"Flash Crash" Price Limits - Help?

P

paysense

I need expert advise. I trade ETF's & futures (separate accounts), typically holding for <i>weeks</i>.

My "swing" positions (QLD, QID or NQ) are held to <b>follow trends</b> and aren't closed/opened until the next day's open - after a shift in trend has been determined.

Commonly KNOWN are the wide price swings in volatile markets for these positions. <b>What isn't commonly known (at least, by me) is downside protection in the event of a crash.</b>

I've downloaded all the CME/NYSE files regarding "circuit breaker" (price limits) rules - as well as recent (since May 6, 2010) SEC approved test trial rules regarding "certain exchange traded funds".

<b>Bottom line:</b> I still have murky thinking regarding how much protection (if any) I'd have during key day and overnight session periods. Especially, since at times I am 2.5X levered against the NASDAQ-100.

Any help from experts would be appreciated -

A. Please describe what happens in ALL events of a price drop that exceeds limits and what define these percent limits.

B. How does this affect both open NQ and ETF (QLD & QID) positions at the extreme of 2.5X leverage.

Thanks in advance.
 
Quote from paysense:

I need expert advise. I trade ETF's & futures (separate accounts), typically holding for <i>weeks</i>.

My "swing" positions (QLD, QID or NQ) are held to <b>follow trends</b> and aren't closed/opened until the next day's open - after a shift in trend has been determined.

Commonly KNOWN are the wide price swings in volatile markets for these positions. <b>What isn't commonly known (at least, by me) is downside protection in the event of a crash.</b>

I've downloaded all the CME/NYSE files regarding "circuit breaker" (price limits) rules - as well as recent (since May 6, 2010) SEC approved test trial rules regarding "certain exchange traded funds".

<b>Bottom line:</b> I still have murky thinking regarding how much protection (if any) I'd have during key day and overnight session periods. Especially, since at times I am 2.5X levered against the NASDAQ-100.

Any help from experts would be appreciated -

A. Please describe what happens in ALL events of a price drop that exceeds limits and what define these percent limits.

B. How does this affect both open NQ and ETF (QLD & QID) positions at the extreme of 2.5X leverage.

Thanks in advance.
More...

Any thoughts?
 
Disclaimer: I don't really know that much so take everything I say with a grain of salt.

I think the rule is pretty straightforward...if an S&P 500, Russel 1000, or one of the 344 ETFs selected moves 10% or more in a 5 min period it gets halted. I'm going to assume QLD and QID are part of the 344.

QLD and QID are 2x leverage, not 2.5x. It is feasible that if the market tanked or shot up 5% in five minutes a circuit breaker halt could happen in one of these ETFs. Regardless, it would just resume trading at wherever the market was trading at a later time time.

I'd think the simplest way to hedge for massive losses would be with options, however, I know little about this. I'd think you could also simply limit your downside risk by setting stops 8-9% away from wherever your etf is trading.
 
Quote from TradingScrub:

Disclaimer: I don't really know that much so take everything I say with a grain of salt.

I think the rule is pretty straightforward...if an S&P 500, Russel 1000, or one of the 344 ETFs selected moves 10% or more in a 5 min period it gets halted. I'm going to assume QLD and QID are part of the 344.

QLD and QID are 2x leverage, not 2.5x. It is feasible that if the market tanked or shot up 5% in five minutes a circuit breaker halt could happen in one of these ETFs. Regardless, it would just resume trading at wherever the market was trading at a later time time.

I'd think the simplest way to hedge for massive losses would be with options, however, I know little about this. I'd think you could also simply limit your downside risk by setting stops 8-9% away from wherever your etf is trading.
More...

Thanks for your input. It is very helpful. Can anyone verify that QLD and QID are included with the 344 ETF's? Is this a permanent program plan for ETF's or temporary trial?

At MOST I use the 2X instrument (using some margin) to get 2.5X (max) leveraged to the NASDAQ-100 (just to clarify).

I don't really want to set my own STOPs, since I "swing" trade the market both LONG and SHORT (and don't want to be cut out of typical bounce-backs toward profitability) - but am trying to figure emergency STOPsfor massive losses -- unprotected by the exchanges.

Though you may be correct, I may need to go with options.

Hope to hear more on this...
 
