Line Your Own Pockets

Michael: 00:00

Alright, everyone. And welcome to another episode of Line Your Own Pockets. It's funny we were talking in the green room that this is this one might trigger a bunch of people because we're it's a topic that I know people get very upset about. And I know personally, I have a not popular take with it, but we're talking volatility halts today. So Dave, why don't you why don't you start us off with why in particular you had this on the list and why you wanted to talk to people about it?

Dave: 00:30

Yeah. It's a topic that comes up every so often, and a trader was asking me about, you know, how to to think about these volatility halts. I did not take good notes about this, and it was a long time ago when somebody asked this. It's been on my list for a long time. So I don't remember exactly the trader it was, but it's such a common topic that, especially in the low float, shorting low float space, there's just I mean, that's kind of the whole all the risk, or there's a lot of risk around those halts.

Dave: 01:07

So I think it's a really good topic. You and I have sort of talked around it a little bit, I think, on some other episodes where so I think I'm very curious how we're gonna talk about this today, where we're gonna end up.

Michael: 01:27

Well, I think first, it's probably a good idea for people who don't know, a, what they are or b, the history behind them. I think it's it's gonna be good to go into because I was there. I was there the day that that kinda created them. But first of all, with volatility halts, we're just talking about there is halts that we have been put in the market and if the stock or interim moves, let's just say too fast. So more than x amount in y period of time, they just shut down for a bit.

Michael: 02:01

It starts at five minutes and I think goes to ten and then it there's all of these stages and we'll not really worry about the nitty gritty, I think of every single rule out there. But the purpose behind it is to just kinda let everyone chill out a bit and just to say, okay, you know, let's take a second to look at the news and to kind of figure out what's what's happening with it and just to give the stock a bit of a pause and then reopens from there at at an auction defined price. So just like when a stock opens or when IPOs, right, they'll look at the bids and the offers and see roughly where people want to trade it at and then it will open at that price. Any first of all, anything you disagree with that definition? And do you remember were you there for what kind of caused all this, which we'll talk about next?

Dave: 02:53

Yeah, I think those rules are pretty close to accurate. They're all sometimes when you just look at them, if you were to naively look at some of these, you might think, Wow, there's a specialist behind here that's deciding when they open. But it's all programmatic, and it's all fully predictable. So you can see and predict exactly when each of these are going to open. It might change during the halt, depending on the action and the auction during there, you know, within it, But it's totally predictable, and you can determine when something is gonna open based on the action entirely.

Michael: 03:36

Yeah. The the rules have been given ahead of time. So it's not they're not and I've heard that where people, they think they halt randomly and they reopen randomly at time random times or places. And that's absolutely not the case. Right?

Michael: 03:53

It is it's all you can read it. It's on their website. It all goes. But but yeah. Were you the day that it all started?

Michael: 04:00

I I was there. Were you

Dave: 04:02

I I I don't remember exactly when this started, so I was I wanna hear your war story here.

Michael: 04:10

There was first of all, there is a great video on YouTube. Just Google flash crash squawk. I used to have this squawk in in my office where a guy was basically just like an auctioneer and just calling out the prices of the the market. And back then, was actually kinda useful because you could hear like the roar of the crowd and everything behind him on on what would happen. But I wasn't at the prop firm at the time, but I just know it's that guy who's been he was running that squawk for I think like thirty years.

Michael: 04:42

He's just sitting on the floor of the exchange just kind of quoting the market over and over. But what had happened was one day seemingly out of the blue, the market just started selling and not just a bit. Let me get the actual numbers here too. But the it just started it started selling and it started selling and it was everyone was scrambling to to try to figure out why. There was no there was no news event.

Michael: 05:14

There was no nothing. This was short after nine eleven. So people were kind of fearing the worst. They were worried about, you know, it's February. Right?

Michael: 05:29

So you had nine eleven, you had some other terrorist attacks, you had things like that. And yeah, the market dropped almost 9% in ten minutes and not a stock like that, especially if you're trading low float stocks. You're like, it's 9%. What's the big deal? No, this was the entire market.

Michael: 05:47

A trillion dollars, which back in my day used to be a

Dave: 05:51

lot of money, but it seems

Michael: 05:52

like every company's worth a trillion dollars now, was just evaporated from the market. And then the crazy thing is you just fast forward a bit, we closed like negligibly down on the day. But what it what happened looking back is a dude just put in like an extra zero in in some code somewhere. That someone sold like a 100,000 contracts on the S and P 500 in one shot. It was like $5,000,000,000 and everyone had kind of assumed the work.

