dnadig

SHO limits don't apply to bona fide market making, I'm nearly certain. But regardless, you would expect the inability to short by non-MMs would actually keep ETFs and Stocks from hitting their breakers, not making it worse. By definition, you remove sell-pressure.

Until 10AM that day, the problem was zero buy-pressure. No bids at all to speak of.

http://www.etf.com/sites/default/files/images/2_rspsurveyor....

Since ETFs are derivatively priced, it's irrational on the face of it. If I sell you a bundle of 100 $1 bills for $50, it's irrational. ETFs are wrappers around stacks of stocks.

A stop with a limit is perfectly fine. It's essentially saying "If the stock trades below X, sell it, but not unless its above Y." So if you bought at 80, its now at 100, and you want to make sure you make some profit, you could put in a stop loss that was at, say, 90/85. So you sell if it goes below 90, but only at better than 85.

The issue there is that in a fast moving market, you might not get filled. When the stop triggers, the order "becomes" another limit order in the limit order book, and if the market's already moved bellow your limit, you dont execute.

Also, Market Orders are ALWAYS executed before limit orders, even if the limit makes it executable. That's just the priority system of the market.

The single stock circuit breakers were put into effect after the 2010 "flash crash" and they're designed to "let cooler heads prevail" when stocks or ETFs go wonky. The problem is that in a real panicky freefall, it just makes the window where the stock is trading very very small (it halts for 5 minutes, opens, hits the next breaker, halts for another 5 minutes, etc.)

It happens both up AND down. This last monday was really the first time they'd been tested en mass.

Well, plenty of traders are out there selling without actually owning -- that's something market makers and only market makers are allowed to do, and it's certainly possible that market makers algos were selling too low along with high frequency traders.

But regardless, when you have a derivatively priced security like RSP (which holds actual stocks -- it has some inherent worth at all times that's knowable) any selling at a discount is supposed to be arbitraged away. In these cases, it wasn't,because the trading windows were too short.

(Hi, I'm the author of that blog post).