Trade bust fishiness

D

d0rian

I've lost a lot of money recently to a series of trades made near the open that then got busted (reversed) in next couple hours.
  1. First off, just how long after market open can a trade be busted? What's been particularly galling about the recent ones is that they were busted nearly 90 minutes(!!) after the open, and long after I'd closed the position myself, leaving me with a naked short it cost me dearly to close. The few previous times I'd had a bust, they happened no later than 9:40am, and an IB rep I spoke to likewise said she'd only seen them happen in the first few minutes of trading. It's obviously completely unreasonable to have to wait hours wondering if your trade's going to stick.
  2. Are busts the result of specific request made by a trader, or are they executed automatically by the exchange? If the former, that seems to open the door for all kinds of shadiness -- are my trades getting busted because of a call someone puts into a contact at the exchange after seeing they got a bad fill on a GTC order they wish they could have back? My reading leads me to believe, though, that trade busts are actually highly regulated and always automated / based on some calculated theoretical value, without any human judgement...but the fact that they happened several hours after the open, and that they weren't actually all that far off from the prior day's close doesn't really add up.
  3. Is there any way to appeal a busted trade? I've read the Exchange rules that mostly boil down to "whatever we say goes, is final, and you have no recourse"...is there really no way to do anything about it, even when it seems clearly erroneous?
 
It is a pity that you lost a lot of money. Usually when I try new options for work, I try to check the efficiency of such an option on small amounts.
 
mskl said:
I could be wrong (not likely) but there is only one exchange that would bust trades like this hours later..........


The Montreal Exchange


stay away
More...

Is something like this happening frequently there? Is there a specific reason (e.g. legal framework for cap. markets in Cananda) that gives room for this type of reversals?
 
mskl said:
I could be wrong (not likely) but there is only one exchange that would bust trades like this hours later..........
The Montreal Exchange
stay away
More...

Yup. Nailed it.

It's a telling / unsettling that you so quickly identified it from the general descriptions in my original post...looking forward to hearing what you know about it.
 
d0rian said:
Are busts the result of specific request made by a trader, or are they executed automatically by the exchange? If the former, that seems to open the door for all kinds of shadiness -- are my trades getting busted because of a call someone puts into a contact at the exchange after seeing they got a bad fill on a GTC order they wish they could have back? My reading leads me to believe, though, that trade busts are actually highly regulated and always automated / based on some calculated theoretical value, without any human judgement...but the fact that they happened several hours after the open, and that they weren't actually all that far off from the prior day's close doesn't really add up.
More...

Just to supplement the above; IB has a page describing their bust procedures, which reads in part (bolding mine):

"Customers who receive an execution which they believe to be clearly erroneous and who wish to have IBKR petition the exchange or market center to have the trade cancelled on their behalf are strongly encouraged to submit their request using the Trade Cancellation Request tool located within Account Management. While requests received via telephone will also be processed, such requests may involve connection wait times and entail information collection on the part of IBKR which, in the aggregate, may lessen the likelihood that the petition is submitted in time."​

This strongly implies two things: (1) that the process is NOT, as in my OP, 100% automated and processed by the exchanges based on objective metrics, but rather there there's a process for an individual trader to request that a brokerage petition an exchange for a trade be reversed, meaning there are absolutely human judgment and biases that factor in, and opportunity for misconduct; and (2) there's clearly a time limit of some sort for all of this.

I'll wait to hear what @mskl has to say, since he seems to have some familiarity with why the ME is particularly awful.
 
How the hell can you do this without the counter party having a say. This is absurd. If it's a person it's one thing, but if it's a bad computer algo it's complete bullshit. Rarely do I understand why people go out and go postal, but this would be one of those cases where Im not quite sure i'd be able to contain my anger.
 
okay. I could talk for hours about these things and I will try to be fair to the ME.

The folks in Montreal quite simply don't understand trading. My issues were frequent but they were about 3-5 years ago. I didn't really care about the money - I just wanted them to update their rules so they were fair. The US markets (equity and option) have done a great job wrt to busting trades. Keep in mind that they also once had crazy rules.

The first problem on the ME is the price range for busts are crazy. For example - I believe all option trades on the open < $2 can be busted if they seem to be mis-priced by .25. So if an option trades at $1.60 on the open and the next m/m bid is $1.85 then the trade could be busted. Keep in mind that on the open - the indicated equity price on the TSX can move significantly just prior to the open (ie these days a stock like Air Canada could have an indicated market of $20.50 at 9:29:59 and then it opens at $22. This makes it very difficult to price your opening orders.

Secondly, there is a guy at the ME who will monitor all trades on the open to see if any trades fall into a bustable category. He will then call that clients broker and ask if they want to cancel the trade. So the second problem is the ME calls the broker (they do not do this at other exchanges). Now, what do you think is going to happen when he calls the broker and says - "one of your customers sold some calls at $1.60 and we can cancel them if you like". The broker will say - what is the current market (say $2 bid). Well of course we will cancel and sell them higher (lol). Look at all the friends this guy can make (too funny)

The third problem on the ME is there is no fee to cancel these trades. In the US - the exchanges have minimum fees to cancel trades. So the client selling at $1.60 would have to pay a fee (say $500 or $1,000) to cancel the trade. This is why so many one lots on the ME are cancelled. Imagine all this nonsense for a 1 lot?

The fourth problem is there is nothing in the rules that allows the Exchange to "lessen the bustable range" (ie increase tradable prices)in times of market volatility or specific equity volatility (like they have in the US). No one at the ME is actually paid to think (lol). It doesn't matter if there is a massive gap up in the equity market (like Friday - I'm assuming these busts happened on Friday?).

The fifth problem is the "assclown from the ME" calling all the brokers to cancel trades can take him a few hours to make all his calls on a big market move. This can result in people like yourself getting the bust at 11 AM (only in Canada)! This Exchange would lead planet earth in busts/trade.

The sixth problem (last one I promise) is that client to client trades are all busted but for those pro/client trades- they can be price adjusted. And clearly this is the Exchange listening to their preferred customers (ie the market makers/pros). So this means (back to the first example) - if you buy 5 calls at $1.60 and a "pro trader" also buys 5 at $1.60 on the opening - and then you both sell at $1.85 then your order is outright busted. You might find out 1 hour later when the market is $3 bid. The pro can adjust it to the minimum tradable price (before getting busted) so in this case he can adjust it a .05 higher to $1.65. Why do they allow this only for the pros? Ask the ME?


Now in fairness to the Exchange -these rules are published and they are not hiding anything and they have also requested comments on these rules from time to time. The problem is that the risk of entering opening orders often outweighs the possible gains so I currently ignore them and focus my attention on US markets - where I currently do about 100K contracts per month and have NOT had a single bust in many many years. Can you imagine buying some puts on SHOP on the opening - then scalping it for .50 and then the stock falls $150 over the next couple hours and then your initial trade gets busted? It's almost as if the ME is saying - if you're right - then we can bust (lol). If you're wrong - have a nice day.....

As I customer you could actually "arb" these stupid rules. But I didn't tell you to do this......

As for what you can do? Unfortunately not much

I'm assuming you are Canadian so you might consider contacting your provincial regulator and filing a compliant. Personally I gave up "complaining" to regulators. All these Exchanges - "self regulate". If you don't like their rules you can play elsewhere...

Best of luck
 
You must log in or register to reply here.
Back
Top