The Trader’s Emergency Survival Plan

(Note: This was originally posted on September 30th, 2011).

As soon as the market opened today the streams and chat rooms blew up with reports that the Think Or Swim/TD Ameritrade platform was down, and unavailable to place trades.  Frantic statements like, “I can’t close my positions out”, “my screen is frozen”, and “I am losing thousands right now” were flying right and left.

The first thing you need to be aware of when trading on-line is that when there are technical problems like this YOU ARE ON YOUR OWN.

The agreements you sign when you open a brokerage account specifically state that the broker dealer is not responsible for technical issues related to platform functionality,  connection problems with the exchange, or data feeds.  This applies to their own technical issues as well as any technical issue of their vendors.

Sure, if you call customer service and complain loud enough, you may get some free trades or a toaster, but they are not going to refund you the five grand you lost because you could not close your position out.

The second thing you need to know is that technical problems will happen at exactly the worst moment.

For example, brokers often roll new code or system upgrades overnight, and although they test the best they can to make sure everything is stable, sometimes an issue will not show up until the rush of opening orders hits their servers.  If you think about it, it is kind of a self-fulfilling action.

Imagine there is some terrible terrorist attack overnight, and everybody and their brother panics and decides to sell their positions as soon as the market opens.  A massive wave of sell orders hits your broker’s site, crashing it.  Those same sell orders are driving the market down, causing more people to sell and sending the market into a free fall.  This is the time you need to get out of your position most, but you can’t.  Believe me, it sucks.

But broker issues are not the only things that can cut off your ability to trade.  If you want to do the most you can to try and prevent that from happening, then I suggest you do the follow;

Backup

In our modern world, especially if you live in major urban centers, we rarely give a thought to losing power, however it still happens.  Just a couple of weeks ago, a major part of Sand Diego County lost power for a number of hours.  No matter if it is a line worker who hits the wrong switch or a fuse blowing out in your house or office, there is always a risk of an unexpected power outage.

Go to Best Buy or Amazon and get yourself a UPS battery backup unit.  You don’t need the one that will power your whole house; you just need one that can give you 15-30 minutes of battery backup.  Once you get it, make sure you plug your CPU, your internet modem, your wireless router, and at least one monitor into the battery backup plugs.  This will enable you to stay up and running and give you enough time to flatten out a position or at least put a stop order in if you lose power.

Redundancy

Even with no broker issues and full power, your internet connection can go down, leaving you at the mercy of the markets.  If you have access to a fiber optic service like Verizon’s FIO’s you should seriously look at signing up.  It is extremely fast and has almost zero downtime.  But no matter what type of internet access you have, you should definitely have redundancy in the form of a separate provider.

Don’t be penny wise and pound foolish; just pay the extra fifty bucks a month to have a backup connection.  Even if you never need to use it, it is great piece of mind to know that if your DSL goes out; you can just switch CAT 5 cables and have your cable internet kick right back in.  (It should go without saying that you should have the CAT 5 cable to your alternate service clipped to the back of your router or computer for a quick switchover).

Duplication

With the ease of use of online trading, there is no reason that you should have all your trading funds with one broker.  Split your funds up 50/50 or 30/70 into your primary broker, and your secondary broker.  Now unless there is a complete failure of the exchange systems, something which is almost unheard of (and if it happens you are screwed either way), you have a backup way to flatten a position.

Say you are long 500 shares of XYZ and you lose access with your broker’s platform.  If they market starts to tank, you can go onto your secondary brokerage account and sell 500 shares of XYZ short, effectively making you flat on the position, which you can unwind when things return back to normal.  Sure you will pay a couple extra commissions, but what does that matter if it saved you hundreds or thousands.

Bonus Tip

If you even happen to fat finger a trade or by either your fault or a technical glitch in the trading software, over buy or sell a position, CLOSE IT OUT IMMEDIATELY.  If you are a trader, you need to be able to analyze a situation and take fast, non-emotional actions, and this is a perfect example of that.  No matter what someone tells you, the exchange has the ultimate power to break a trade, and remember, you are not their client, your broker is.

How long will it take you to pick up the phone, get through to your broker’s customer service department, have them contact their order desk, and then the exchange?  Do you want an open oversized position out there for all that time, possibly going against you hard, only to find out that the trade stands?

Trust me, kill the trade immediately, then call your broker’s customer support line and explain the situation.  If you are a good customer, and the loss is not too big, you have a decent chance of them scratching it for you or at least giving you some free trades to compensate.

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8 Responses

  1. You could also have a laptop with a loaded battery and 3G connection ready (or use your smartphone to connect, some brokers also offer Apps for trading). Protects you from power outage and connection trouble.

  2. Keep in mind that when you put that “battery backup unit” into your system, you’ve added to its complexity and have created an additional potential point of failure. My first one went into intermittent failure mode just after the warranty expired and created several crashes. My second one (different brand) is now going into a different failure mode in that it often won’t turn on. Hopefully my experiences are the exception, but increasing the complexity of a system is often just a bad idea.

  3. Pingback: Saturday extra: the horror show | Abnormal Returns

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