Stocks - Risk of Intraday Price Shocks

Discussion in 'Trading' started by MiamiHurricanes, Sep 24, 2006.

  1. The goal of this thread is to discuss the risk of substantial intraday price shocks when trading large equity positions in concentrated, levered, undiversified, short term strategies.

    To take a bit from a quote below, and comments on "freak losses due to price gaps, trading halts, order imbalance, typos on order entry, broker failures, computer failures, etc." should also be of high value here.

    Current thoughts are restriction to highly liquid ETFs, baskets, or issues for companies that have the highest credit ratings where the probability of significant accounting problems/major intraday developments are lower and merger activity should have minimal impact because the company is so large already.

    Any statistical studies or insights are welcome. Somewhere in academia, I would imagine that there must be some research on the frequency of price shocks...
  2. Here are some comments from an '02 thread:
    Trading ›› how do YOU use margin?

    I think the thread has some great content.

    Quote from Rigel:

    There is at least one circumstance in which it isn't prudent to use margin. Scalping and margin don't go together. A trading halt with a 50% gap in the wrong direction on a single full account position at 5:1 margin could put you out of the game and into huge debt in the blink of an eye, and it will happen sooner or later. Scalping single positions with margin is very unwise IMO.

    Quote from daniel_m:

    Daytraders (the kinds i know) normally risk in the region of 10-50 cents per trade. As such, it is quite normal for daytraders to use the full 4:1 margin on a single position. Many (prop traders) use a lot more than that, and have multiple positions on aswell. The key factor is how much of their account they are risking; if it is within reasonable risk management parameters, there is no problem with the 'obscene' levels of margin.

    As to Rigel's suggestion that it is STILL risky (intraday margin) because a stock WILL get halted (it WILL happen to you): I'm not sure what the rules are for halting stocks, but I assume that they are only halted if they are falling. In that case the risk only exists on the long side. If a stock is falling precipitously, it is pretty dangerous to be buying it regardless of whether it'll be halted or not. (even though some people do...and make good money at it)

    Quote from Traden4Alpha:

    P.S. RE HALTs: Although I am sure that many halts occur after a decline in stock price that might let a skilled trader exit before the halt, I suspect that some of the worst halts happen so quickly and under such an order imbalance, that most daytraders would be caught holding positions. Imagine if 9/11 had occurred at 10AM, instead of before market open.

    Quote from Traden4Alpha:

    Ugly Issue 5: Freak Losses

    As darkhorse points out, freak losses hurt the aggressive user of margin more than they do the non-margin trader. All of these sims assume that the trading system obeys a simple statistical law for profit and loss (the Monte Carlo used normally distributed returns, the Pascal triangle sim used binomial returns). Neither sim allowed for freak losses due to price gaps, trading halts, order imbalance, typos on order entry, broker failures, computer failures, etc. Although one could argue (and hope) for freak wins, I suspect most ET traders would agree that freak losses outnumber and outweigh freak wins. Again, this issue is another strike against using margin.

    Quote from vulture:

    I was re-reading a few of the older posts on this thread where someone said that the only instance where you would most likely experience a catastrophic price shock(while simultaneously overleveraged) would have occurred on the downside...

    But the problem is that since about 1998, I would argue that the majority of price shocks have occurred on the upside...There were at least two significant upside price shocks in 2001 alone...The price shock which occurred in 1998 was extremely swift and occurred one day before an options expiration, thus ensuring that all the gamma players were extremely exposed...

    The interesting aspect of these multiple price shocks is that the skew still does not reflect this risk on the upside...Whereas following the 1987 stock market crash, all index options traded at a perpetual skew with a graduating scale of higher and higher IV's the further OTM...I have not seen the same affect in the call side...So one could argue that the majority of short term players(ie futures scalpers, index options traders, market makers, etc,etc) have much greater exposure to upside catastrophes predicated on the fact that there is less margin for error when making big bets against the upside and then having the shock go the unexpected way...
  3. I always trade ETFs at this point in my 'trading career', so for a price shock to really wipe me out, the general market would have to drop a huge amount (probably 25%+).

