Flash Crash vs day-trader reaction time

Discussion in 'Index Futures' started by ktomi, Sep 1, 2011.

  1. ktomi



    I have been daytrading the S&P E-mini futures (CME Globex, Ticker Symbol: ES) for a few days. I am newbie amateur trader and I need some advice. :confused:

    I am concerned about a possible flash crash or any uncontrolled sudden movement of the market. I am talking about movements when the price shoots right out of the chart window within one bar.

    In order to play it safe I don't hold any open positions:
    - At major market opening times, e.g. New York, London, Tokyo Stock Exchange opening times etc.
    - At 'Market Moving Indicator' release times, which I look up from an economic calendar.

    Does anyone have any screenshots of the 2008 flash crash on a 1-5 minute chart by any chance? That would be great!

    It may be silly, but I don't use protective stops. If the market doesn't move as I expected, I just manually close the position. Maybe this is what I should do, have an emergency stop in place.

    But even so, even with a stop, what's your estimate, what's the maximum loss in terms of points movement I could encounter in a worst case scenario? Let's say I place my stops 10 points away from my entry! Will my stop even fill at all? Will it fill with a reasonable slippage, e.g a slippage of 0, 1, 10 or 100 points?

    If you have any advice or comments, please reply.

    Thanks in advance. :)
  2. maximum loss is always bigger than you'd imagine- for example if you look back to ED's in i believe like sep of 09, they used to only move maybe 10-15 tics/day on the most volatile of days- and then one day GS sold 5000 strips and in one sell order they sold off 150ish tics... so even if you had a stop loss market at -20 it wouldn't have gotten filled until -151 (ie 131 tics of slippage on something that doesn't move at all)

    just remember in trading "the impossible is simply an eventuality"
  3. A 120+ point move in the ES can (and already has) happened.
    If you are worried about such an event, there are a couple of possibilities:

    1) Set a catastrophic stop-limit order with a healthy margin on the limit so you know it'll get filled, but not so much to get picked off by a flash-crash-bounce (which would gut an account using a standard stop order).

    2) Keep some ultra cheap, far OTM put options on either the ES or the VIX. Normally they will just decay away to nothing like every other type of insurance policy you have. How much you spend is based on how much you are willing to absorb. If you are carrying more than a single option as insurance, I would probably even go as far as putting in a GTC imit profit order in the event it turns in to a flash "bounce." In that event, you'd be sitting on a nice fat profit.

    Here's a couple of charts from the 2010 crash:
  4. ktomi



    All true, good points. Probably I am in a better situation with the ES where there is a 20000 position limit. Looking at the open interest figures during the European or Us sessions, considering that limit, it can't be moved hundreds of points all at once.

    Moreover just thinking about it now, there must be a reason why my broker needs a maintenance margin of $4000. With the ES being $50 / point, it is 80 points.

    Maybe I should just trade short considering the current climate. But it's silly again, because any time someone could go long in big quantities for the short term...
  5. the chart won't tell you what it was really like when the flash crash happened....

    first of all, i put in orders that just didn't get filled...when shit gets crazy, execution goes bonkers.

    second of all, there was at one point, i believe, no bids. And then after that the bid/ask spread was more than 10 points....ten whole ES points.

    obviously it was an extreme situation, but my main point is looking at a historical chart doesn't actually tell you about that execution environment. It will give you a false sense of confidence.
  6. just to clarify i was referring to eurodollars- a short-term fixed income instrument... if that can move that far... imagine what "equities" can do
  7. Read up on CME order types and their No Bust Range. You do have some protection against wild fills.
  8. ktomi



    I know you were. That's what ED stands for. And there is no position limit on that one. While there is on ES.
  9. ktomi



    Thanks for your reply.

    I don't quite understand what you are saying under point 1. But from what I am able to comprehend from it, it sounds dodgy. I understand what a Stop-Limit order is, but once it's moving at a pace that I can't trade it manually, I don't wanna guess anything. I want to be out.

    And I don't understand at all what you are saying in point 2. But this is because of my complete lack of knowledge about options, apart from that, it can be a clever idea. Although I am not a big fan insurances. I am talking in general now. Paying for insurance is money out of the window, but this is a different topic.

    And thanks for the charts! I know I am fussy, but SPY is an ETF. :) Anyway, still very interesting. Probably these flash crashes don't happen just out of nothing. There is a buildup preceding it. I am just not sure I would be able to sense that.

    I usually trade both long and short direction regardless of the major trend. Maybe I should quit that and trade just in the direction of the major trend...
    #10     Sep 1, 2011