Garanteed stop losses: who's benefitting?

[alphahunter]

Something "truely extraordinary" just happened to me!

My garanteed stop losses on this spread-bet US stock has been hit - in ultra low volume, share down 6% in hardly any volume right at the US opening within 3 minutes, hit my stop loss - and then oh miracle, got back to its level (actually 2% higher) where it should have never moved from.

The stock is subject to a solid cash-bid, there have been NO RUMORS or TALKS of the bidder walking away (the two companies are desperate to merge, so are their shareholders) and NEVER has the target company share-price moved by more than +/-2% to the average discount to cash-bid of 12%. We are talking about two small caps, probably too small to interest any arb deasks.

It took just about twice as many shares to drive the price down as there were shares (my holding) to collect on the cheap. I do not have the VWAP between the opening and my stop loss being hit.

I'm just wondering, who is the clever winner in this trade, that managed to hit my garanteed stop loss bid and sale the stock back into the market at say mid-price, making close to 9% (less VWAP cost) in 3 minutes and 10 seconds?

 

[foredog]

Are you sure it's not just that there was a large spread when the market opened and a scrap traded at the bid, therefore triggering you're stoploss?

I'd doubt it's the SB out to get you, if it is move your account.

 

[PualoP]

Are you actually insinuating that a spread betting firm has gone into the underlying market and moved a stock lower just so that they can take out your stop?

 

[alphahunter]

Are you sure it's not just that there was a large spread when the market opened and a scrap traded at the bid, therefore triggering you're stoploss?

I'd doubt it's the SB out to get you, if it is move your account.

Thanks for your reply,

Very fair point you've made. Unfortunately - and unless I haven't found the key - advfn does not to provide tick-by-tick bids and offers on US stocks as they do on UK stocks (e.g. gone after 30 minutes).

I thought could it be conceivable that the SB sold some shares on a weak bid / large opening spread to get to the garanteed stop loss. I would assume that the SB hold some shares to hedge their book as my total position with them in the stock is (was) twice as large as what was garanteed.

The reason why I am "surprised" is that the target price's SP has never deviated by more than 2% either way to 12% the cash-bid discount and give it another 2% for the widening spread, that 4%. The bidding co was up 1.5-%-2.0% at the opening when the target dived down. But again, I do not have the series of market bids.

I am ready to give the benefit of the doubt as I have been pleased so far on the whole with the SB but this was the first time I ever used a garanteed stop loss.

Could I ask a favour, could you point me in the right direction where to get for free tick-by-tick bids and offers on US stocks after the action?

Thanks for your reply.

Alphahunter.

 

[alphahunter]

Are you actually insinuating that a spread betting firm has gone into the underlying market and moved a stock lower just so that they can take out your stop?

Is it possible?
The underlying share-price intraday high and low show that the very low of the day hit exactly the garanteed stop loss. I don't know what the underlying volume was at that price point, but the garanteed stop loss "worked" in that respect.

I do not have access to the series of market bids or vwap (e.g. no bloomberg terminal) so I do not know what the cost would be to take the price down.

Am I naive, schizophrene, cynic or spot-on?

BTW, why the laughing icon?

 

[foredog]

Why not post in the US shares section asking if someone with access can tell you what the time and sales were first thing and see if it was just an unlucky incident where a scrap traded on a wide spread.

 

[anley]

Who's benefitting?

That's an easy question to answer.

Who are guaranteed stops heavily marketed to - beginner and general retail clients

Who are guaranteed stops not heavily marketed to - professional traders or those who've been around for a bit.

The conclusion is obvious, the spread betting firms are benefitting by selling overpriced insurance to people who don't know the real value of said insurance.

 

[Trader333]

What was the stock ?


Paul

 

[alphahunter]

Who's benefitting?

That's an easy question to answer.

Who are guaranteed stops heavily marketed to - beginner and general retail clients

Who are guaranteed stops not heavily marketed to - professional traders or those who've been around for a bit.

