Order busting

sprstpd · Jan 13, 2005

Quote from Toonces:

Did your broker call the exchange that it traded on? I know that on Island (before the merger with Instinet) the rule was always if a trade is 20% away from the 'prevailing market' then it's a bust.

My broker called the exchange it was trading on. I know the rules for busting and my order was well into bustable territory.

The rules for busts on ECNs are here:
ARCA
http://www.tradearca.com/exchange/pdfs/ErroneousExecutionPolicy.pdf
BRUT
http://www.nasdaqtrader.com/Trader/eBrut/infoCenter/Other/Clearly Erroneous Policy 6-2003.htm
BTRD
http://www.b-trade.com/compliance.asp
INET
http://instinetgroup.com/legal/trade_policy_guidelines.shtml

Was this a stock that had fresh news, that was already trading well over $30 by the time your order hit? That's the only explanation that would make any sense.

There was no news on the stock. The typo was my own fault and I take responsibility for the trade. You are right, the fact that it was not busted made no sense at all. I complained to the best of my ability but it got me nowhere.

I remember a long time ago a stock that was trading at about 1.40 (with fresh news) and an Instinet trader bids 2.00 with size, and I sold to him. It was pretty reasonable to bid that high, because it was pretty big news. But the exchange busted all the trades at 2.00 because it was over 20% higher than 1.40.

This is what I like to call the "free option." On good news, someone will bid just above the busting percentage for the ECN they are trading on. If they get hit and the news wasn't that good, they will call and attempt to bust. Sometimes it works.

stock777 · Jan 13, 2005

The ecn's are aware of the 'free option game', so unless they are in on a conspiracy, that would be dangerous.

I had some jackoff bust a 50 share trade I did on some $4 stock pre market , because it was 20 or 30 cents higher than the prev close.

Did a lot of trades like that when ARCA had different rules, and no other trade ever got busted.

sprstpd · Jan 14, 2005

Quote from stock777:

The ecn's are aware of the 'free option game', so unless they are in on a conspiracy, that would be dangerous.

I had some jackoff bust a 50 share trade I did on some $4 stock pre market , because it was 20 or 30 cents higher than the prev close.

Did a lot of trades like that when ARCA had different rules, and no other trade ever got busted.

ARCA has the best rules of any ECN in terms of busts. It is usually on INET where the shenanigans happen because the busting percentage is the smallest (3% for stocks >= $10). 3% sounds like it should be plenty but when there is news in the aftermarket, 3% isn't anything. I doubt people purposely put on a "free option" trade to begin with. However, once they realize they misinterpreted how good/bad the news was, they always try to bust if their bid/ask fell out of the 3% window.

For example, I remember HD had earnings one premarket morning. The headline number came out and it was really positive - someone bid about 4.5% over the closing price on INET. I sold some of my HD shares to that person (was already long some). Turns out the earnings were good but not spectacular and that was the high print of the pre-market. After that there were some prints near the close. Now you figure since there is news that trade would stand. But no, it was busted. During the day, the market really started to go and HD went with it. HD ended up that day pretty close to where that shmuck busted the trade.

I have other examples over the years of this happening. Trades on news that I felt were legitimate were busted just because the price happened to fall outside of the bustable window.

Now it would be one thing if I could talk to an INET representative personally and chew his ass out on these bust decisions. However, I can't do that. I can only talk to someone at my brokerage. And my brokerage claims that busts are at the discretion of the ECN judging the busts and that they have no say in the matter. However, it seems like my brokerage could at least say something like, "you know INET, there was news on HD - you shouldn't bust that one." I don't get the sense that is happening. Of course, maybe it is true that my brokerage can't do anything about it. But then I think, lots of people say their brokerage "goes to bat" for them in these busting decisions. Makes it sound like the brokerage has some role to play, however minor that may be.

I have learned that 99% of the time the busting process is fair, but there are times when it is not logical. It certainly has made me more cautious when handling a trade if it is outside the bustable window.

alanm · Jan 14, 2005

Has anyone had any bad bust experiences on INET (like the HD story) in the last six months?

I've been both the target and the requestor of several busts in that time, and all of them were ruled on fairly.

mdl060374 · Jan 14, 2005

Quote from sprstpd:

One day, some guy makes a mistake and enters an aftermarket order $10 higher than the real price on a $30 stock. I short it. Gets busted within 15 minutes. No big deal, I expected it. On the same day, I erroneously entered an aftermarket order approximately $10 higher than the real price on a $30 stock. Someone takes my bid. Within a minute, I call to have it busted. Answer comes back: no bust. True story.

Other people will probably try to respond and claim that the busting process is fair, but I am 100% sure that it is rigged given the right circumstances. That is the only conclusion I can come to given what I have experienced over the years. However, I must say that in the last few years it seems to have become slightly more fair. Not perfectly fair, but more fair.

IT is still not fair. I worked for a market making firm an I believe some assistant at Morgan Stanley hit the wrong key and didnt realize and took a stock down 10 points... All trades were busted...

The fact of the matter is it is all about lobbying and palm pressing, and clout. The bigger guys get preferential treatment.

stock777 · Jan 16, 2005

I sold a bunch of stock by mistake in a very THIN name a while back. Took the $11 stock down 60 cents, on a sell, when I meant to BID the stock.