Michael: 06:25

Again, 2010, so you're thinking after 09/11, after the great financial collapse, everyone's like all like worried For no reason the market just completely tanked. What happened from that was a couple things. One was people realized that HFT market makers aren't going to be there when you need them because they all had systems in place, because they're all systematic in nature to just turn off, to just cancel everything. The amount of liquidity in the market just evaporated. There was no bids out there.

Michael: 06:59

No one was buying anything. And all of the manual traders were looking for what's, you know, why if the market goes down like 2% in a day, that's they'll talk about it on the news. But this was down 9% and there's just nobody knows why. Everyone's trying to say, did did something hit something? Did the nuke go off?

Michael: 07:17

Are we at war? What's going and couldn't find anything. And then slowly as people kind of discovered there was nothing going on, you had people just starting to to kind of buy back in and and buy dips. And that did again a handful of things. Imagine you were someone who had just had an investment, you put out a stop loss.

Michael: 07:36

There were some stocks that were down 2030% in a single day just to close even or green. So that was the origin. So from that there was a whole bunch of committees formed like governments do and how can we figure out a way to do this? And the idea was that if there's a move happened that was too fast and too far, you halt the market to give those people time to digest what had happened. And then with an auction, so in today's world, if that would have happened, you probably would have an initial quick drop.

Michael: 08:06

The whole market would stop. People would realize nothing bad has happened and then that auction price would probably actually bring it back up to where it was and the market would just resume as normal because that was like yeah. I remember I was working at the hedge funds at the time and our phone was just ringing off the hook. Everyone was just staring at the CNBC just going, what's happening? Where it seemed like the entire world just implode.

Michael: 08:32

I know just don't think a lot of people know that and they think these rules were made up arbitrarily, but it really was a it looks like everything's coming to an end moment that that made them implement these rules.

Dave: 08:48

Alright. So, yeah, I do remember that time. And my guess is, you know, whenever I hear the word, okay, government committees are formed. I start to worry. And yeah, they came up with this solution.

Dave: 09:05

So my guess is where you're going to fall on this is you think they're a pretty good thing, just from what I've gathered from how you presented this.

Michael: 09:17

I think, and this is probably actually where we'll agree. I think it probably happens happened in the same way a lot of things from the government happens where the intention was probably a good thing. Like, did done almost have the financial system be able to collapse because some dude hit an extra zero on his keyboard. Doesn't seem like a good it seems like we need a a solution there. Do I think they picked the right one?

Michael: 09:43

Probably not. You know, it's so does do I agree with the mechanism? No. But is it better than the entire world coming to an end? Because what if you put an extra two zeros in?

Michael: 09:58

Right? Does does the whole world cease to exist at that point? So I what where I disagree with a lot of people is a lot of people I think believe them to be nefarious in some way. And it's it's the whole quote of never assume malice when incompetence fits the same rule. So I think it was probably the same as you know, they're they're sitting around a table somewhere.

Michael: 10:21

A lot of people who've never traded before and they're saying, do we do to make sure this doesn't happen? And one guy goes, what if we just stop the market for a while? And he goes, okay. And the reason it's it's a natural evolution because the market has had, especially the future markets has had limits forever. There's a there's a and they happened a couple times in COVID where if the market's down too much in a single day, it stops for the day.

Michael: 10:46

And those have existed for like a hundred years and have not caused any problems. The problem I think I have and I ain't gonna place I think we'll agree with. I don't know why we have to do it for single stocks.

Dave: 10:59

I was just thinking the same thing.

Michael: 11:01

Right. Like, you know, who who cares if especially, right, random ass biotech from China, why goes up a thousand percent in the day. It it it it matters to us who trade it, but that's not going to affect the planet. So if there was an argument I could make, it would be markets and then maybe mega cap, like companies that are systemic. Like you don't want Apple, you know, selling off 30% in in a couple minutes.

Michael: 11:36

But yeah, who cares about, you know, mom and paw grocery store or something like that, whether it could go to zero in a minute. I don't think it's not gonna affect anything. But yeah. So I I don't basically I'm not there are better ways to do it, I believe, but I don't think it was done under any sort of like malice to like hurt small traders or something. I think there was a legitimate reason that they decided to to do what they did.

Dave: 12:00

So are the overall market ones, do they also trigger on the upside? I'm not even sure.