The conclusion is obvious, the spread betting firms are benefitting by selling overpriced insurance to people who don't know the real value of said insurance.

Yeaaaah right. Sorry but cheap and slightly patronising talk.

Sounds like why bother buying a put option. I have seen enough bids failing to materialise and see the share price of the target company slumped as a result. This one went from $1 to $1.85 on the bid, paying 55cts to cover that risk does not seem expensive.
As a matter of fact, SB do sometimes misprice garanties as I experienced with Rohm & Haas under bid by Dow Chemical back in December, whereby paying for a garanteed stop loss was far cheaper than writing a put option for the similar risk/reward outcome. In other term, the pricing of the stop loss was based on historic data / volatility, not on the potential binary outcome of the bid.

So yes we know that garanted stop losses are marketed to the retail and highly ignorant public, not to the Astute Professional Traders.

 

[alphahunter]

Why not post in the US shares section asking if someone with access can tell you what the time and sales were first thing and see if it was just an unlucky incident where a scrap traded on a wide spread.

will call a friend with a bloomie. Thanks.
PS: Jeez some of the posters here seem to be big-headed !

 

[foredog]

lol

 

[anley]

Alpha

I should now, in my time we took the retail trade for £100,000s on guaranteed stops but made virtually nothing from them via the professional clients (I class those as working in the square mile).

Nothing like scare marketing to sell over priced insurance

And did the professionals sometimes get slaughtered on slippage, 20 points, 30 points sometimes even 50 on the FTSE? You bet they did, just part of the business. But when you add that slippage up over the year and then compare it to the amount of insurance you would have had to pay for g.stops the difference was shocking.

Patronising talk or not, it's fact.

 

[tar]

which stock ?

 

[alphahunter]

Alpha

I should now, in my time we took the retail trade for £100,000s on guaranteed stops but made virtually nothing from them via the professional clients (I class those as working in the square mile).

Nothing like scare marketing to sell over priced insurance

And did the professionals sometimes get slaughtered on slippage, 20 points, 30 points sometimes even 50 on the FTSE? You bet they did, just part of the business. But when you add that slippage up over the year and then compare it to the amount of insurance you would have had to pay for g.stops the difference was shocking.

Patronising talk or not, it's fact.

Anley,

Your second message has meat to it and reinforced my conviction on guaranteed stop losses. Thanks.

I personally don't buy guaranteed, as it is usually priced way above the statistical occurence of the risk that is being insured against. Even without using sophisticated pricing model, a simple distribution of daily returns makes it obvious.

I don't use stop losses either - may be I should - as I suspect that my stop loss order is bound to be executed with a fat slippage that will be no better if not worse than my belated behavorial reaction on dealing on adversary price action (read "what's the ....is going on? close position!")).

Having said that, I bought twice guaranteed stop losses on US stocks when I expected a piece of news to come by a given deadline would have a sharply binary impact on the share - say > 2 sigmas.
I've noticed the SB fail in these cases to adjust on time (read increase) the "minimal distance" of the garanteed stop losses whilst the call / put prices at strike shoot-up.

The minimal distance seems to be based on historical rather than implied vol before the SB catches-up eventually (in the Rohm & Hass case, they stopped garanteing stop losses as they could not off-load their risk in the option market at an attractive price. In the Imperial Energy case (UK stock), they increased the minimal distance to the point that it was not making sense anymore to insure).

 

[anley]

Of course g. stops should not be avoided in all situations.

For example, if I were a trader in the FTSE and usually traded £5 a point then 99% of the time I wouldn't use them.

But say I had a big idea, one which if it worked could make big cash and so traded £50 a point, then I think the insurance is well worth if, even if it is expensive.

G. stops are just another tool in our toolbox and we'd be stupid to chuck it out, Keep it there even if you use it 2-3 times a year.

 

[alphahunter]

What was the stock ?


Paul

CSR bidding for SiRF

 

[tar]

CSR bidding for SiRF

that was late !