Someone got taken to the cleaners on Monday, buying 16,000
shares of QAI-a trade that highlights the nuances of
market-on-close (
MOC
) orders. They could have avoided it. Here's what happened, why and
how you can avoid it.
At 4:00:00 p.m. ET, around 16,000 shares of the IQ Hedge
Multi-Strategy Tracker ETF (NYSEArca:QAI) were executed at
$28.83-that's $1.28, or 4.64 percent, more than its last traded
price of $27.55 at 3:59:59 p.m. Eastern time. It was completely
unwarranted.
At 3:59:59 p.m. ET, someone was offering 12,800 shares at
$27.56. The fund's underlying value didn't change in that one
second. At the end of the day, its net asset value was $27.50.
| Time |
Exchange |
Bid Size |
Bid |
Ask |
Ask Size |
Trade |
|
3:59:15
|
NYSE Arca
|
100
|
27.51
|
27.55
|
3,900
|
|
|
3:59:59
|
NYSE Arca
|
200
|
27.51
|
27.55
|
1,600
|
|
|
3:59:59
|
EDGA
|
|
$27.55
|
|
3,800 |
|
3:59:59
|
NYSE Arca
|
200
|
$27.51
|
$27.56
|
3,800
|
|
|
3:59:59
|
NYSE Arca
|
200
|
$27.51
|
$27.56
|
12,800
|
|
|
4:00:00
|
NYSE Arca
|
|
$28.88 *
|
|
16,077 |
|
4:00:00
|
Nasdaq
|
200
|
$27.51
|
$27.60
|
18,000
|
|
* NYSE Arca Market Closing PriceSource:Bloomberg
The trade was the result of a poorly executed market-on-close (
MOC
) order. MOC orders for NYSE Arca-listed ETFs are automatically
entered into the NYSE closing auction, which is outside of the core
trading session.
Unfortunately, orders in the NYSE closing auction are exempt
from Rule 611:the Order Protection rule. The basic idea
behind the rule is to protect investors from faulty trades by
comparing all nationally placed quotes.
If a better price exists for a market order, it gets routed to
that exchange before it can get traded at its current exchange. In
the case of the MOC trade in QAI, there was no protection-the trade
was exempt because it occurred during the auction and not during
the regular trading session.
It seems likely that the buy order was entered as a market order
into the MOC NYSE closing auction. Had it been a limit order, the
buyer's limit would not have been $28.83, which means the final
execution price would have been great news. Given that the last
price was $27.55, a market order must have been behind that
terrible trading strategy.
After a buy order is entered, NYSE alerts market makers that
wish to participate in the closing auction. From there, market
makers can begin to enter competitive quotes to match the buy
order. The algorithm behind the auction system considers the size
of quotes as well as the price.
A market maker can enter 100 shares offered at $27.55, but
should another market maker offer 30,000 shares at $29.00, more
than likely, they'll get the bulk of the order. There are no second
chances in the system. If you enter a market order into the
auction, you're trusting that there will be competitive quotes and
adequate size as well.
In the case of QAI, a market maker was willing to match the
16,000 shares that the buyer needed. However, at 4:00 p.m., they
were only willing to do so for a price of $28.83-and no other
market maker was really there to compete with them. Frankly, you
can't blame the market maker, either. This was a $500,000
transaction-you need some type of competitive edge to justify the
trade.
At 4:00 p.m., if a market maker has to deal with the burden of
hedging out QAI, he's going to want a good amount of edge. That's
especially when you consider that most of the securities that make
up QAI are ETFs that probably aren't very liquid after the market
close. QAI also holds futures and swaps based on emerging markets
indexes and real estate funds.
It's not necessarily rocket science to hedge these things, but
it's also not ideal to do so after core trading hours. So again,
anyone doing the trade is going to want some kind of edge to offset
the additional risks and challenges of an after-hours trade. This
isn't the SPDR S&P 500 ETF (NYSEArca:SPY) that you're
hedging. It's a fund that barely trades one creation
unit-50,000 shares-per day.
There are a few lessons to be learned here. For one, stay away
from market orders in general. Structuring limit orders based on
the current inside market is a far better strategy than simply
shooting blind. It's OK to let the market maker come to you. With
the current market structure these days, you have no idea of what
may occur in the next second-or millisecond.
Secondly, intraday trading isn't so bad, as long as you keep the
indicative intraday NAV in mind and you try not to show your
hand.
Whoever placed this buy order in QAI would have been much better
off executing the transaction buying in smaller lots during the day
or even using a volume-weighted average pricing algorithm.
Thirdly, if you need to place an MOC order, understand the
market and dynamics of the security you're dealing with. QAI is no
SPY, so you're probably better off talking to someone at Knight
Capital or Wallach Beth about getting a fair deal for a block
trade.
In some cases, relying on your own MOC order is akin to shooting
in the dark-especially for an ETF that trades under 100,000 shares
a day on NYSE Arca.
Unfortunately, whoever was on the buy side of this trade won't
see their money for a long while. Since inception, QAI has broken
the $28 range once. The fund isn't designed to be a blockbuster,
it's a hedged strategy.
The buyer can't break the trade either. NYSE does have a price
collar on how far closing auction prices can be from the last
traded price. In this case it would have been 5 percent-that's a
0.36 percentage point difference from where the trade was actually
executed. So close, yet so far away.
It gets worse. Take a look at the table above. A market maker on
Nasdaq probably saw the trade go through on NYSE, and added some
salt to the wound. That market maker offered 18,000 shares at
$27.60 right at 4:00 p.m. ET-maybe in hopes that the buyer wasn't
done with the order.
So learn from the mistakes of others-no one wants to end up as
another person's lesson.
Permalink | 'copy; Copyright 2009 IndexUniverse LLC. All rights
reserved
Don't forget to check IndexUniverse.com's ETF Data
section.
Copyright ®
2012 IndexUniverse LLC
. All Rights Reserved.