This article explains how robots can run off the rails. When they do they cause carnage along the way. Lone-traders with limit orders sitting in the market can get filled and go under 300 points in 30 seconds. If they have an associated stop loss they get filled and stopped within seconds, with the stop filled a frightening distance from the expected stop level.
It is assumed lone-traders don't use, or have access to algorithm systems, nor trade in market-moving lot sizes.
But by trading in the same arena as institutional-traders, lone-traders are exposed to the actions of institutions who can move the market and who do use high-speed electronic systems.
It happened on 29 December 2008 in the SPI200. An algorithm released a market-on-open (MOO) buy order x 100 lots. The market was particularly thin due to the holiday season. There was nobody home to meet the order. Price exploded up 200 points triggering a further series of algorithms and stop loss orders lifting the market a further 200 points in 50 point leaps. By the time the orders ran out of steam the market had lifted 400 points, all in 30 seconds.
NYSE has a limit-up and limit-down rule where the market closes immediately a specified range has been achieved. The market cannot go beyond the limit mark. Australia does not have such a mechanisim. The ASE, in the event of an excessive move, reviews trades outside a range of 250 points and cancels all trades outside that range.
market-on-close
Institutions and main-players head for the exits soon after the cash close is fixed at 4:10 pm.
On 23/12/2008, the day before christmas eve, the market was extremely thin, at 4:29 pm a market-on-close (MOC) order of about 400 lots was executed in the last minute. The market exploded up 150 points, releasing icebergs and triggering stops, cleaning them all out. Total volume in those few seconds was 900 x lots.
market-on-open
On 29/12/2008 at 9:50 am the market-on-open trade occurred lifting price 400 points in a blistering 30 seconds.
It was later reported that one trade cost the dealer $800,000. And that was only the dealer.
solution - arranging the trade
In the absence of any explanation from the exchange it can be assumed that the "exchange manager" invoked the "orderley market" rules to avoid further disruption to the market, by arranging with the "dealer" (whose robot caused the carnage) to conduct subsequent MOC balance-up's off-market. And so it was ..
On 29 December 2008 the final closing trade of 1179 lots at 3587 was an off-market trade representing 9.0% of the total volume for the day.
On 2 January 2009 the final closing trade of 1039 lots at 3677 was an off-market trade representing 9.6% of the total volume for the day.
The BTF is an "off-market" trading mechanism available for selected SFE .. offering flexibility and certainty ..
The BTF enables professional market users to arrange and transact orders of significant size, tailored to their individual
needs and thereby minimises price impact and time delays that may occur when transacting orders of large size in the
central market.
suggestion
Always have a standing limit sell order, sitting in the order-book, 200 - 249 points above the market.
Happens about 3 or 4 times a year. The majors can and do make mistakes. Take advantage of it.
Dont use stops. You will get stopped out. You will need to wear a bit of pain.
If using an electronic trading platform, you will need enough in your account to cover the possible margin.
Check with the SFE periodically to find out what the limit-up threshhold is. It can change.