Michael: 12:06

Limits? No. But volatility halts. Yeah. So there is no upward limit, which is it's funny because so in this moment in time, if you're listening to this later, we're we're in the whole AI kind of craze with a lot of these NAND memories or flash memories.

Michael: 12:26

And anyway, the Korean market's going nuts. The Koreans like their two of their stocks make up like 30% of their entire market and they're they're Samsung and SK Hynes whom who make these NAND chips. So we've noticed that they do stop up and down. So it's like for two weeks there, the South Korean market just would open up, halt either up or down and then close for the day. But yeah, for us, for the limits, they don't they just happen to the downside.

Michael: 12:56

They they don't happen to the up. Yeah. And with volatility halts, again, I I don't see why they happen to the upside. That doesn't make any sense to me is because who cares if dude hit an extra couple zeros to the upside? It shouldn't.

Dave: 13:09

Yeah. You know? Alright. So I I think in this situation, it's it's useful to think about, okay, what's good for society, the overall market

Michael: 13:22

Mhmm.

Dave: 13:22

And then what's good for traders? And the my it was very interesting. I pulled all the traders, almost all the traders I coach. A lot of these guys are professionals and been doing this for a long time. There are basically two different camps.

Dave: 13:43

Ones that wanted to get rid of them. They thought they had no good reason. They thought they were a free market would be a better approach. And granted, what I specifically asked them about was the single stock volatility Halts. So I sort of brushed and I think that's what we're talking about because the overall market ones, they don't ever really come into effect.

Dave: 14:10

I mean, it's pretty rare.

Michael: 14:12

Yes.

Dave: 14:12

But these volatility halts for single stocks happen every day routinely. So a lot of traders have been caught in some of these where they, you know, you lose a lot of money if you're caught on the wrong side of some of these halts. So I think the trader, sort of the trader default instinct is to I think they realize that it's probably better if these didn't exist. But then so that's one camp. The other camp was like, no, these are great.

Dave: 14:50

Not because they're great for society, but because they're great to make money off of. In fact, one guy so Chris, he had a really good quote. He said, I don't know about the big picture, but for me, anytime there's an auction, there's an opportunity to make money. So why would anybody want to get rid of these things? And that's, like I said, that's separate from what though, you know, what's good for the overall market.

Dave: 15:18

But for professional traders, it definitely seemed to be two different camps. One that wanted to get rid of them, but another one that, definitely didn't want to get selfishly didn't, definitely didn't want to get rid of them.

Michael: 15:36

Okay. So that that's probably the best place to move to now. Cause I think, and I'll, I'll give you a chance to disagree if you want, but I think we both agree that probably makes sense for individual like that the market as a whole. An argument could be made for like systemically important companies, but it makes no sense for random, you know, company that's worth $5,000,000 to have volatility rules for that's and speaking purely from the, you know, benefit to long term investors and health of a market. That that's where I stand currently and then we can move the topic over because I I I think I'm gonna agree with the guy who's who's pro auction, but that's a different question.

Michael: 16:28

And I I like that you separated it like that because there's one to say the flowing markets of people who's who most of the time, know, put a certain percentage of their paycheck into Apple and and walk away and don't look at the market until the next time it's put a certain percentage of paycheck in is different from us to play the game. So the thing to benefit or harm those two different people are just different you're answering different questions. Right? Is, you know, and, you know, the the politicians that make it are definitely not concerned with with us. Right?

Michael: 17:10

They're concerned with the voting populace that just right every two weeks they auto deposit somebody into the market. And those people were the ones who would definitely have been up in arms when the market dropped 10% in a single day during a day just to close positive. Right?

Dave: 17:25

Sure.

Michael: 17:26

That's the old man that has a heart attack who's calling his I was gonna say member of parliament, but that's us, your senator or whatever and saying, hey, you gotta fix this. So, I think I think that's the best way to do it is let's finish the topic of whether or not we think they're good to protect society and then go on to what the benefit or or drawdown the traitor is and whether they should be they should be kept for them.

Dave: 17:51

Yeah. Well, I think you have to think about what the intentions were and then what do these actually satisfy what was the intent? And what we're talking about really here is two very different things. One is something that happens so rarely. I mean, how many times have overall market limits been hit?

Michael: 18:21

Was COVID and then before COVID there was 09/11. So that was what, nine nineteen years in the separation of those two things.

Dave: 18:33

So I could get behind something that happens that infrequently. But when we talk about volatility halts now for single stocks, I mean, that's a completely, absolutely a completely different thing. You've got, you know, first of all, they go up and you halt them when they go up. That's sort of, that's kind of odd to that we come out of a committee. I mean, usually you kind of have the opposite where, it's okay if it goes up, that's American, right?