According to CFTC:

Trading in futures and options is not suitable for many members of the public. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances.


Let me translate to you. Futures trading involves substantial risk and only risk capital should be use. Futures trading is NOT FOR EVERYBODY.


More than 90% of small traders FAILED to understand the CFTC disclaimer that result substantial loss!!

Good luck
 
Thanks for the re-post for the CFTC warning regarding the impact of financial risk in actual trading.

As a system developer, I am trying to hone in on possible further reining in of risk in the event of sudden crash - than what the exchanges provide.

Is QLD & QID included? and is this a program that expires (trial)?
 
I had to take a follow up course for my trading firm. I got questions that seemed to come from the exchanges directly. I keep remembering about 5% drops and how these circuit breakers come in. Which trades are honored AND which are not. I think you have to wait for after 5mins in the case.

In the end I myself am ulclear what the rules are in a "crash" as far as circuit breakers.

If you short cover or get stopped out at the low I have no idea what happens.
 
Quote from Petrobras:

I had to take a follow up course for my trading firm. I got questions that seemed to come from the exchanges directly. I keep remembering about 5% drops and how these circuit breakers come in. Which trades are honored AND which are not. I think you have to wait for after 5mins in the case.

In the end I myself am ulclear what the rules are in a "crash" as far as circuit breakers.

If you short cover or get stopped out at the low I have no idea what happens.
More...

I had compiled the following in a text file -

http://en.wikipedia.org/wiki/Trading_curb

http://www.nyse.com/press/circuit_breakers.html

ETH (overnight) - am covered at 5% (plus or minus) for NQ contract.
Going to have to think about what to do.
5% (~10-15%) overnight "seems" appropriate, 10% (20%-30%) at higher leverage "seems" extreme - must at least lower leverage to preserve capital.
Need "alert" when/if this happens.
Keep in mind "limit offered" may mean can get out at 5%, 10%, or 20% price limit.
Uptrend or downtrend (plus or minus), check volatility/leverage...can scale back accordingly.
Bottom-line: preserve capital.
Do I decrease leverage: probably safe to stay vested, but at lowest (0.5/1.0) level.
Uptrend limit up (overnight) - leave alone (still check vol)
Uptrend limit down (overnight) - check vol, can scale back
Downtrend limit up (overnight) - check vol, can scale back
Downtrend limit down (overnight) - leave alone (still check vol)
RTH???

www.cmegroup.com/rulebook/files/S_5544.pdf - 2010-12-27

35902.I. Price Limits, Trading Halts, and/or Trading Hours
Daily price limits and trading halts of the E–Mini Nasdaq 100 Index futures contract shall be coordinated with trading halts of the underlying stocks listed for trading in the securities markets
For the purpose of this rule, the primary E-Mini futures contract shall be defined as the nearest E-Mini Nasdaq 100 futures contract month. Exchanges staff shall have the responsibility of determining whether the primary futures contract is limit offered.
For the first day of trading in a newly listed contract, the implied settlement price will be the most recent daily settlement for the Nasdaq 100 Index futures contract whose expiration date matches that of the newly listed contract.
Price Limits: For purposes of rules determining price limits and trading halts, RTH and ETH refer to, respectively, the Regular Trading Hours and the Electronic Trading Hours of the Nasdaq 100 Index Futures.
At the open of RTH, there shall be Price Limits corresponding to a 10.0%, 20.0% and 30% decline below the Reference RTH Price.
The Price Limits shall be calculated at the beginning of each calendar quarter, based upon the average closing price of the Nasdaq 100 Index futures contract whose expiration date matches that of the current primary E–Mini futures contract, during the month prior to the beginning of the quarter (P) and rounded, as follows:

5.0% Price Limit
equals
10.0% Price Limit
equals
10% of P rounded down to nearest integral multiple of 10 index points
20.0% Price Limit
equals
2 times the 10.0% Price Limit
30.0% Price Limit
equals
3 times the 10.0% Price Limit

