Hello beautiful Apeys!!
I have something to share with you that I think could be another missing piece of the puzzle.
Switches get Glitches
I stumbled upon this thing called a “Kill Switch”.
It seems to answer a lot of questions and tie up some loose ends on things we haven’t been able to explain.
I’m very surprised that there has not been one DD on this subject this whole time. I checked, and I can’t find anything posted about it. So I feel it’s my duty to use my weaponized autism to post it to the Ape-kashic records.
Remember all those times we see volume glitches happening to GME? Big lots showing up in the order book and then they’re gone? Entire volume candles being deleted?
I think this is the reason:
6130. NASDAQ Kill Switch (a) Definition.
The NASDAQ Kill Switch is an optional tool offered at no charge that enables participants to establish a pre-determined level of Net Notional Risk Exposure (“NNRE”), to receive notifications as the value of executed orders approaches the NNRE level, and to have order entry ports disabled and open orders administratively cancelled when the value of executed orders exceeds the NNRE level.
(b) Net Notional Risk Exposure.
Participants may set a NNRE for each MPID individually. Each participant is responsible for establishing and maintaining its NNRE. Participants may adjust NNRE values intra-day.
(c) Notification.
Participants will receive notifications when the total value of executed orders associated with an MPID exceeds 50, 75, 85, 90, and 95 percent of the NNRE value. When the NNRE is exceeded, the notification will include the total number of orders cancelled and remaining open in the System.
(d) Operation.
Unless cancellation is prohibited by Rule 4752, 4753, or 4754, a Kill Switch when triggered shall result in the immediate cancellation of all open orders of any type or duration entered by the participant via the affected MPID, and in the immediate prevention of order entry of any type via the affected MPID. The participant must request reactivation of the MPID before trading will be reauthorized.
(Some apes, like myself prior to writing this, might be asking “Wtf is an MPID?”..
Don’t worry ape, I got you covered. According to this link,
Term:
Market Participant Identity (MPID)
Definition:
What does Market Participant Identity (MPID) mean? This identifier is used by FINRA member firms to report trades,
Ape terms:
It’s just a number that identifies the entity making the trade.)
Here’s a more recent FAQ from NASDAQ:
What this means is that if a broker or a firm places orders that would push them over their risk threshold, BAM kill switch engaged until the next trading day, or they call up NASDAQ and get it raised.
Basically the kill switch stops orders that would fuck the firm up. And cancels all open orders.
This would explain why we see volume being deleted. It would also explain why sometimes… just sometimes.. You try to put in an order and it comes back as canceled. And you go and post on SS and say “LOOK AT THIS SCREENSHOT GUYZZZ THEY STOPPED THE BUY BUTTON AGAIN” and then like 10 minutes later you try to do the same trade and it goes through.
It’s the kill switch protecting whoever is filling the order. It’s not a glitch, it’s a kill switch operating as intended and your broker just had to reset the kill switch.
Some extra info about it according to:
Under the proposal, according to Lou Pastina, an NYSE Euronext executive vice president who participated in the SEC roundtable, a broker would determine its “Peak Net Notional Volume Threshold” for every symbol for a given day of trading.
This is not average daily volume. Rather, the metric is the sum of the firm’s net long positions and its net short positions. If, for example, a firm bought 1,000 shares of IBM and sold 600 shares of IBM, 1,600 shares would count against the threshold. Its net long position, however, would only be 400 shares.
Under the proposal, if the broker exceeds this net notional threshold, the exchange would be obliged to cut it off. Importantly, it is the broker, and not the exchange, that determines this metric, based on its historical trading records.
As I’m reading this shit, it’s becoming more and more clear. It’s just so obvious. So many “glitches” are just kill switches. It feels like the picture just got a bit clearer.
It actually could bring more insight into the question “Why did brokers turn off the buy button but leave the sell button on?”
Here’s a case study with Knight Capital.
TL;DR of the case study:
Knight Capital Group was an American global financial services firm engaging in market making, electronic execution, and institutional sales and trading. In 2012 Knight was the largest trader in U.S. equities with a market share of around 17 percent on the New York Stock Exchange (NYSE) as well as on the Nasdaq Stock Market.