Dave: 19:04

But if it goes down, oh, stop the presses. What's really evolved since then is opportunity for manipulation, and you definitely see that in some Chinese names especially. I mean, there's been some real widow making trades and halts that you see from this. And that's because there's a system to gamed, and that's just what has evolved. So it's a you know, my own stance about this has evolved over time a bit.

Dave: 19:54

Like, so at one point, early on, was just starting to really get into trading and doing well. My thought was, I want to avoid these things entirely. Like, don't want to have to think about them. I don't have to they seem scary to me. I just you know, I don't really wanna understand them.

Dave: 20:17

All I don't wanna know all I wanna make sure is I I don't wanna be in a stock that happens to haul. Upside or downside, I don't care. Right? That was my default stance for many years.

Michael: 20:27

And I don't I don't think that's wrong because I know where you're gonna go with this, but I don't think that's wrong, especially I would say for a newer trader. Right? For someone who is newer to the game, I wouldn't fault anyone, especially especially those who focus on the short side of things with saying, I'm gonna try to figure out where these halt points are and try to exit before them or or or whatever whatever the game plan is. So I don't, you know, I I know, right, we'll talk about opportunities with them, but I would not blame anyone entirely if they say, right, I hate these things and I do everything in my power to avoid them because as someone who is, you know, been frequently stuck in them, there's just this moment of, you know, and and this comes from a swing trader. This comes from someone who has large amount of money just sitting in stocks overnight in which I can't really trade out of.

Michael: 21:24

But it's a different thing because it's not just halted because there was a random time on a clock hit and it's halted because this thing is moving potentially against you and potentially in a in a in a really fast way. So, yeah. So, you know, I just don't if you're someone who's listening to Dave and you're like, yeah, I'm still there. Again, I think that's fine with it. Maybe start to think about and and and potentially paper trade and expand your mind on, but don't necessarily just so go, okay, well, these these are things to be taken advantage of when when you're new.

Michael: 21:57

Once you start, I think once you've lived kind of through them enough, then maybe there'll be more of a, how do I exploit them? But I just don't know if I'd recommend that for someone kind of right off the right off the train into Tradingville.

Dave: 22:09

Sure. Yeah. And I think it's important to understand the mechanics of how they work, and you hit it spot on. The important part about these things is there's a halt, then there's a resume, and with the resume, there's an auction that takes place.

Michael: 22:29

Mhmm.

Dave: 22:30

And that's very similar to it's not exactly the same, but it's very similar to the auction that happens at the open, at the regular market open for every stock across the market. I remember this being a huge light bulb for me when I realized the first trade of the day for a given symbol is not necessarily the open price. And when I finally understood the mechanics of that, I was like, oh, wow. That's kind of blows my mind. That that's so I remember sort of thinking, okay, I was one kind of trader before that.

Dave: 23:03

After I realized that, I sort of became another trader.

Michael: 23:07

Do you want to and you want to explain that a little, just in case, for people who might not understand what you're talking about briefly?

Dave: 23:15

Sure. So on the market open, you know, the market doesn't just open and then the first trade that happens to come through is the market open price. Yep. There's an auction that occurs for each stock in the market. And to participate, anybody can participate in the auction.

Michael: 23:35

Mhmm.

Dave: 23:35

And you you participate by using on open orders for the opening

Michael: 23:41

Which IG has, right, that you can look for look up market on open or or I think it's just moo, m o o orders for for buying and selling securities. You'll you'll get whatever that opening price ends up being. You're just part of that that auction.

Dave: 23:57

Yep. And you're you can use a limit on open And similar for on close. So for the market close, you could similarly use those auction orders to participate in the auction.

Michael: 24:11

Those are just, I I know some people love them and some people hate them. I know you as more of a a programmer probably don't use them at all. But I've spoken to clients and people who are trading especially from abroad and they're not there for when the market trades. And for them, I actually think they're a really good idea where if you are simply you say you have a strategy that you know, you you buy a certain basket of stocks in the open and you have a stop loss and you sell one to close. It's a very good way, I guess, to make sure that you don't need to worry about any technical problems with whatever PC or whatever bot that you have Because those orders just go out there and they're they're being held kind of away from you.

