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I want to start this thread after the major internet outage on Monday, August 16th 2010. This showed that the risk of trading is not only when an error occurs with our trading, eg we didnīt set the stoploss or we clicked the sell button instead the buy button vv.
Even when you do all your best seriously it can happen that you have a very high loss or you are bancrupt - without your own fault.
I personally have no problem to be responsible for my trading and my errors - but I can not accept to get lost because of errors in the "system", personal or technical issues.
At this point I have to state that this Monday, August 16th I had no loss. When the internet connection was established again I had $ 750.- profit. I was in a trade with 2 contracts TF.
So this thread is not to blame someone - this day changed my mind after years of trading live.
How can retail-traders protect themselves from gettin bancrupt?
I want to mention now 2 ideas: liability of traders and automated trading.
I donīt refer to complicated strategies - think about a simple OCO. Now, after the fact the problem is clear 100%, right? The OCO is on the exchange and is handled from NinjaTrader on my computer. What can happen now, or what has happened on Monday? My stoploss was filled (or maybe my profit-target - I donīt want to find out, no matter which one) but as the connection was broken - not on my end - it couldnīt be handled. So the other order still was on the exchange - and filled afterwards and of course without stoploss! Cotton dry what can happen. In my case it ran in my direction and I had my "lucky" profit of $ 750,- But what if it goes in the other direction, what if you have not only 2 contracts this moment but 100 contracts, what if the connection is not restablished after 10 minutes (I think it was) but only in 1 hour. Youīre lost maybe.
At this opportunity I want to mention that I called my broker and I couldnīt talk to him - of course, as probably hundreds other trades tried to to the same. I wrote an email and I received the reply to call the trade desk. So I called the trade desk (of course several times) and after maybe 5 minutes someone answered - and told me that they canīt do anything.
After this I have to think not only about my OCO. Or I do not think about it longer, I already removed my "trend-ATM" and my "choppy-ATM".... I do no more bracket orders in the future. I only do stoploss - hoping that there might not be some hidden issue I donīt see now but only next "major internet outage".
I have to think about something more important. The liability of traders! It can not be that someone suffers big losses maybe because another one isnīt doing his job or because of technical issues at the other end.
How can we have a limited liability? I state that I donīt mean limited liabilty in case of some error by myself, I mean limited liability in case of losses because of other reasons mentioned above.
Therefore I think now to trade with a LLC. Not because of maybe tax-advantages with establishing a LLC in one of the famous "low-tax-areas". Only because of the idea to protect ourselves from thoses errors.
I emailed my broker to ask what if I trade with LLC and asked about the difference as they have different funding instructions for private accounts and LLC accounts and how it is handled when occuring big losses. But they donīt know!
Iīd more than happy to receive reply to the idea with trading with a LLC.
This is an important question, thank you for putting it up here.
Operational risk cannot be excluded, but it can be reduced. If you have a long position and the exchange is hit by a terrorist attack there will be a problem to exit in time, and the world maybe different afterwards.
The operational risk includes several elements, and not all of them can be totally managed.
Managed by Trader: Telephone Lines, Internet lines, PCs.
Redundancy required. I have a second PC (laptop), which is always charged. I have a mobile backup internet connection, in case my fixed line does not work. I have a fixed and a mobile telephone line.
I use a broker, who allows for OCOs , so in case I have a technical failure, the OCO is still supposed to work as I do not hold the bracket orders locally on my PC.
Important: If both internet connections fail, I have prepared a list of different phone numbers to join my broker to close all positions immediately.
I do not understand your post. If your internet connection fails, why don't you just phone your broker and close the position?
I am not engaging in (unsupervised) automatic trading, as I would need to rent server space on two PCs in two different locations, which would mutually control each other.
Managed by Broker: Telephone Lines and access to the exchange
If the broker fails, I am in trouble. First I will not know, whether I have a position or not, as it is not clear whether orders have been correctly transmitted to the exchange. Also I should know which of my running orders are locally simulated by the broker or held by the exchange. Do you know, whether your stop order is held by your broker or by the exchange?
Once I know my position and how running orders are handled by the failing broker, I can use a second broker to set off the first position. Problem here is to get the information, because the broker lines will be crowded.