Knight’s Electronic Trading Group (ETG) managed an average daily trading volume of more than 3.3 billion trades, trading over $21 billion … daily. In 2012, a “simple human error” caused Knight’s trading software to buy up 150 different stocks at a total cost of around $7 billion in the first hour of trading. This error threatened to bankrupt the company, but they were able to sell off the stocks and avoid total disaster.
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That, and an issue with Goldman Sachs is the reason for the kill switch idea in the first place.
But something caught my eye from the case study:
Under stock exchange rules, Knight would have been required to pay for those shares three days later. However, there was no way it could pay, since the trades were unintentional and had no source of funds behind them. The only alternatives were to try to have the trades canceled, or to sell the newly acquired shares the same day.
Knight tried to get the trades canceled. Securities and Exchange Commission (SEC) chairman Mary Schapiro refused to allow this for most of the stocks in question
Once it was clear that the trades would stand, Knight had no choice but to sell off the stocks it had bought. Just as the morning’s buying rampage had driven up the price of those shares, a massive sale into the market would likely have forced down the price, possibly to a point so low that Knight would not have been able to cover the losses.
Goldman Sachs stepped in to buy Knight’s entire unwanted position at a price that cost Knight $440 million – a staggering blow, but one the firm might be able to absorb.
A week later, Knight received a $400 million cash infusion from a group of investors
Sounds familiar doesn’t it? A company had bought more shares than it could afford and was forced to sell and later needed a cash infusion (Robinhood got a 1B cash infusion). But in Robinhood’s case, retail “supposedly” owned those shares so they couldn’t force a sell.
And so the only thing Robinhood (and many other brokers who got fucked due to their own dumbass decisions) could do was to set the security to sell only.
So it appears we have two separate situations but pretty much the same outcome.
What does that imply? That the kill switch protocols treated Retail’s buying as an anomaly and a red flag to the system. (And continues to do so, but now they have a “handle” on it because the entire market is now in collusion to keep the system from collapsing.) As if Retail’s buying was a rogue algorithm buying the same ticker over and over.
The kill switch got engaged, and they manually set everything to “closing positions only” to get Retail mirror Knight’s institutional sell off.
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Maybe I’m completely off the mark here. Maybe they don’t work the way I think they work.
That’s why I want to post all of this with complete transparency that I’m an autistic crayon eating monkey and hopefully someone can school me about these things which are very intriguing and that would make the community better as a whole.
Really hoping our resident wrinkle brain u/dlauer could chime in on this considering he helped to create them according to this article
In the wake of the trading mishaps suffered by KCG Holdings and Goldman Sachs in the past two years, brokerages are beginning to demand “kill switches” and monitoring technology by brokerages, said David Lauer, a former trader at hedge fund Citadel and a consultant to Verdande. Lauer would not divulge the names of the vendor’s prospects, but said the firm has “active partners” as well as “active proofs of concept in a few production deployments.” The consultant expects the firm to be ready with a product in the first quarter of next year.
In any case, I felt these kill switches should come to light as there literally is nothing on here about them.
TL;DR The kill switch is a tool that prevents a broker from placing orders that would push them over their risk threshold. If the broker exceeds their net notional threshold, the exchange would be obliged to cut them off. This would explain why we see volume being deleted and orders being cancelled.
Edit: I also want to highlight the fact that if Dlauer was creating kill switches for companies to use privately, that means the one offered by NASDAQ as an optional free tool is just one version of a kill switch.
In other words, the rules we see for the NASDAQ kill switch could be different than what certain companies are actually using. So Robinhood for example could be employing a different version with custom parameters. Every broker could have a different one. I’m not saying NASDAQ is the only one that has a kill switch.
I’m more so pointing to the fact that these mechanisms exist, something we have not covered until now. Knowing this going forward, certain anomalies could easily be explained and deduced that some form of kill switch has been implemented.
And the SEC has the authority to let them delete trades, as shown in the Knight case study.
The only way I as an individual investor can be sure to bypass any sort of kill switch is to DRS. They can’t kill or switch a share registered directly in my name.
Edit 2:
Another nefarious way this could be implemented is that maybe there aren’t any shares to buy and the broker places a kill switch limit on just a specific security and then they go dark when certain securities get bought up (cough GME cough) and this way they can say “We didn’t halt trading for only GME, it’s a system wide shut off”. And legally they’d be telling the truth. Just omitting the fact that GME is what triggered the kill switch..