Busting trades causes markets to fail, right?

Discussion in 'Economics' started by SomeYoungGuy, May 7, 2010.

  1. When markets get all wonky like yesterday, it makes perfect sense that liquidity is going to disappear.

    When Accenture for example is rightly prices about $40, but all hell broke loose so I see it trading at a penny. If I can be sure trades will be enforced, I will be happy to buy it at a penny. But the next guy will say "I'll buy it for a nickel" so I better bid a dime, then right on up to price discovery.

    If I have to worry about trades getting busted, far better for me to reduce my risk and withdraw from the market completely. Too much of a gamble for me to buy at $20 and sell at $30 as I try to add liquidity to the market, if I have to worry that the $20 buy will be busted but not the $30 sell. I would wind up short at $30 when the market resumed normal pricing at $40.

    When they fool around with the system, that's when things really go awry.
  2. There are a lot of domino's that fall as a result of bad last trade prints or busting trades.

    All options will be skewed... Are they going to bust option trades during this period?

    Index funds are comprised of the price of the underlying so when they bust these trades do they go back and adjust the indexes?

    What about traders who are filled in the bust range that subsequently sell outside of the bust range? Are they not left with an open short?

    What about traders who were automagically liquidated by their brokers based on these bad prices?

    Leveraged ETF's pose another problem.
    UDOW targets -300% of the daily movement.
    So if for example this ETF sold a bunch during the run off and the ETF is used by investors to hedge. What are they going to do go back and adjust these ETF positions.

    These equity exchanges should look at implementing rules similar to CME Group. Publish a similar no bust zone per instrument and give precisely 8 minutes to correct trades. After 8 minutes the trades stand forever.

    The regulators and exchanges have available plenty of computers to monitor and maintain order. No human should make any discretionary call. Automate it and make it timely. 8 Minutes is more than sufficient for all controls and notices to be provided.
  3. this seems on par with, if I win a malpractice award of $5 million, but a higher court overturns the decision, that I should just avoid medical care altogether...
  4. Leaving the market IS the answer unless You learn to trade in the environment you should get out. This sort of thing happens in the futures markets all the time. I remember getting my face ripped off in Cocoa futures and in natural gas, unleaded gas and crude oil futures back in 2000 and 2001. Fast market rules apply during such volatile sessions. You learn quickly how to exploit these scenarios after getting smashed.:D
  5. But all the buyers did disappear. To fix your analogy, it would be better not to sue in the first place. As in, be a market participant, but when the market goes tipsy turvy, don't even try to help fix it by adding liquidity because you'll get burned beyond simply making an unprofitable trade; you'll get burned on a profitable trade that they bust.
  6. Occam


    Reread the original post, TraderZones -- I don't think you understood it.

    These situations are, in fact, incredibly dangerous. Imagine you buy 1m shares by adding liquidity at 4c, exit at $20, then have the 4c buy busted when the stock has hit $40. OOPS...what was originally a $40k, unleveraged long trade becomes a $20m loss. Game over. :D
  7. Perhaps you should read the original and my posts, and this time try to understand what is being discussed
  8. Lethn


    The reason all these markets are beginning to fail isn't just because of failed trades a large amount of it will be due to the news of the bailout of Greece. More bailouts, means more printing of money, which in turn means more inflation and the devaluation of whatever currencies that decide to foot the bill.

    Ignore the mass media bs, there is no such thing as the markets having a 'crisis in confidence' the markets aren't that stupid the majority of the time and they certainly aren't going to listen to stupid politicians who think that printing money is going to solve all our problems.
  9. Occam


    I think I know perfectly well what the OP was discussing, but I have no idea what you're trying to convey with your seemingly irrelevant medical malpractice example.

    Do you know what a trade bust is or how they work? You might consider googling this. Formally, they're often described as "clearly erroneous trades".

  10. An experienced trader would never get into the situation you describe. I know every guy I trade with knew immediately the prices on Thursday were wrong and that getting into a broken trade was a distinct possibility. As such everyone either traded very small or not at all.

    Also, having trades busted is nothing new. I have 2-3 per year it seems and never that I recall have any worked in my favor. Imagine that.
    #10     May 8, 2010