Michael: 25:02

So although not ideal, like you could do much better with, you know, like the the system that Dave's built and everything where you can set a specific time, you can use time exit orders. Like there are ways that I think are are probably more nuanced and and better. But the there's something to me that is satisfying about having I've set my stop loss and I've set my market on close orders and those have those are now the brokers problem. And you know, a meteorite could hit my house and right those will trigger kind of perfectly. So there are interesting ways to do it if you create strategies and and with real tests for example, a lot of what you're doing when it comes to exiting is just using that closing print because, know, if you're building a strategy using daily bars, you're you may be executing a lot on the opening print and selling on the closing print.

Michael: 25:55

So using those orders is a good way to make sure that you secure those prices without much in the way of of slippage.

Dave: 26:02

Yeah. So and that's the important thing. The important thing about the most important thing for me about an auction is it's a high liquidity event. So you can move a lot of stock through there. So why is that important?

Dave: 26:19

Well, that's how you can actually scale a strategy, is having one side of the trade be in an auction, like fill through an auction, because you're going to have everybody's going to get the same print. You can move a lot of stock through there. They're specifically designed for high liquidity. So that's one way to think about and design a strategy such that one side of it takes that and all of a sudden, like half of your trade is basically pretty well scalable.

Michael: 26:58

Yes, that's a very I important your, that's how the market opens, but it's not necessarily the first print. So I think we should finish that, that thought as well.

Dave: 27:09

So that print now NASDAQ stocks let me back up. NASDAQ and NYSE handle these auctions differently. NASDAQ stocks almost always open immediately after 09:30. Yep. Nicey stocks sometimes, often they open right after 09:30, but sometimes you'll see minutes go by and several minutes go by before some of these stocks open.

Dave: 27:42

And it's essentially like an extended pre market and the specialist, for whatever reason, has still decided not to open the stock. Maybe it's a lot of participation in the auction. Maybe there's a large imbalance and it hasn't played out or become efficient enough or been steady enough, so it's still the auction is still open. And those are harder to predict. Like, you can't like, there's some human involvement there, believe it or not.

Dave: 28:15

So but it's still a high liquidity event. And so let's take this back to halts. So why are we even talking about auctions when we're talking about halts? The answer is when the halt resumes, like when the stock resumes trading after the halt, you have the exact same or very similar opening auction that occurs. So all of a sudden throughout the day, you have this potentially high liquidity event that you can anchor a strategy to.

Dave: 28:51

So I think a lot of traders like this, I know this goes completely under the radar for a lot of traders. Yeah.

Michael: 28:57

And because a lot of people, I think, they see the halting print and they see the opening print and they just don't really look too deeply in the middle of of kind of what happened there. But just to when we say auction, we'd we'd literally mean that. It is it is a more sophisticated version of, you know, you you see on TV the people with paddles of when what they wanna buy certain things at and that that is what happens on the open of every stock and it's what happens on IPOs and what happens on unhalting of stocks is that there will be some people put in orders to to buy it at whatever price it unhalts and they'll sell it and they'll be limited and they'll you can put out and then there is just think of there's somebody sitting there saying, okay, well, you know, this thing halted at $10 and there are tons of people over there that are looking to sell it and only one guy over here that's looking to buy it. Well, you know generally in that case, the whole price will potentially be lower than that $10 depending on their their size of their position.

Michael: 29:58

And this just kind of mechanic happens in the background. If you're just looking at, you know, the time and sales or or more importantly the chart, you just see it close, then you see it open at another price. And I think that's what causes some people to think that there's like some hijinks afoot, like where it opens up at. But it's not. It's just it is a, you know, again, a specialist.

Michael: 30:19

I think very rarely, most times, just completely programmatically in which if everybody wanted to buy the thing into the halt and there's a whole bunch of orders sitting there, they'll open it higher and and vice versa. So it is I really like auctions because they are very pure free market mechanic type situations where the price it's gonna open at just solely depends on what the market thinks it's worth when the market is is kind of chilled out. So if you find a strategy around auctions, you're right. You've gone from say two auctions a day per stock to now two auctions a day plus some. And in a lot of cases, I would say especially for some of these crazy low float ones, much more interesting and much more kind of enthusiastic auctions in those halts and un halts.

Michael: 31:11

Because often, the stock that's halting, you know, yeah, maybe it's gapped on the day or something like that. So the open was interesting, but these are stocks that no one's heard of and and will no one will ever hear of again. So they're just getting a lot of kind of retail action and participation around these prices while everyone's kind of crapping themselves a bit about what's gonna what's gonna happen to them.