    For guys who just are trading 1 stock with not a lot of stale liquidity, or who rely heavily on the specialist, a buyout/takeover/drug news/etc could be a lot worse as this could cause the said 25% move that would wash me out on an ETF.

    For example I recall EPL being bought out a few weeks ago, and the stock racing from 18-22, and then from 22-24 in a matter of seconds. In that stock the previous days/week there was a lot of algorithmic selling, and should a person have been on the offer frontrunning the algo selling, they would have been finished.
  4. Thank you Szeven,
    I have been searching for some academic/statistical analysis on this stuff - so far nothing - but not that this would necessarily provide substantial value.

    I imagine that there are countless examples of #@%'ed up and totally cherry price actions in stocks. I will take a look at EPL - damn what a bloody disaster if short - announcement at around 1000 EST. What a pack of asses. Why not make the announcement pre-market? This is what my concerns are. So many securities are pure derivatives of some wank ass executive officers and their lying, cheating, and stealing or at minimum, unpredictability. At least in other markets, there is honesty - "we are here to take your money"

    To emphasize my interest in single issues to play would be the largest companies with AVG daily volume north of 5M in main line industries - no pharmas or biotechs.
  5. silk


    My experience is that major intra day moves in stocks are extremely rare. It is extremely rare that co's issue news during the day. Sure it happens. But i've been trading every day for 4 years and i think only once or twice have i been hit in a major way because of a news event intraday. By major i mean > than 8 or 9%. It was THC back in 2002, it was halted and gapped down from $35 to $28 i think.

    But even in that case, you could tell something was up as when i bought it the stock was already down big on day and had huge block sellers. So the reason i got caught in it was that i was trading backwards and probably incorrectly.

    But i trade more NYSE type stuff, large caps mid caps. Perhaps more risk in other types of stocks.
  6. Similar to what some of the other guys said: (1) trade the most active indices if you're concerned about intraday price spikes in individual stocks. (2) If you insist on trading in a single common stock, reduce your position size down to your own "comfort level". (3) Trade only the most active stocks where you can get in and out of your "big" position relatively easily. (4) Trade stocks that have listed options. Usually, atleast half of a stock's daily volume is the result of options-related activity. (5) Those things should keep you out of trouble atleast 362 days out of the year.
  7. Thank you silk and nazzdack, and others - this is all very helpful.
  8. In the past couple of months i have seen two huge (huge to me and my style of trading) price shocks.....EPL as mentioned before and GTK (no longer listed under GTK) that was halted mid-day and reopened almost 4 dollars both cases we had guys trading those stocks within minutes of the stock being halted...we were just lucky enough to not have a position against the big move...and also unlucky enough to not have a position going with the big move! :)

    But these moves are an inherent part of riskiness of trading. One should just make sure that the profits they take from their style of trading can cover the losses that may occur from these huge price movements. I made around $25,000 on EPL during the week prior to that huge spike...and if i had got caught in that huge spike with a short position of 10k shares i still would have been fine as i would have been able to get out for a $20,000 dollar loss and still been ahead on that stock for the week....however if i had got caught with 20-30k short...then the 40-60k loss i would have taken still wouldnt have finished me as i know my trading style would be able to cover those losses in a couple weeks or months.

    RISK REWARD..... if you manage it properly these intra-day price shocks shouldnt be enough to finish your trading career for good.....well unless you get real unlucky...which is also an unfortunate aspect of trading.

    Bottom cant be a scared trader....if you base your trading strategy on the idea you might take a huge beating one day then you will never make the huge money. One thing i have noticed is that the guys you never lose money (or very very rarely) also never make huge money....the reason??? they take no risk. Some people just cannot handle the stress that comes along with huge risk and so they never take the huge winners either......its a trade off...if you want the big had best be ready and prepared to take the huge ass-whuppin
  9. Example of overnight risk - WARR into 092506

    But this was a small cap stock...
    #10     Sep 26, 2006