From 687fc5147b9442e253e310f7737aae94d061ce52 Mon Sep 17 00:00:00 2001 From: Matt Spinola Date: Mon, 3 Aug 2026 21:55:35 -0400 Subject: [PATCH] docs(crowdmon): UC-2 recommended widening a stop, which does not protect UC-2 "Stop placement and gap risk" told the reader to set "a wider stop with a smaller position, sized so the wider stop costs the same dollars". That prices a protection the instrument does not deliver in the one regime the document was written about. A stop is a trigger, not a guarantee. It converts to a market order when touched and fills wherever the market next trades, so in a gapping name it fires because the cascade has started, not before it. Widening does not buy protection, it moves where you find out. The document already contained the refutation twice and did not connect it. UC-2's own premise says "the unwind gaps through it and fills far below", which is as true of a wide stop as a tight one, and UC-1 states the mechanism outright: "when it falls, it will fall through your stop". UC-2 now leads with defined-risk protection (long put, or a collar where the premium is unattractive), which is the only structure that pays in the gap rather than transacting into it, and was previously offered second as an alternative. Where a stop is the only tool available, the guidance is to size so a gap through the level is survivable rather than sizing to the stop distance, since the stop distance does not determine the loss. Widening is kept, demoted to a trade-off with both sides named: a wide stop keeps you in a positioning unwind, which UC-6 says usually mean-reverts, and costs more in a fundamental repricing, which UC-6 says does not. That makes it UC-6's decision, taken during the drawdown, rather than an assumption made when the stop is placed. Also corrects the section 7 preamble, which promised "stops that survive". Found while correcting the same error in crowdmon's plain-language summary (crowdmon#57). Recorded there as docs/design/amendments-2026-08-03.md section C28, which reasoned about this file but did not edit it. Docs only. crucible-stack suite unchanged at 407 passed under npf/.venv. Co-Authored-By: Claude Opus 5 --- docs/design/crowdmon_system_description.md | 12 +++++++++--- 1 file changed, 9 insertions(+), 3 deletions(-) diff --git a/docs/design/crowdmon_system_description.md b/docs/design/crowdmon_system_description.md index 9ff1f77..6baea65 100644 --- a/docs/design/crowdmon_system_description.md +++ b/docs/design/crowdmon_system_description.md @@ -266,7 +266,7 @@ Ownership metrics are step functions that update on filing dates. Do not interpo ## 7. Use cases — the retail workflow -A retail trader is not going to move a market, so the value of this system is not the same as it is for a fund risk desk. A fund uses it to decide how much of a crowded book it can carry. A retail trader uses it to **avoid being the marginal participant in someone else's unwind** — to size correctly, to place stops that survive, and above all to correctly classify a drawdown while it is happening. +A retail trader is not going to move a market, so the value of this system is not the same as it is for a fund risk desk. A fund uses it to decide how much of a crowded book it can carry. A retail trader uses it to **avoid being the marginal participant in someone else's unwind** — to size correctly, to choose protection that pays in a gap rather than triggering into one, and above all to correctly classify a drawdown while it is happening. The tool finds very few trades. It prevents a specific and expensive category of mistake. @@ -282,9 +282,15 @@ Check the positioning-crowding percentile and exit-pressure percentile for the b *Trigger:* setting a stop on a name flagged as crowded. -In a crowded, high-DTL name, a tight stop is a liability rather than a protection: the unwind gaps through it and fills far below. Use the downside-asymmetry metric (§4.2) and the square-root impact estimate (§5.2) to make the trade-off explicitly. +**A stop is a trigger, not a guarantee.** It converts to a market order when touched and fills wherever the market next trades. In a crowded, high-DTL name that is exactly the moment the book is thin, so the fill arrives below the level, and it arrives *because* the cascade has started rather than before it. UC-1 states the same fact from the other side: the asymmetry the system flags is "when it falls, it will fall through your stop." Widening the stop does not change that. It changes where you find out. -*Action:* a wider stop with a smaller position, sized so the wider stop costs the same dollars. Or replace the stop entirely with a long put and accept a known premium instead of an unknown slippage. The system's contribution is telling you *which* names need this treatment — applying it everywhere is just expensive. +So the choice is not tight versus wide. It is between what protects and what merely triggers. Use the downside-asymmetry metric (§4.2) and the square-root impact estimate (§5.2) to price the gap explicitly, since §5.2 is denominated in the units the decision is actually made in. + +*Action:* on the names the system flags, prefer **defined-risk protection**: a long put, or a collar where the premium is unattractive on its own. That converts an unknown slippage into a known premium, and it is the only structure that pays *in* the gap rather than transacting into it. Where a stop is the only available tool, size the position so that a gap through the level is survivable, rather than sizing to the stop distance, because the stop distance is not what determines the loss. + +**Widening is a trade-off with two sides, not an improvement.** A wide stop keeps you in a *positioning unwind*, which UC-6 says usually mean-reverts, and it costs you more in a *fundamental repricing*, which UC-6 says does not. Which of the two you are in is UC-6's question, and it is answerable while the drawdown is happening, so that decision belongs there rather than being assumed here. + +The system's contribution is telling you *which* names need this treatment. Applying it everywhere is just expensive. ### UC-3 — Short-side screening