Dave: 31:35

Yeah. So I think it is important to understand how these work and understand what the opportunity is. And it's it's it was clear. It's clear that a lot of traders don't understand the opportunity just because of some of the responses I got. And then, like, for example, here's another guy said very specifically, Really, it just tells me whoever's complaining about this isn't paying close enough attention.

Dave: 32:08

Kind of a harsh way to say it, but I think it's true.

Michael: 32:14

Well, yeah. Or they are just emotional because of the burn. That's the other thing is, like, now we're talking about the reopening process, and I I don't think that's the thing that probably gets people. It's probably the initial closing process to begin with. I think everyone who is, you know, vehemently thinks these things are evil and to be stayed away from.

Michael: 32:39

It's the other side of things. Right? It's a guy who's short, what that Q and it was opening up like a 100% kind of over and over again. So I think that's more of the problem is that they're they've just got burned and they just look at something and say, okay, it's it's too dangerous for me to even participate in anymore. And sometimes like a like a hit like that can actually blind you from potential opportunities.

Michael: 33:07

Because if the only thing sticking in your mind when it comes to halts is that they hurt, it's hard to sometimes turn that around and say, but how could they how could they make me a few bucks When you're looking at it and saying, I lost, you know, a whole bunch of money during Halts. It's easier I think intellectually just say these things are stupid and right, everything's rigged and then to go, okay, that sucked. Now, how do I make a bunch of money off it?

Dave: 33:35

But Yeah. Yeah.

Michael: 33:37

You know, I think it's emotional versus intellectual, think is the way to split it. Right?

Dave: 33:43

But that should that that that should be, you know, if you lose a lot of money in one of these, that should be a very good indication that, okay, how can I make a lot of money in these?

Michael: 33:55

That should be the first thing

Dave: 33:56

you think of. But yeah, it takes a just like we talked about last time with the drawdowns, like, drawdowns are opportunities was sort of the underlying message. And but it's hard to it's hard to turn your psyche to start thinking that way.

Michael: 34:11

Because one person looks at it and says, well, I shorted this stock and the stock halted, and then I open it opened up and it was 20% higher when it opened up and that hurt me real bad. But The the correct reframing, and you know, I know it's hard especially if you got really burnt by them, was like, there's someone out there who bought that print right before the halt and then likely even sold it when it unhalted and instantly made 20% with, you know. So, yeah, the the other side of that does exist. So I think and it's funny. I don't hear a lot of complaints about down halts at all.

Michael: 34:52

Like, it's only about up halts, which again makes me think that that's just the purely emotional because they've they've gotten burned in them. So it means that so likely it's happening because people are they're doing the kind of low float penny stock shorting and that's where the the kind of pain can come from is because, know, if if an average stock if an average stock halts, it's probably opening within a couple percentage of its halts price. The ones that are are moving significantly from their halt price just by definition are gonna be kind of these lower float junkier names that are are ripping for some reason that they've got a bunch of people trapped short and likely the other participants pushing it higher know that and are are kind of stepping on them, you know, kicking the man while they're down, but that's the nature of the game.

Dave: 35:46

Yeah. Yeah. And this those situations create an environment for manipulation Mhmm. Or potential manipulation. And, you know, that sort of feeds the trader psyche where there's, you know, conspiracy theories around this manipulation, but in a lot of cases, there's it's definitely true.

Dave: 36:16

You see some manipulation in some of these. So think the lines are blurred there. So with the traders I coach, one exercise I have them do to really understand or start to understand how auctions work is look at so in Interactive Brokers, you can add a column in your in the watch list there that show that's like the daily open and the daily close. And those don't populate until the auction takes place. So what you could do is have a watch list of symbols and add some nice ones, and you'll see, and I'll I have a good way of looking for these, and I'll send it to them in Slack and say, Hey, look at such and such today because it didn't open for like five minutes.

Dave: 37:11

Go and look at IB, go and look at time and sales, you can see the opening print that came through and what was happening before and what was happening after. That's a really good way to visualize how the auction happened, you know, what was happening before the auction completed and the stock actually opened. So it's it's a good exercise to go through because it it definitely opens your eyes about what's actually happening in this situation.

Michael: 37:40

Yeah. And that it'll be interesting. I'll talk to you about the data because that would be probably a pretty decently hard data problem to solve where you're most if you think of most simple data feeds, it's high low open close on, you know, different bars. But what you're looking for is you're looking for something that is there would have to be some sort of bid ask on top of that that happens at, like, at, like, different times. So and like we talk about it, it's there is likely less people looking at that edge because it's just not apparently in the data.

