Was The Market Mayhem A Mistake? Maybe Not.

Forbes ^ | May 7, 2010 - 2:13 pm | Liz Moyer

[SmokingJoe]

Someone put on a bearish position in the S&P 500 just 10 minutes before the market took a dive Thursday, suggesting the market swoon was less a mistake and more the result of some traders exiting a carry trade, hedging, or outright speculating. In any event, the much discussed "fat fingered" trader might not exist.

What's clear is that once some computers hit triggers to sell, that selling pressure triggered other computers to sell and within minutes the rout was on. It also happened at a time of day when margin calls would have snowballed.

Data from Interactive Brokers shows 48,000 worth of June S&P 500 puts taken out at or minutes before 2:30 Thursday. The stock market dive began at 2:40 and went as far as 998 before recovering to close down 347 points for the day. Some of the trades were clearly erroneous -- a $40 stock dropping to a penny at Nasdaq, for example. The exchanges have agreed to break trades on nearly 300 stocks that traded more than 60% away from their last price during the volatile 20 minutes that caused most of the damage Thursday. That won't help shareholders of Procter & Gamble, whose stock only fell 33% during the window. Assuming those puts were purchased, that trade made someone a lot of money. In fact it looks as though more than a few traders made money Thursday -- or at least didn't lose as much as they might have. The open interest on June S&P puts was more than 200,000, according to Interactive Brokers.

[NVDave]

I agree with your last two para’s completely.

I’d add this: the actions of the two HFT’s that pulled out of the market when it started going down proves that their arguments for being allowed inside access to the market are now proven false. When the market needed liquidity, they fled.

This begs the question “Why do we tolerate HFT’s, again?” Because their only supposed utility was to provide liquidity. If they don’t, then there’s no reason for their existence.