Archive for April, 2013

Flash crashes and the gold smash illustrate why stop-loss orders are bad for you

Wednesday, April 24th, 2013

Stimulated by this post at A Dash of Insight by Jeff Miller.

Yesterday’s Twitter-induced “flash crash” and last week’s “gold smash” illustrate why using stop loss orders and trailing buy orders can be a really bad way to play in the markets.

Folks with a “shopping list” and trailing buy orders in the S&P yesterday might have gotten a bonus by getting their orders executed during the dip, but 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! That sudden dip isn’t always buyable…

But there’s a broader conclusion to both the gold-smash 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 it very 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. And maybe sometimes those sudden dips prove profitable, but it sure looks a lot like collecting pennies in front of a steamroller.

New Paths to Improved Standards of Living

Friday, April 19th, 2013

From a discussion at Economist’s View, I submit the following on the topic of “more exploration of non-wage paths to rising incomes and living standards.”

Another possibility to improve living standards would be to minimize the rentier / interest-earning fraction of the population (who are effectively a tax on the working, indebted population) and help those individuals find more productive (or at least, less-extractive) roles. This issue has both generational-conflict and class-conflict dimensions, but there are non-conflict alternative solutions that no one talks about. A shift in cultural values could lead the seniors to think less in terms of a pure-leisure “retirement” and more in terms of “aging gracefully” while still contributing as much as possible to family and to society. A second shift could lead the “rentier class” to be stigmatized for engaging in consumer lending (a tax on the borrowers) while socially rewarding those who actually engage in investment behavior (formation of true sustainable capital, rather than consumption).

Lowering prices, or at least the rate of increase of prices, would improve living standards (at least in a ceteris paribus world). The inflation goal could be 0%, not 2%, and in fact “stable” is the statutory goal in the Federal Reserve Act. The debt-funded sectors (housing, healthcare and education) all need to become less expensive in order for living standards to rise.

A third way of increasing living standards would be to encourage job growth in sectors that actually improve living standards, while minimizing jobs (and other costs) in sectors that don’t really contribute. I mentioned the broken healthcare sector above. If we could find a new “peace dividend” (improved international diplomacy resulting in a reduction in military and homeland security staff), that would allow perhaps another million potentially-productive members of society to actually produce goods and services (that would improve living standards), rather than defending against harm (which consumes resources that perhaps could be better used elsewhere).

The options exist. We just need to get people thinking about them, instead of wasting their time on divisive non-solutions.