Michael: 38:22

Like, you just look at the high, low, and close data and that's what you're running your test on. And then there's this other bit inside of it, which probably means, yeah, there's a little bit of edge there just to say, I'm one of the fewer quantitative traders that's looking at it, and we know of the traders out there, the nerds like us are so you're taking a large amount of people and then we're the nerdy subset, and then inside that, there's another little nerdy subset. So the amount of people looking at that data would be pretty minute, I would say.

Dave: 38:54

Yeah. And it is sometimes hard to actually find the data for the opening, you know, for the daily open and the daily close. Now when you get daily bar data, it it should be in, you know, the the actual auction prices for the open and the close. But that's not always the case, depending on your provider. Not definitely not always the case.

Michael: 39:19

That's why some will say some will have two different prices where they have adjusted versus non adjusted and yeah, they'll call them weird things as opposed to just

Dave: 39:32

Yeah. So it's it's the easiest way to look at the open and the close for today's data is IB has that column you can add. And when you, you know, when you look at a list of stocks and one of them hasn't opened, you'll see the open field is blank. It'll be after 09:30. Like, hey, what's going on here?

Dave: 39:55

Well, the auction hasn't completed. It hasn't closed. There is no, open price for the day. When it does, it'll fill in immediately when that happens. So it's interesting to do that.

Dave: 40:07

Interesting to look at time and sales to see when that opening print came through. The opening print is going to be, it's going to have different attributes on it. So when you look at it in time and sales, it's going to be very clearly defined. There's going to be just one of them and you can see exactly what the opening print was. And you'll see that it's easy to see.

Dave: 40:28

It's a very large typically, a very large print, a lot of volume on this one print. You're like, hey, what happened? Well, that's the auction. Everybody got the same price. And these auctions are designed you know, they're optimizing for the maximum number of shares to be executed.

Dave: 40:46

So there's market orders that come in. There's limit orders that come in on both sides. And the print that gets made is the one that maximizes the number of shares that can happen. So that's how those are resolved. So

Michael: 41:04

I think the I think the takeaway and I think the thing that traders should start thinking about is we started kind of this this chat just talking about, right, the Halts are there, are they good or are they bad? And then eventually, the conversation has to move into, well, this matter, none I knew about it. Right? And then unless I am wealthy enough that I can pay the right people to have, like, there's no government official that's running on, I'm going to change the halt system for stocks. If it happens, it happens like the PDT rule just happened one day.

Michael: 41:39

It just went into some sort of whatever got basketed up with a bunch of other stuff. So alright. It's like the end of the day, what we think about them is the least relevant thing on planet Earth. It comes down to if you look at something and you say this is a a rule, a a law, a government enforced whatever. Well, if it was built by men, then it's by definition likely imperfect and there might be ways to to look at it for edge and and kind of exploit it.

Michael: 42:11

And that's the, you know, the difference from when I used to trade discretionarily prop, it was when there was actual physical market makers for everything. So we played these games all the time. There's tons of them. You know, there still are some for we didn't even talk about the closing imbalance, but that's one that still exists. I used to trade a bunch of back in the day.

Michael: 42:33

And the rules will change, but these are great edges to try to exploit. They might not be, you know, quote unquote bread and butter strategies where, you know, 90% of your trades come from these. But if you look at them and say, well, you know, there's a handful of these that happen every single day. If I can build something that has an edge with them, then that's great. And then if one day I wake up and the the halts are gone.

Michael: 42:59

Okay. And you know, move on to the next thing. But and I think that kind of should in your brain as a traitor, you should if you were listening to this and you were just like, man, I hate halts or the worst thing ever at the beginning of the conversation. And you never sat down to say, well, how can I make money off of them? Could be like a little eye opening moment for what else are you, you know, bitching and complaining about that happens in the market that if you weren't, you could say, well, how could I exploit this?

Michael: 43:30

It's kind of our whole job is to look at things and say, right, what's is there an edge here at all? And if so, what is it?

Dave: 43:38

Yeah. So one more thing I wanna say and sort of report back from the traders I asked about this. So a lot of them said, yeah, they wish they would go away. But of the ones that realized, okay, they're probably here for good, there were some suggestions about how to change them. And the most common one was for the bands should be looser for smaller names, for, you know, smaller price stocks.