Didn't even bother to request a bust, as I didn't think a case could really be made (this was during market hours) and I didn't want to call attention to it as an error. Luckily, I was able to cover at a very small loss, by being patient.

But if someone makes a serious error that would cost them huge bucks, I don't have a big problem with the busts. Also, all the innocent stops that get triggered are also usually busted, if all trades are killed.

MRWSM · Jan 19, 2005

Biggest bust I had was back in 2001 when Greenspan lowered interest rates for the first time. The QQQ(Q) went from 52 to 62 in a second and went nuts back and forth from 59 to 63. I got filled at 59 and sold at 62 a few seconds later and was so happy until they busted it at about 6:00 PM. The thing is it was an actual trade, sure it was nuts but that's what the stock was doing. It should have never been busted.

Ahh the good ole days.

nyc-hotshot · Jan 19, 2005

I'd use 10% as a rule of thumb for ECNs, although you can definitely still get busts under 10% on occasion.

The basic point is that the trade must be "clearly erroneous" in order to be broken. Clearly erroneous meaning obviously wrong or obviously done by error.

sprstpd · Jan 19, 2005

Quote from nyc-hotshot:

I'd use 10% as a rule of thumb for ECNs, although you can definitely still get busts under 10% on occasion.

The basic point is that the trade must be "clearly erroneous" in order to be broken. Clearly erroneous meaning obviously wrong or obviously done by error.

You would hope that it would be this simple. However, it all comes down to the persons at the ECN who make the final decision. You would think that "clearly erroneous" would be easy to judge, but apparently it is not.

mskl · Jan 19, 2005

Quote from sprstpd:

ARCA has the best rules of any ECN in terms of busts. It is usually on INET where the shenanigans happen because the busting percentage is the smallest (3% for stocks >= $10). 3% sounds like it should be plenty but when there is news in the aftermarket, 3% isn't anything. I doubt people purposely put on a "free option" trade to begin with. However, once they realize they misinterpreted how good/bad the news was, they always try to bust if their bid/ask fell out of the 3% window.

For example, I remember HD had earnings one premarket morning. The headline number came out and it was really positive - someone bid about 4.5% over the closing price on INET. I sold some of my HD shares to that person (was already long some). Turns out the earnings were good but not spectacular and that was the high print of the pre-market. After that there were some prints near the close. Now you figure since there is news that trade would stand. But no, it was busted. During the day, the market really started to go and HD went with it. HD ended up that day pretty close to where that shmuck busted the trade.

I have other examples over the years of this happening. Trades on news that I felt were legitimate were busted just because the price happened to fall outside of the bustable window.

Now it would be one thing if I could talk to an INET representative personally and chew his ass out on these bust decisions. However, I can't do that. I can only talk to someone at my brokerage. And my brokerage claims that busts are at the discretion of the ECN judging the busts and that they have no say in the matter. However, it seems like my brokerage could at least say something like, "you know INET, there was news on HD - you shouldn't bust that one." I don't get the sense that is happening. Of course, maybe it is true that my brokerage can't do anything about it. But then I think, lots of people say their brokerage "goes to bat" for them in these busting decisions. Makes it sound like the brokerage has some role to play, however minor that may be.

I have learned that 99% of the time the busting process is fair, but there are times when it is not logical. It certainly has made me more cautious when handling a trade if it is outside the bustable window.

I would disagree with the 99% figure. However, in most cases I would say that these unfair "busts" are not due to fraud but simply ignorance. Here are a couple of busts that I have had in the last year:

One premarket I sold some DNA (>$100) up $2.10 ish on ARCA. There was some news (minor) but it caused the stock to go up 2% +. ARCA has a $2 or 15% bust policy in the premarket but since there was news and the stock had traded some decent size on INET (all the way up) - then there was no way to expect a bust.

The $2 value is just a guideline and the fact that it was a $100 stock should have also been a factor not to bust. Also DNA had traded all the way up on INET (no busts) and traded higher on INET shortly after my sale on ARCA (the only trade that took place on ARCA). When this scenario takes place the ECN is suppose to use the last sale including in the pre market (only if no trades took place should they use the previous nights close) but since these trades on INET were not on the "consolidated tape" (all listed securites trades that take place on INET in the pre/post are not on the consolidated tape) they did not know that the stock traded all the way up on INET. And yes this information is readily available on the INET website but the person making the decision on ARCA was not aware of this and was not aware of the news that came out.

Another bust took place on PDG (gold stock) one morning. Gold was up $10 that AM and I sold the stock up $.55 ish which was just above the INET threshold (3%). When I mentioned this to my broker (gold up $10), they relayed the message to INET and I was told that the guy who made the decision was not aware that PDG was a gold stock as he simply looked at a newswire to see if there was any stock specific news. PDG opened up .50 that morning and easily traded through my sale price by 9:45 AM.

You guys seem to know a lot about the "busting procedure" but I'll bet many of you don't what happens in the following situation:

1) trader A from broker Z buys a stock from trader B on ARCA/INET who also has the same broker Z. Trader A requests a bust. What will the broker do?

P.S. AlanM: Do you remember the bust I helped you with a couple of years ago?