I saw this post on SI before ET, but will just paste my comments here: ------------------- To:Raymond Duray who wrote (13370) From: Dustin Tuesday, Jul 10, 2001 9:35 AM Respond to of 13371 Re: Portfolio insurance crashed the market I was under the impression that the portfolio insurance companies were let off the hook because they only aided the crash after the ball was rolling. I forget the actual numbers, but I thought the Berkeley guys who the gov't employed came to the conclusion that the market still was going to crash, just not as bad. The relation of trailing stops to portfolio insurance doesn't make much sense to me anyways.
hardrightedge, IB does not benefit from not offering trailing stops. It is something people have requested and may choose other firms as a result. dustin, the relationship to portfolio insurance is the premise there is always enough liquidity to get out of a trade at the stop price.
who exactly 'proved' that portfolio insurance caused the crash? With all due respect to the chairman's view,this is bunk! After every crash people hunt down someone, something to blame.....cause it sure wasn't their fault!! Did you know that Congress held inquiries into banning the use of telephones in the markets after the crash of 1929? Their reason? "It causes information to flow too quickly." Markets have vicious feedback loops both ways (we saw the positive feedback in 99 and saw the ugly side in earlier crashes) If you don't believe me read Shiller's research where he sent questionaires to major traders *the day* of the crash in 87. Why did they sell? because others were selling! I would like to point out that technical analysis is much more to 'blame' for the effect that he mentions as it causes many traders to pay attention to the same price levels, etc. and in many cases act in concert. Will he also outlaw technical analysis? Another weakness in the chairman's arguments is that he takes the biased view of traders being on the long side (and therefore using trailing stops to sell and cause a price decline due to a liquidity vacuum). What about the 'danger' of traders using trailing stops on short positions and causing prices to pop up? wouldnt that 'danger' balance out the other danger? could we simply back away and let markets function?
Wow, I really have respect for IB and their forward thinking in making direct access stock and futures trading available at a low cost, but I must admit I don't understand or agree with IB managment on this issue. As mentioned in previous posts, I think IB is assuming too much...i.e. everyone is using stops, wants to trail them, and would execute them all at the same price. If you are properly using stops, are you not already moving them up manually as the price moves in your favor? Does this not cause the same problem as IB states? The only difference is that one is automated and the other not. If the market were to crash, are we to assume that people without access to automated trailing stops will sit idley by while their postions fall to zero? How does a trailing stop produce more exits than trading manually, other than to enforce discipline (which I feel would benefit traders, not hurt them)? Since other firms already offer this feature, shouldn't we be roaming abandoned streets, dodging gangs of vagabonds, as we search for rodents to cook for dinner by now? But what do I know? I don't run a major brokerage. Kirk
At first blush, Mr. Peterffy's comments may seem extreme, but I'm not so sure. We all take for granted the rationality of markets. I've seen enough to make me cautious of assuming too much in that dept. however. 6/29/2001, when Nasdaq went down at 2Pm, saw some pretty strange price fluctuations, and many trades went off at perverse prices. way outside normal trading. However unlikely, don't assume your $50 stock won't print at $10 in a flurry of selling, for whatever reason. A market order will get you out just in time to make some bottom fisher a happy camper. Your stock is only worth what the next foo.... uh, buyer , will pay. Not a penny more.
The quick answer to WarEagles question is: It's a matter of timing. If enough people place stops in the same area, and the instantaneous volume of selling is great enough, most of the orders will get executed at BAD PRICES. The reason for this is quite simple. Buyers will not have TIME to come to the bid. By the time they realize its a fire sale, many orders will have executed. Been watching L2 for many years, and I've seen this many times. I doubt if the QQQ would suffer this , but many thinner stocks would tank badly. Your MSFT, INTC are not very vulnerable to this scenario. That said, there are stops placed all over the plac already, at Cyber, Etrade, Schwab, etc. So I'm not sure why IB thinks they are the 'Last Straw'
Considering we 've been able to tank 60%+ in the last year without devious stop placement, gushing blood or worldwide famine, the concern still seems a little misplaced.
I understand this point, but it doesn't really fit the arguement. Here's my interpretation of why the portfolio insurance co's (especially LOR) were blamed at first: For every point that the S&P dropped, LOR needed to sell XX number of S&P futures, which in fact forced the S&P lower, so they had to sell more futures...and so on. This cycle tanked the market for two days. Now, how does this cycle relate to trailing stops? Sure those long positions that used trailing stops will be stopped out, and maybe at poor prices, but it doesn't then force the trader to also sell short for every new downtick in the market...which I believe to be the main point here.
It may well be a misplaced, even paranoid concern. In all fairness though, since they would be the guys on the other end of the frivilous lawsuits........ "Sir, you mean you didn't expect to sell your KKD at 12 5/8, when your stop said 29? I feel your pain, but the specialist had a heart attack when an order to sell 5,000,000 shares came in from our group, and there was only an Island bid for 200 shares. Don't feel bad, the next guy sold out at 90 cents."
Stock777, I agree that there would be bad fills, it happens all the time on market orders orders. My point is, what difference does it make if the stop is manually or automatically executed? Either way, it is still a market order and subject to the execution risks that go along with it. Whether I trail the stop myself or let a computer do it for me should have no bearing on the ultimate outcome. I think it is flawed to assume that all stop orders would suddenly be placed at the same levels with this technology. The only thing I could think of that might have influenced IB is that their software is also used on an institutional level, where volume is much greater, and thus the effect on the overall market of millions of shares being dumped simultaneously from one source (and therefore at the same price) might need to be considered. But isn't this a form of program trading, which is done everyday anyway? And if you had millions of shares to dump, would you trust a single trailing stop to get you out with a market order? Ah, if only those guys were that unsophisticated... Kirk