Classic Glitch Strategies

In this previous post, I explained the basics of what exactly a "glitch" is, now let's further your glitch education by giving some examples of glitch strategies. Here are some of my favorite strategies from the past.

The Hunger Games This “rookie sniping strategy” is not only a great example of a glitch strategy; it also illustrates how ruthless the trading business is. This strategy was my introduction to glitches and served as a baptism by fire into the world of trading.

It was what we might call an arbitrage strategy. Arbitrage is the holy grail of glitches, if not the whole world of trading. It allows the trader to take advantage of price differences between different markets and exchanges, and when done correctly, it offers what we traders call “free cash”. Arbitrage has become tougher to find in today's electronic markets, but it was a lot easier to come by before automated trading took over.

When I was starting out, all the separate exchanges that traded U.S stocks were not linked together like they are now, so on one exchange, a buyer might be trying to buy XYZ stock at $10.25, and then on another exchange, a sucker–sorry, I mean seller–might step in and try to sell XYZ at $10.00. It doesn’t take a genius to realize that this market fragmentation presents an opportunity for a skilled glitch trader, or arbitrager.

The savvy veteran traders at my first trading job would wait for that sucker to offer XYZ stock at $10. They would quickly buy in and then immediately sell on the other exchange at $10.25, for a quick .25 cents of free cash. They were taking advantage of the exchange arbitrage to make these lucrative trades, but also of the inexperienced traders, such as myself, who were often supplying the bait.

At the proprietary trading firm, Zone Trading (which is now Kershner Trading) in Austin, Texas, I sat together with the rest of the wide-eyed rookies on one side of a highly segregated office; on the other side sat the savvy veteran traders. Some of my first, but not fondest, memories of trading were watching those guys sitting frozen with their eyes glued to their gigantic old-school CRT monitors. Their itchy trigger fingers–which had been conditioned by countless kills while playing their favorite 1PP shooter games–would hover over their keyboards.

We rookies would go about our business on our side, eagerly learning the ropes of our exciting new profession. Inevitably though, one of us would make a slip on the keyboard and place a bid or offer that was out of whack with the other exchanges, thus offering a juicy scrap for our “co-workers”. When that erroneous order would hit the exchange, a feeding frenzy would ensue. The thundering sound of fingers pounding on keyboards would wail from the veterans’ side, followed by an eerie silence and then a scream of agony from the hapless rookie trader who was caught in the trap.

This cruel game, where your supposed “teachers and mentors” preyed on your every mistake, provided quite an eye-opening introduction to the world of trading. However, I somehow survived this trial by fire, and I am proud to tell you that I never adopted this cold-blooded strategy when I became a veteran…mainly because I was way too slow on the keyboard to compete for the scraps.

Auction Order Strategy By breaching the glitch-trader’s time-honored code of secrecy, and revealing this next strategy, I may incense a few of my peers. I’ll be careful not to divulge all the secrets, but I can’t talk about glitch strategies without mentioning the one strategy that has probably provided for at least half of the profits of every successful equity trader I have known over the last 20 years. It’s no surprise that this secret is guarded like the Crown jewels. In fact, when I mention the world of opening and closing auctions to traders outside my circle, I usually get a blank stare and expressions of shock that everyone isn’t making all their cash trading using fancy candlestick technical setups like the guy on the YouTube video brags about.

Auction strategies revolve around a single aggregated trade that happens at the open and close of the U.S. stock markets (NYSE and NASDAQ) in each individual stock. This auction is typically for the benefit of big players who want to buy, or dump, large quantities of shares. I won’t get too technical, but the goal is to build strategies that take advantage of this large aggregated twice-daily auction. I would encourage every equity trader to familiarize themselves with how these auctions work, not only because they offer ample trading opportunities, but also because they are an important part of the market structure.

One great example happened right before Christmas in 2020, when Tesla was to be added to the S&P 500 index. This meant that millions of shares of Tesla would be bought by the numerous funds that mimic this index, and the last day for these funds to buy Tesla was on Friday, 18th December. Although these funds had weeks to buy shares before Tesla was added to the index, many waited until literally the last minute and used this closing auction to buy the remaining shares they needed. Therefore, with one minute left before the close of trading, the Nasdaq market indicated that there were 17 million more shares to be bought than to be sold (a buy imbalance) on this auction.