When the primary futures contract is limit offered at the 10.0% Price Limit, a 10-minute period shall commence. If the primary futures contract is limit offered at the end of the 10-minute period, trading shall terminate for a period of two minutes, after which time the market shall reopen. The next applicable price Limit shall apply to such reopening.
When the primary futures contract is limit offered at the 20.0% Price Limit, a 10-minute period shall commence. If the primary futures contract is limit offered at the end of the 10-minute period, trading shall terminate for a period of two minutes, after which time the market shall reopen. The 30% Price Limit shall apply to such reopening and shall represent the Total Daily Price Limit.
Trading Halts: If there is an NYSE Rule 80B trading halt declared in the primary securities market, trading shall be halted. Once trading in the primary securities market resumes after an NYSE Rule 80B trading halt, trading on the E–Mini Nasdaq 100 Index futures contract shall resume.
If an NYSE Rule 80B trading halt becomes inapplicable, the corresponding Price Limit shall likewise become inapplicable. E.g., if an NYSE Rule 80B trading halt, triggered by a 10% or a 20% decline in the Dow Jones Industrial Average, has been declared in the primary securities market, and trading in the primary securities market has recommenced, then the 10.0% or 20.0% Price Limits shall become inapplicable, respectively. E.g., when the NYSE Rule 80B 10.0% price limit provisions are suspended after 2:30 p.m. Eastern time, then the 10.0% Price Limit shall become inapplicable. Trading on the E-Mini Nasdaq 100 Index futures contract shall continue and the next applicable Price Limit shall apply.
Opening Time: If either a trading halt was in effect or the primary futures contract was locked at a limit at the close of trading, then the opening time of trading on GLOBEX® shall be delayed until 6:00 p.m.
During Electronic Trading Hours (ETH), there shall be no trading of E-Mini Nasdaq 100 Index futures at a price more than the 5.0% Price Limit above or below the Reference RTH Price. If the market is limit bid or limit offered fifteen (15) minutes prior to the opening of the RTH, and remains limit bid or limit offered five (5) minutes prior to the opening of the RTH, there shall be a trading halt in effect until the commencement of Regular Trading hours (RTH). During the trading halt, the Exchange shall provide an indicative opening price for the re-opening of trading on GLOBEX, if applicable, pursuant to Rule 573. Once RTH commences, the next applicable trading limit shall be in effect.

Rule 80B
A New York Stock Exchange rule that restricts trading for specified periods in the event the Dow Jones Industrial Average experiences one of three specified percentage declines. See also circuit breaker.
Case Study New York Stock Exchange Rule 80B is a circuit breaker designed to limit panic selling during serious market declines and extreme volatility. The rule provides for brief trading halts during a severe market decline as measured by a single-day decrease in the Dow Jones Industrial Average. Circuit breakers on the NYSE are currently in effect for three thresholds: 10%, 20%, and 30% declines in the Dow.

1. 10% decline in the DowOne-hour trading halt if the decline occurs prior to 2 p.m.
2. Half-hour trading halt if the decline occurs between 2 and 2:30 p.m.
3. No trading halt if the decline occurs after 2:30 p.m.

1. 20% decline in the DowTwo-hour trading halt if the decline occurs prior to 1 p.m.
2. One-hour trading halt if the decline occurs between 1 and 2 p.m.
3. The market closes if the decline occurs after 2 p.m.

1. 30% decline in the DowThe market closes for the day regardless of the time.
 
stock index futures are subject to price limits (sometimes called “circuit
breakers”). Please consult the Rulebook...
trading curbs 5% overnight market "limit down"

Trading curbs, also known as "circuit breakers," are a trading halt in the cash market and the corresponding trading halt in the derivative markets triggered by the halt in the cash market, all of which are affected based on substantial movements in a broad market indicator.[17]
[edit]United States
There are three thresholds each of which represents different level of decline in terms of points in Dow Jones industrial average.
In the event where threshold 1 is breached, the first halt is triggered. If that point is reached before 2 p.m., the market would shut down for an hour. If threshold 1 is breached between 2 p.m. and 2:30 p.m., the halt will last 30 minutes. No trading stops will take place if threshold 1 is breached after 2:30 p.m.
If threshold 2 is breached before 1 p.m., the market would close for two hours. If such a decline took place between 1 p.m. and 2 p.m., there would be a one-hour pause. The market would close for the day if stocks sank to that level after 2 p.m.
In the event where threshold 3 is breached, the market would close for the day, regardless of the time.
The thresholds are computed at the beginning of each quarter to establish a specific point value for the quarter.
For the first quarter of 2009, threshold 1 is 850 points, threshold 2 is 1700 points, and threshold 3 is 2600 points.[18]
The rules would halt trading on the major securities and futures exchanges in a coordinated cross-market halt if the circuit breaker is enacted.[19]
[edit]

