Why allow Busted Trades?

A

achilles28

There's probably a tonne of history behind this that I'm ignorant of, but look at it from a couple angles.

1) Busted Trades are a moral hazard.

They remove market punishment for reckless or stupid behavior, encouraging it to happen again.

2) They punish innocent counter-parties

Why should the guy who plays by the rules and trades honestly, pay for the mistake of some idiot who makes a fat finger by selling 1 billion shares at bid, or can't babysit their algo?

3) They destroy market confidence and erode liquidity

The more frequent busted trades are in any market, the less honest traders will trade those markets. Who wants to trade US equities, now that mini-flash crashes are the norm and trades are busted in individual stocks on a routine basis? This is nonsense.

Busted trades really seem to be a get-out-of-jail-free card, offered by exchanges to their biggest clients to keep their business at the exchange. The exchange and the big traders collude to screw other participants for their own mistakes. If both parties agree to bust a trade, sure. It's consensual, right? What about all those traders that got cleaned out during the flash crash on Proctor and Gamble et al? How fair is that? If you hit the offer to buy 1 million shares and need to get out, why shouldn't you have to sell your position, like everyone else?
 
I agree completely. Some may argue that you shouldn't be able to wipe yourself out financially with a typo, and I can sympathize with that point of view. However, there has got to be some penalty (the bigger the better in my opinion) for screwing up.
 
Quote from achilles28:

There's probably a tonne of history behind this that I'm ignorant of, but look at it from a couple angles.

1) Busted Trades are a moral hazard.

They remove market punishment for reckless or stupid behavior, encouraging it to happen again.

2) They punish innocent counter-parties

Why should the guy who plays by the rules and trades honestly, pay for the mistake of some idiot who makes a fat finger by selling 1 billion shares at bid, or can't babysit their algo?

3) They destroy market confidence and erode liquidity

The more frequent busted trades are in any market, the less honest traders will trade those markets. Who wants to trade US equities, now that mini-flash crashes are the norm and trades are busted in individual stocks on a routine basis? This is nonsense.

Busted trades really seem to be a get-out-of-jail-free card, offered by exchanges to their biggest clients to keep their business at the exchange. The exchange and the big traders collude to screw other participants for their own mistakes. If both parties agree to bust a trade, sure. It's consensual, right? What about all those traders that got cleaned out during the flash crash on Proctor and Gamble et al? How fair is that? If you hit the offer to buy 1 million shares and need to get out, why shouldn't you have to sell your position, like everyone else?
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of course if you are on the other side you will change your tune fast.
 
It used to be that there were clearly erroneous "clearly erroneous" trades. I mean $30.00 stocks trading a few times at $1000. It seems to me, back when that would happen, it was in the best interest of the markets to break those trades as that was not good price discovery.

I don't see that many of those kinds of trades anymore (people have learned not use market orders, market makers are better at catching stuff before it gets that far). However the thing that bugs me about the breaks they do now, they will look at where the stock in question moved AFTER the suspect trade to determine if they should break the trade.

For example if a $30 stock suddenly trades at $45 but then goes back down to $30, they will probably break trades above $36 or something. But if there's a buyout of a $30 and it shoots up to $45 and you got short at $40 for some reason, good luck trying to break that. I don't think it's fair for the markets to use information that was not available to the traders (i.e. future trading price) when trying to decide if the trade is "clearly erroneous".
 
CME has one of the best sets of rules and model defining a No Bust range by instrument based on previous quarter trading prices. ie.. currently 3 points for ES.


http://www.cmegroup.com/company/membership/membernet/files/20090928S_5013.pdf

"The liability cap of $500,000 for error makers in the former version of the rule has been eliminated. New Section E. (“Liability for Losses Resulting from Price Adjustments or Cancellations”) makes a party who is responsible for a trade being price adjusted or busted liable for all realized losses of persons whose trade prices were adjusted or busted as a result of the error trade, provided that those persons took reasonable actions to mitigate the loss. Given that the financial exposure to a non-error making party is unlimited, it was determined that limiting an error maker’s liability was inequitable. A claim for loss must be submitted within five business days and the procedures for filing claims are detailed in Section E."


The CME
GlobexTM electronic trading platform deploys various measures designed to preclude “run-away” markets not driven by the fundamentals of the situation.

These measures include …
(1) order quantity restrictions,
(2) price banding,
(3) stop price logic functionality,
(4) market and stop order protection points,
(5) message traffic “throttling,” and
(6) option market maker protections.

While traders may enter multiple orders, the quantity of any single order in E-mini S&P 500 futures is constrained to 2,000 for outright positions and 5,000 for spreads. Different quantity restrictions are imposed in various markets as appropriate. This is intended to prevent so-called “fat-fingering” errors.

Price banding is a system functionality that prevents a trader from entering a buy order than is more than 12 points above; or, a sell order than is more than 12 points below, the last transacted price (or any better bid or offer) in E-mini S&P 500 futures. (Levels vary on a market-by-market basis.) The CME Globex system rejects orders entered at prices outside this protective band.

The stop price logic functionality is designed to prevent the execution of stop orders under certain conditions. If a stop order, or series of such orders, would result in transactions at price levels beyond the contract’s no-bust range, then the market is placed in a “reserve” state where orders may be entered, modified or cancelled but not concluded.


The CME Globex electronic trading system allows users to enter market-protected and stop orders that are automatically assigned a limit level. This threshold is set at 3 points in E-mini S&P 500
futures but may vary from market to market. Use of this functionality is intended to prevent orders from being filled unintentionally apart from prevailing market levels.

CME Group maintains automated controls on the volume of message traffic for individual connections to the Globex system. This functionality can throttle back message volumes such that the number of messages per second (MPS) falls below a pre-specified
threshold.

Option market maker protections represent controls established limit one’s exposure to execution on a large number of standing orders. When these parameters are met or exceeded within a specific
time period, this functionality may cancel all standing orders for that trader and prevent further order entry for a specified time period.


Regarding flash crash:

"Busted Trades? – While the cash markets were still
sorting out all the trades, and many trades remained
unsettled as of May 10th, all futures transactions
during this period had been settled and cleared.
There were no instances of busted or even disputed
trades in the context of stock index futures offered
on CME Group exchanges throughout the period in
question."

"While inconclusive at this point, we believe that the
stock market incident of May 6th might be traced to
divergent trade practices and price protection
mechanisms amongst the various stock trading
venues on which domestic equities are traded and
which comprise the National Market System (NMS)."
 
Busted trades aren't always due to a trader on one side of the transaction screwing up. The exchange themselves can send out execution reports that are in error.

And what if you have a stop loss order that is executed solely due to a fat finger trade. Do you really want to be forced to have that trade stand?
 
Quote from colonial dr:

give me one "ini flash crash". Sounds like you cant deal with draw downs. If hft makes so much money....why are you too stupid to go work for one -or start one?
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You obviously don't understand the millions it costs for the hardware alone. That's besides the point. If some firm has enough capital and intelligence to start one, getting a decent risk management plan is a no brainer.
 
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