Seconds before the close of trading, smart traders bought in at somewhere between $640 and $660, and then immediately offered (sold) their shares to this auction. Most of us auction veterans expected this to be a good trade, but we were blown away when the auction price was $695. These smart, and somewhat lucky traders had made around $50 per share in only a few seconds, and with just a couple of clicks of the mouse.

I should hold my hands up and say that I wasn’t one of them. I was a little frightened by the high price of Tesla and its volatility. To put it lightly, it was a decision I regretted when a couple of my peers made more money in those 30 seconds than I had made in the last 15 years of trading. Fortune favors the brave, I guess.

VXX Glitch Another glitch strategy I have used in the past involved $VXX, a volatility-tracking ETN (exchange trading note). It’s been one of my favorite stocks to trade over the years, so I have always kept a close eye on its trading action. When the market gets volatile, this volatility ETN naturally fluctuates more. Back in 2014, when the volatility in the market spiked, I noticed a pattern that seemed too good to be true. From exactly 3:14 pm to 3:15 pm, during the after-hours trading session, this stock would have a quick move to the upside, which was unrelated to the market action. It doesn’t take a genius to figure out how to profit off of this glitch; buy VXX at 3:14 pm and then sell at 3:15 pm. Two clicks of the mouse, and one minute of my time, was all it took to execute one of the most successful trading strategies of my career.

I later learned this spike was happening because of a quirk in the rebalancing of VIX futures, but ultimately the “why” doesn’t matter, the important thing after discovering a glitch is to formulate a strategy as quickly as possible and then execute. As with most of these glitch strategies, this one only worked for a short period, maybe a year, so it’s imperative to put your foot on the gas when it's working, but it’s just as important to be ready to apply the brakes once it stops.

Bitcoin Arbitrage A good arbitrage strategy is one that offers a superior edge and is simple to execute: buy on one exchange at a low price, and sell on another for a higher price. An excellent example was an inter-exchange arbitrage opportunity involving Bitcoin in 2017 and 2018.

The cryptocurrency markets were crazy at this time, and Bitcoin was prone to wild price fluctuations. Since Bitcoin isn’t traded on a centralized exchange, the insane action was spread among multiple exchanges. This market fragmentation proved to be very inefficient, resulting in huge price differences between exchanges, providing an environment ripe for opportunist arbitrage traders. It was as simple as buying Bitcoin on one exchange for perhaps $5000, and then transferring it to another exchange and selling at perhaps $5500. While simple and effective, there was a little risk. Sometimes it would take up to half an hour for the transfer to process, and during these wild times, there was a chance that the price could swing against you. However, if the price difference was big enough, it was definitely a risk worth taking.

eBay Assasin

As I said earlier, glitches happen in all markets, and online marketplaces such as eBay offer ripe pickings for savvy traders. I have my own glitch story from the Polish version of Ebay. This humbling experience began when I inadvertently advertised some computer monitors for sale at a ridiculously low price. Within minutes of posting this ad, a buyer was at my door with a handful of cash and a cheeky smirk on his face. After the buyer split the scene of the crime with monitors in hand, I started to get a little suspicious, so minutes later I checked the website to see what similar monitors were being sold for, and to my shock and horror, saw my monitors back on the market at a 50% premium.

I compare this glitch hunter to those veterans who provided me with my introduction to glitches at that first office of mine. This guy who showed up at my door was using the same strategy as those parasites; look for an errand offer, hit it quickly, and get the hell out. This guy even had the balls to come to my own house. I have to admit that I was disappointed in being on the wrong side of the trade, but I wanted to congratulate him on one hell of a trade.

I could keep on listing glitch strategies: the airline flight that was mispriced at only $1 online, the wager that was placed before the bookie had time to update his odds after a major injury to the star quarterback. These are all examples from the past, and a good glitch strategy disappears fast, so my goal isn’t to hand out golden glitch strategies, it isn’t that easy, and unfortunately, I am not that charitable. Instead, I hope to provide a roadmap and leave the challenge of finding these winning lottery tickets to you, the reader, but I can at least guarantee they are out there, and offer further examples and guidance in my book.