Circuit breakers

On the New York Stock Exchange (NYSE), one type of trading curb is referred to as a "circuit breaker." These limits were put in place after Black Monday in order to reduce market volatility and massive panic sell-offs, giving traders time to reconsider their transactions.
At the start of each quarter, the NYSE sets three circuit breaker levels at levels of 10%, 20%, and 30% of the average closing price of the Dow Jones Industrial Average for the month preceding the start of the quarter, rounded to the nearest 50-point interval. As of the second quarter of 2010, these levels are 1,050 points, 2,150 points, and 3,200 points respectively.[1] Depending on the point drop that happens and the time of day when it happens, different actions occur automatically:

Trading curbs on Dow futures contracts traded on the Chicago Board of Trade are based on NYSE levels, with the exception that only the 10% threshold is in effect outside of regular NYSE trading hours, and is relative to the previous daily settlement price.

Circuit breakers (does not include QID or QLD?, what are circuit breaker trigger & price reference price)
Officials announced that new trading curbs, also known as circuit breakers, will be tested during a six-month trial period ending on December 10, 2010. These circuit breakers would halt trading for five minutes on any S&P 500 stock that rises or falls more than 10 percent in a five minute period.[46][47] The circuit breakers will only be installed to the 404 NYSE listed S&P 500 stocks. The first circuit breakers will be installed to only 5 of the S&P 500 companies on Friday June 11, to experiment with the circuit breakers. The 5 stocks are EOG Resources, Genuine Parts, Harley Davidson, Ryder System, and Zimmer Holdings. By Monday June 14, 44 had them. By Tuesday June 15, the number had grown to 223, and by Wednesday June 16, all 404 companies had circuit breakers installed.[48] On June 16, 2010, trading in the Washington Post Company's shares were halted for five minutes after it became the first stock to trigger the new circuit breakers. Three erroneous NYSE Arca trades were said to have been the cause of the share price jump.[49]
As of September 10, the SEC approved new rules submitted by the national securities exchanges and FINRA to expand the circuit breaker program to include all stocks in the Russell 1000 Index and certain exchange-traded funds. The SEC also approved new exchange and FINRA rules that clarify the process for breaking erroneous trades. A list of the securities included in the Russell 1000 Index, which was rebalanced on June 25, is available on the Russell website. The list of exchange-traded products included in the pilot is available on the SEC's website. The SEC anticipates that the exchanges and FINRA will begin implementing the expanded circuit breaker program early next week. The erroneous trade rules were developed in response to the market disruption of May 6. The rules will make it clearer when — and at what prices — trades will be broken by the exchanges and FINRA. As with the circuit breaker program, these rules will be in effect on a pilot basis through Dec. 10, 2010. For stocks that are subject to the circuit breaker program, trades will be broken at specified levels depending on the stock price:
For stocks priced $25 or less, trades will be broken if the trades are at least 10 percent away from the circuit breaker trigger price.
For stocks priced more than $25 to $50, trades will be broken if they are 5 percent away from the circuit breaker trigger price.
For stocks priced more than $50, the trades will be broken if they are 3 percent away from the circuit breaker trigger price.
Where circuit breakers are not applicable, the exchanges and FINRA will break trades at specified levels for events involving multiple stocks depending on how many stocks are involved:
For events involving between five and 20 stocks, trades will be broken that are at least 10 percent away from the "reference price," typically the last sale before pricing was disrupted.
For events involving more than 20 stocks, trades will be broken that are at least 30 percent away from the reference price.
On May 6, the markets only broke trades that were more than 60 percent away from the reference price in a process that was not transparent to market participants. By establishing clear and transparent standards for breaking erroneous trades, the new rules should help provide certainty in advance as to which trades will be broken, and allow market participants to better manage their risks.

. . .but to understand what happens in each/all instance(s) may be done best by calling CME & ProShares.

Since this is not THAT complicated conducting dialogue would also work.
 
You must log in or register to reply here.
Back
Top