Saturday, May 13, 2006

OCA - One cancels all Orders

It’s a long time – if ever – that I’ve written about technicalities. If someone sucks in trading it’s me, it’s not the software, the Internet connection, my broker or the exchange. It’s me. Very simple and part of the risk I take, you take.

But as it happened now twice within 2 weeks to me, I think it’s time to remind you about some small print in your brokers contract.

If your broker supports it you most likely will use OCA orders, if you trade with Stops and targets set the moment you open a trade. Makes sense, as you never know when the Internet connection to your ISP, to your broker or to the exchange will break down. You just know, it will happen and if it happens your position is protected.

But what you most likely will forget, as it happens very seldom is, that under certain circumstances both orders might fill, leaving you in a very uncomfortable position, as you are for sure now set against the current market trend.

Say you are Long Gold 720.00 Target 723.00 Stop 718.50. As long as the market moves normally the moment one order is filled, the other is cancelled. But say Gold spikes down on one big order to 717, you are stopped and reverses immediately as a flurry of buy orders rush in, driving Gold to 725 in the blink of an eye. Well then it can happen that your target order is still valid on ECBOT, as the OCA functionality is provided by your broker, not the exchange. And even if your broker has fast connections to the exchange, it still takes time to cancel the other half of an OCA order pair. Time during which you have an active Sell order on the exchange, while you are already out of your position. Assume your target is filled, you are now Short Gold at 723.00 with the market trading at 725.00.

Do the calc and you can see that your trade has cost you 150$/contract for the stop and 200$/contract for the short, you never intended to take. Can it happen? You bet it can. It happened to me two times in the last two weeks. The first was in the Euro, while I was away and coming back found myself short Euro after the NFP release, which cost me 45 ticks to cover the trade in addition to the 20 I paid for the stop. The other yesterday in a gold spike down, which I saw and was able to cover at BE+1 knowing already what had happened and subcontiously being prepared for just that occurrence.

1 comment:

Scope said...

I experienced once with HSI (300 ticks drop in one minute). After that I think bracket orders are inherently dangerous when the stop is close to the target. So I open each trade with just a stop order. Observe the market unfolds itself and submit target if only the market is weak or losing momentum. From the point a bracket is formed, I expect the position will be closed by either the stop or target very soon so I monitor it more closely. When market changes and the original target are no longer relevant, I will widen the target to extremely high level, sometimes a hundred ticks away.

I really want to limit the exposure of OCA being held at the broker, especially when market turns hectic during the drop of Internet connection.

Btw, I really enjoy reading your blog. Thanks.