Managed by Exchange:
If the exchange stops working, you can set off your position with a hedge via a different exchange. For example you could set off a long position of TF (ICE) with a short position of ES (CME). This requires an additional margin from your broker, as the new position will not benefit from margin reduction applicable to spreads. Make sure that you don't use all your margin, because in case of an adverse event, you may not be able to set off the position because of margin requirements. In this case the margin mechanism, designed to protect you, makes things worse.
Important :
By going through all adverse scenarios, it is possible to be prepared for a number of scenarios to follow the pre-established rescue plan. BP did not have such a plan in case of an oil spill, and as everybody noticed this made things worse.
Yes, a LLC will shield your personal wealth from an adverse event.
It's not a bad idea if the LLC can save you from filing personal bankruptcy in the event that your losses exceed your equity, i.e. with a stock broker or in the event your futures broker also can not close your positions due to technical problems. Does anyone know if that is the case?
I thought the brokers required a personal guarantee if you traded through a company/LLC.
For someone who lives outside the US (like I do), one way to help mitigate massive losses is to only keep in your account with the broker enough funds to cover your normal margins and drawdown. If something goes badly wrong (black swan) and the broker closes my positions out such that there is still a loss in my account, then he is going to have to come and chase me overseas for the balance.
@FatTails - what broker do you use?
PS: forgot to add that apparently on Monday you could still access your orders via ZenFires web inteface. I have access to this and it useful in such situations.
I use Interactive Brokers. UK subsidiary is registered under the FSA and deposits should be guaranteed up to GBP 50,000. NinjaTrader transmits OCO orders to Interactive Brokers. I think that these orders reside on the server's of Interactive Brokers, will have to enquire again into this.
I think along your lines of thought. BTW, What is the link for ZenFires web interface ? i thought it was not yet active. Here is what i got from my broker:
There was a major internet outage this morning along the east coast significantly impacting the capacity of the region. Three core internet service providers each experienced interruptions leading to the loss of internet access for users or extremely slow connections while attempting to route through alternate paths.
As a result, orders routing to the data center were held up for long periods of time before reaching the Zen-Fire trading engine. Although not all Zen-Fire users were affected, the number of interruptions required the order routing services to be restarted forcing users to reconnect on a more stable path.
As the premier network and market data solution, Zen-Fire is implementing the following steps to prevent or minimize the impact of large-scale internet outages in the future. 1. Inform traders of a potential issue
Zen-Fire is working to integrate a RSS feed alerting users of the status of Internet connections. This service will be used to alert potential issues and keep traders informed on the latest developments. 2. Provide an alternate login to check order status and flatten positions
A new web based trading application will be available next month that will provide a mechanism for traders to check the real-time status of orders and positions. Traders will be able to send a 'Flatten' command directly to the engine and avoid any 3rd party trading application. This tool will only show orders that have made it to the engine and can be used to confirm the status of 'pending' orders on other platforms. 3. Addition of new ISPs
Though previously relying on the core Internet Providers, additional regional ISPs are being integrated over the weekend to serve as emergency backup when the majors become unresponsive. In rare cases, they may be used to carry the primary load for short periods of time or serve as excess bandwidth during minor outages. 4. Closer integration with 3rd party platforms
The Zen-Fire development team is working with 3rd party developers to help improve the stability and efficiency of their platforms by helping to make them more closely integrated with the engine.
If you have any further questions regarding the technical details of the outage, please contact your broker for more information.
Thanks that you brought up this question: I do not understand your post. If your internet connection fails, why don't you just phone your broker and close the position?
Maybe I didnīt explain it 100% correctly, thought so. I CALLED THE BROKER SEVERAL TIMES! THEY ANSWERED THEY CAN NOT FLATTEN THE POSITIONS!!! This is why I started this thread. I have in the meantime excuses and explanations from the broker. But however - they could not flatten my positions! This is the issue. If so I really would not write this here. And the point you brought up too with terrorist attacks is also an issue I thought - but I didnīt wanted to write this in my first post. So maybe you think, this guy can not call his broker by telephone - I did 20 times to reach one person - and he is afraid of terrorists and aliens, too.
And I know that the orders or bracket orders can be held at the exchange and at the brokers server. But they are handled from my computer. And I know where my stop is - it is on the exchange. And my OCO was on the exchange. And this is the issue. It would be better if in case of bracket order the stoploss only is actually on the exchange and the target on my PC. Then itīs not the worst - as my stoploss is filled but no new entry is realized.
