trailing stops? CYBER Corp (now Cyber Trader) and other direct access brokers do.

    A: We believe that trailing stops are a controversial issue and we are opposed to them for the following reason.
    Trailing stops are liquidating orders placed simultaneously with an opening order. The stop price is a set amount away from the price at which the position is entered into and it moves penny for penny with the stock price as long as the stock price moves in favor of the position. Once the stock price reverses by the amount set in the trailing stop order, the position is liquidated.
    It is a method of trading that, taken to its ultimate conclusion by a large number of followers, would ruin its practitioners, their carrying brokers and wreak havoc in the market with potentially dangerous repercussions for the economy.
    Trailing stops are akin to "portfolio insurance", generally recognized as the reason behind the large downward spiral of the crash of 87. Both strategies are based upon the illusion of a liquid market with price continuity for any size at any time. A stop order turns into a market order when activated and market orders must be executed immediately at the best available price, no matter what the price may be. When using stop orders, the price will gap to the next available quoted price or limit order and the next stop order will be executed at this price. It should be clear that when many trailing stop orders are active on the same instrument, they will potentially all generate market orders at around the same time, independent of when and at what price they were originally placed.
    Let us now consider the imaginary scenario in which the NASDAQ 100 index as represented by the QQQ reaches and penetrates a widely recognized chart point in its relentless upward march. The penetration of the chart point is a signal to thousands of technologically well equipped traders to jump on the bandwagon by issuing orders to buy Qs at market with a trailing stop of say 20 to 200 cents under the subsequent high. As they pile in, the price shoots up, convincing momentum traders to follow. These traders also want to protect against losses, while enjoying the gains as long as the momentum carries the Qs and will want to use trailing stops.
    The price continues to climb as the traders watch their profit accumulate and issue additional buy orders, thinking that their gains are protected by their trailing stop orders. The only suppliers of Qs to the market are market makers and arbitrageurs who buy baskets full of NASDAQ 100 stocks to hedge their sales. As their buys of the baskets pushes up the prices of the underlying stocks, those stocks begin to attract additional momentum or chart point users with their trailing stops.
    Everybody plays, everybody wins.
    The Qs finish the day with an 18% advance, a new record, attracting some profit takers the next morning. This profit taking causes a slight reversal, maybe only 20 cents, triggering a few of the closely set trailing stops. The resulting market orders from the first few trailing stop orders, hitting out ever lower resting bids, activate the trailing stops set to go off at successively larger reversals, generate more and more market orders to sell.
    But there are no buyers. The offer prices falls down further without any bids in sight. The avalanche of sell orders in a cascading market activates a temporary trading halt, but the selling cannot be stopped. A long list of electronic sell orders are waiting in the pipe line to be executed at any price.
    Longs, expecting to be closed out 20 to 200 cents under the highs, get executed at 10, 20 or 30 dollars lower than their stop price. Margin accounts undergo forced liquidations along with bank loans collateralized with listed equities. The President reassures all of us that the FED stands ready... etc.
    This exaggerated, but possible, scenario can be applied to a small group of traders trading a single stock, with much smaller but similar effects.
    Trailing stops bunch all the stop orders near the same price level, resulting in a rush of market orders all at the same time, causing a gap in the stock price.
    Using trailing stops works only as long as only a few people do it, and they are not concentrating on the same instruments.
    Interactive Brokers serves professional investors and traders. We provide our customers with sophisticated tools that will aid them in earning a profit and fulfilling an economically useful function.
    A facility for trailing stops is not such a tool. It will generate large commission income for the brokers who provide it, but on the long run, the customers of these brokers will loose their money and it will destabilize the market.

    - Thomas Peterffy, Chairman, Interactive Brokers Group (06/29/2001)

  2. trinfo


    The dude is right...
  3. jmcgraw


    Technically, I guess he is right... But his scenerio borders on the paranoid.

    What he outlines is a typical bubble, which happens with or without trailing stops. :)

  4. Doesn’t this scenario occur all the time, sans the gloom and doom? How is it that the lack of automation prevents many traders from executing stops at or around the same price level if that is their intention? Is Mr. Peterffy suggesting that the availability of trailing stops would somehow homogenize stop placement? I don’t know about the rest of you but the ability to automate my trailing stop has no bearing on where I chose to place it. Considering I have read so many poor reviews of IB’s stops on this website, I doubt I'd trust an IB stop order to execute properly, anyway.

  5. huby


    ......and then people start jumping out of buildings, and off of bridges, and then there is blood in the streets, and then people rob the dead bodies, and then there are riots, and wars, and anarchy, and we'll have to go to marshall law, and then the government will collapse, and the Russians will nuke us, and don't forget Armageddon, and it will be the end of all mankind......because of trailing stops.

    I agree that the principle is true, but c'mon. Is that really the reason IB won't offer trailing stops? At least tell the truth.--"IB doesn't currently have the technology to offer trailing stops". I'm with IB and I love them and wish they would offer trailing stops. Def, what do you think of all this?
  6. def

    def Sponsor

    Ofcourse IB has the technology to offer trailing stops if it decided to implement them. Also if you read the reviews lately, the stops seem to be working fine.

    Our chairman, Thomas Peterffy, has been so far ahead of the curve from day 1 that I'm not about to question his thought process. He's been called a fool by others many times as he built a computerized trading system starting in the early 80's. My thoughts on this are immaterial as the buck stops with him. However, I do believe he genuinely believes in fair and orderly markets and does not want to facilitate anything that may be construed otherwise.
  7. it's a real stretch to think that everyone wants to use trailing stops.
  8. vvv


    worst case or not, IB's chairman is certainly not unrealistic in his what-if scenario, certainly makes sense when you're talking about a majority of clients that presumably trade intraday and therefore would probably work with pretty tight trailing stops.

  9. You put 50 intraday traders in a room and you'll come up with 150 ways of handling stops. Just seems there are so many other types of "circuit breaker" protection schemes out there that this one is way outdated.

    IB is such a funny animal (I have an account with them as well). Half of their practices are ultra-loose and the other half ultra-conservative.

    Can I bring up this "diabolical" question (which I don't know the answer to): does IB in some way benefit with this policy, at the expense of their customers?
  10. Personally, I really like that IB have decided to focus on stable, fast and inexpensive order entry.

    I'd much rather have reliable order entry without Level II, charts, scanners etc, since those pieces are readily available through other sources (who specialize in provideing those services).

    #10     Jul 10, 2001