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« Weighing the Week Ahead: Interpreting Mixed Signals | Main | April Employment Report Preview »

April 23, 2013


Wisdom Seeker

Hi Jeff -

I think you can go a step further with this discussion...

First, although those folks with a "shopping list" and trailing buy orders in the S&P yesterday might have gotten a bonus, it's a risky way to trade. Consider those folks with trailing buy orders for gold last week - they were hammered by getting their orders filled at prices which soon proved to be well above the market price!

There's a broader conclusion to both the bear raid and the flash crashes: any time you send a stop-loss order to your broker, you're giving Mr. Market a free option to liquidate your shares at a loss to you (and thus a profit for Mr. Market). In the old days a "flash crash" was called a "Bear Raid" or "running stops", and it was one of the ways the marketeers fleeced the muppets so that the brokers could have their yachts...

Conversely, any time you leave a trailing buy order out there, you're giving Mr. Market an option to dump his shares on you, at a price which might have been fair when you entered the order, but most likely won't be fair when you get your execution.

All options have at least some value. Why give value away for free? Folks shouldn't be giving those stop-loss and limit-order options away to the market, unless they're getting good value in return. Maybe the peace of mind is worth it, but it seems like Mr. Market is collecting a lot of rent from those unwilling to hold their positions with conviction...

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