Lessons from the Pros

Bad Ticks or Real Ones?

Many times I get the same question over and over again and although I am not thrilled to write a whole article on the topic of "a bad tick," the repeated appearance of the question pretty much compels me to do so. The question comes from my email box and in the shortest possible terms, the various students ask: "How can we tell with certainty that something IS or is NOT a bad tick?"

Let me start by simplifying what a bad tick really stands for; in essence, it is erroneous data. A tick is basically a trade, and the technical term "a bad tick" really means an inaccurate or incorrect trade. Explaining the concept of "a bad tick" in simple terms without any example isn’t the same thing as showing it with a verifiable example. Thus, I will use an example which took place at the close of Wednesday, September 23, 2009. To refresh the reader’s memory, on that day, Big Ben made his usual 11:15 AM PST (2:15 PM EST) appearance. He left the interest rates unchanged. His gesture was interpreted by the market as positive news, so the market went higher until the very last hour. At 3:00 PM EST, the Bond Market closed and within a few minutes of its close, the stock market direction reversed. Within the very last hour of trading, the stock market had taken out its (Wednesday) lows and soon afterwards, it also took out the previous day’s (Tuesday’s) lows. Basically, the stock market had fallen off a cliff.

At the time, I was trading options on the XLF and I observed a perfect example of "a bad tick" which wasn’t really bad at all. However, it seemed on the chart like "a bad tick" at first. (See Figure 1) However, the chart by itself, or without the Print (the Tape, or the Time & Sales) can occasionally be incorrect. It was only after a closer look at the Print that it became obvious to me what really took place.

Let me start by explaining first what the XLF stands for, and then I will present all the other relevant facts. The XLF is the ETF (Exchange Traded Fund) which tracks the financial sector. Its liquidity is huge. Just on Wednesday, September 23, 2009 alone, the XLF volume was over 108 million shares. In our Professional Trader classes, we teach our students to trade only the stocks that have ample liquidity: A minimum of 1.5 million shares per day. The XLF’s daily volume surpasses those bare bones’ requirements multiple times over. Consequently, the liquidity of options, both calls and puts, is amazing. The XLF trades just as all the most liquid equities do, the Bid Ask spread on the October options is only a penny wide.

Anyhow, I did explain in one of my earlier articles that there are a handful of ETFs which trade an additional 15 minutes after the market is closed. Basically, the closing price quoted will be the one from 4:00 PM EST, while the options still trade and move either up or down during those additional 15 minutes until 4:15 PM EST. I suggest the readers refresh their memory by rereading that article. I have provided you with a link to it right here.

Figure 1

Figure 1 above shows the 1 minute chart of the XLF. Observe that the bodies of candles are colored in slightly different shades of either red or green. What makes the difference is the vertical dashed line which is the line of demarcation between the regular stock market session (9:30 to 4:00 EST or 6:30 to 1:00 PST) and the after-hours session. There is a brownish red candle on the chart that is unlike all the others. It took place exactly at 1:13 PST. By the way, on my TradeStation platform, I have changed the times to PST so it matches my local time. Any trader looking at this bar would NOT be certain whether it was "a bad tick" or a real one. The Times and Sales is the sure way to verify what actually took place in that moment. Figure 2 below shows the chart as well as the Time and Sales (T&S).

Figure 2

As can be seen in Figure 2, at exactly 01:13 (and 15 seconds) PM PST, the trade went through. This specific trade was in the amount of 800,000 shares and it was filled at 15.3351+ to be exact. The existence of this trade on the print is verification that this was NOT "a bad tick" but a real tick.

In order to explain my point better, I have pulled only 3 trades out of the T & S and placed them into Figure 3 below.

Let us examine what really took place chronologically. The first trade was filled at 01:12 (and 35 seconds), and it is in red. The price at which 360 shares were filled through NASDAQ was at the Bid; namely at 15.05. The next trade, the highlighted one, is the trade we are scrutinizing. It has gone through at 1:13 and the price has jumped from 15.05 to (29 cents higher) 15.34 approximately, in basically 40 seconds. The third trade of 200 shares was filled at 15.06, which is only a penny higher from the very first trade.

Now let us ask ourselves, did the price first really go from 15.05 to 15.34, which is 29 cents higher and then come crashing right back down within such a short period of time? Or was that just "a bad tick?" Once again, by a mere look at the chart alone, a trader can never be sure.

The clue lies in the SIZE of the shares that got filled at that unreasonably high level. The 800,000 shares isn’t such a small number especially if we do the math behind it. To be exact, 15.34 times 800,000 shares equals $12,272,000. Had the trade been properly filled at 15.06, the price would be (800,000 times 15.06) $12,048,000. The difference between the price on which the trade did get filled versus the price on which it should have been filled is 224,000.

As I am writing this, I already see in my mind the reader asking all sorts of questions – how, why, is this legal, etc? Although I can only speculate on what the scenario behind this could have been, I am willing to share my thoughts with the readers. In essence, I think that those 800,000 shares were actually a stop loss order. If Figure 1 is again scrutinized, it could be conjectured that a big institution has shorted 800,000 shares at approximately $15.30 around 12:15 PM PST. As the market closed the stop loss was placed, yet a slight omission was made. Instead of placing a Day or GTC (Good ’til Cancel) order, the Day + (plus) or GTC + (plus) order was placed. The difference between the Day and Day + order is that the Day + is good even after the stock market officially closes, while the Day order alone is good only during regular stock market trading hours. The same holds true for the GTC and GTC +. Again, this is just my take on it.

In conclusion, I have shown an example of a tick which appears to be a Bad Tick, yet is not. However, it is only after verifying through the Times and Sales that the truth emerged. An option trader should always pay attention to what is going on with the underlying. Have green trading.

- Josip Causic