Dave: 44:12

They get hit too often for smaller names. And I think that's probably true. I mean, it's almost certainly true. So that was a I mean, I could see a change there to that would make more sense than what's

Michael: 44:28

There's going on like a data normalization question there, like, which we talk about all the time. Like, how we're not just we're not just saying, oh, I'm gonna risk 5% of trade because that makes no sense. You know? It's it's yeah. You would you should take the you know, something at how much does the stock actually move or maybe even throw some market cap equation or something in there.

Michael: 44:51

There'd be a better way to do the same system we have now and just change the map the math because a 10% move in Apple is completely different from a 10% move in random ass company y that, you know, is has reverse splitted and therefore it's got three shares in its float and and it's it's ripping today. The other thing that I you know, when I talk to people is suggestions. We already talked about it. It's like, why halt the upside? That doesn't make any it doesn't make any sense.

Michael: 45:21

Let let the, you know, halt the downside because that was the worry and then just let the upside go nuts and the market will just kinda figure that out. And it just leads me to the cryptocurrency markets, which still have flash crashes all the time. As someone who trades crypto, they just they happen consistently. But the market, it it deals with them. It does it okay.

Michael: 45:48

I I've seen many times where if you're ever scrolling through Twitter and you follow some of these these crypto accounts, they just constantly show, I I swear I saw one. I was scrolling down and it was like $200,000,000,000 liquidated from the Bitcoin market to like, because it dropped. And then if you kept scrolling long enough, you'd see another 150,000,000 or billion dollars liquidated to the upside. So, you know, these things that in different markets, they just happen all the time. But I think if the markets are fully electronic and twenty four seven, it just you let them go, which the when I was thinking about this, what I was thinking is that okay.

Michael: 46:29

So it's 2010 in the flash crash. There's gotta be a certain look at that was sixteen years ago in in technology. Right? So the technology has changed in that last sixteen years. So if somebody hit a button like that to cause a flash crash, I wonder if it even do anything anymore.

Michael: 46:51

You know? Like it's because we're so much more advanced now.

Dave: 46:54

Yeah. I mean, that does it's hard for me to believe that there aren't safeguards in place now that would prevent literally one person from causing it, like fat finger or something that causes it, that doesn't make it's it's hard to believe.

Michael: 47:10

Well, and yeah. Just I don't know. Something that would flag an order that's that large, you know, in in comparison. But Just I don't know. There's but, yes.

Michael: 47:19

I guess the moral of the story is you're stuck with them. Sorry. But maybe we've given you some ideas to maybe start down a path to see if you could you could make a couple bucks off them, if you could, you know, sidestep them in some way and just know that the rules are the rules are published. Right? The rules it's nothing is hidden.

Michael: 47:40

You can do enough research. You can find exactly when your stock's gonna halt for for how long and for what reason and and the mechanics that take to open it. It is all upfront and and public and just kinda just go find them.

Dave: 47:54

Yeah. And if if you happen to be listening to this podcast and you're on a committee with some power to make changes about this, just ignore everything we said. Everything's fine. Don't don't try to improve anything. Yeah.

Dave: 48:05

Just sit on your hands.

Michael: 48:07

Actually, make it make it little more archaic would be nice. Just, you know, pull that tech technology back. But one, I know we're over. One funny story before we went is that one of the games we used to play way back in the day is that there was essentially two markets that existed before something called regen MS came out. You can look that up where there was actually a specialist for every single stock that existed out there.

Michael: 48:31

But at the same time, they were rolling out computerized systems. And of course, the computerized systems were way faster than the specialist. So every now and then, they would just leave free money on the table where the market has moved, but the specialist hasn't. So you could buy from the computerized side of the market and you could sell it back to the specialist at a completely different price. It was pure free arbitrage.

Michael: 48:55

And, yeah, it was a sad day when when that went away. So Yeah. You know, it'll be a sad day again if this ever gets tokenized away or whatever ends up doing it. But it's the nature of it. Right?

Michael: 49:07

Make these don't rely, I don't think, a 100% on these strategies because anything that's created with a regulation could be undone. Right? You know, your president could wake up tomorrow and the right guys talk to him and he said, oh, they're done. And you don't wanna be left completely holding the bag there. But if there's a game to be played, that's that's our job is to figure it out and play it.

Michael: 49:30

Play it for as long as you can.

Dave: 49:31

Absolutely.

Michael: 49:34

Alright, guys. Well, as always, I'm Michael Nauss.

Dave: 49:37

And I'm Dave Mabe. Talk to you next time on Line Your Own Pockets.