Mini Flash, ETFs, Reg NMS, and Stop Lights
Friday was an interesting day for market participants and observers. Apple (AAPL) had a mini flash crash. As a sponsor of ETFs it was interesting not to see people quickly blame Apple (or iPads??) for this. I know it’s a silly thought but that is exactly what happened two years ago for our last flash crash. The cries blaming ETFs caused the SEC to have a special investigation into how ETFs participated in that event. Thankfully, BATS (an all electronic stock exchange) was quick to raise their hand and take the blame (software malfunction) – which led to many interesting articles talking about the “machines” striking back. Then the BATS IPO fiasco, again blamed on the “machines” (their own). Also no cries that IPOs cause flash crashes either (I agree, not the IPOs fault).
For me I think back to how Reg NMS took the human element out of trading and allowed the “machines” to take over. I am not against technology. It’s great for so many things, including the financial markets. However, human intervention has value too. Technology alone can’t effectively raise your kids, or manage employees. Even the robots Amazon recently purchased need human oversight and intervention. I know there were some challenges with the specialist model, but we chose to pull down the stop lights and the speed limits instead of fixing the real problem.
I know the exchanges have implemented their own form of priced-based stop lights, but it needs an experienced human eye to see the prices that are coming in and understand the best way to provide the execution. Did we have stub quotes in the old specialist model? I don’t recall that we did, but maybe I don’t remember. Stub quotes are illegal now, but somehow BATS trades went off at .01?? That doesn’t seem like a software glitch as much as it seems like someone is taking advantage of a electronic only system (maybe I have this wrong and those .01 are not real trades place by someone (or someone’s machine).
To bring the specialist back would be a big change. The NYSE has redesigned their floor for the new electronic era. Though, I think there could be some hybrid, right? Use the machines for market orders within a range of best bid/ask, and then the rest go to a specialist? I don’t know, there are much smarter people out there who can come up with much better ideas. Either way, we need to bring the stop lights and speed limits back to our markets. It’s not even to get rid of the flash crashes. Those get corrected easily. It’s the global confidence in our markets that is far more important. You take the stop lights and speed limits off our roads, and people are nervous to drive; it’s not different for our markets.
One last note, on the TVIX, it’s not an ETF (exchange traded FUND), it’s an ETN (exchange traded NOTE). It’s a bond/debt instrument whose interest payment is tied to something else (in this case 2 times the movement of the VIX). To me, investing in the VIX is like yacht racing. You need to be really wealthy, and only using a small portion of your wealth, or incredibly sophisticated. If you are neither, please stay away (from any investment you don’t understand). If you are looking for a way to hedge your portfolio, find an expert who knows how to do it.
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