Posted on 05/07/2010 9:07:54 PM PDT by 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.
(Excerpt) Read more at blogs.forbes.com ...
So you'd want to ban short sells and margin accounts?
Fine by me, but something tells me a whole lot of investors will be very, very unhappy with you ... swinging from a lamppost unhappy.
Just sayin' ;->
The prices may have been real, but under an unreal situation: The NYSE had placed circuit breakers halting the selling of those stocks, but other exchanges (with much thinner volume) did not also stop the selling. Lo and behold, those stocks suddenly had penny-stock-thin volumes at the bid, but a lot of eager sellers. Drop a few millions of shares to sell at market, and you clean out all the bids down to a penny. The story might well have been different if the NYSE was still trading those stocks.
My first thought too.
This was the opposite of the hapless Times Square Bomber!!
Never let a crisis go to waste.
AMEN!!!!!
BINGO!! It's all about Government grabbing what we have left of "our own money" and putting it under their control.
By the way, have you seen the public sector unions demanding "fairness" in retirement funding? That's right - they're pushing the Obama Administration to NATIONALIZE retirement, which means they'll come after our 401k's and re-distribute them "fairly" ... after all, Obama thinks America does better when we "spread the wealth around!"
“Good morning, lab rats...”
- _A_Good_Year_
Reference bump! ;-)
Give that man a prize!! Exactly how that happened. It was all very real and exactly what could have been predicted to happen in the circumstances. Nothing at all nefarious about it. When a computer is told to hit the bid at the market and the side exchanges are the only ones trading, it goes through them like they weren’t there. No reason to break any of the trades IMO. The system performed as expected.
My first thought too.
This was an Al Queda test run.
There is nothing illegal about betting against the market. I trade e-mini Russell futures and you can bet your bottom dollar that if I see a big seller come in (and yes if you trade real time you can see bids and offers) I either sell if I am long or reverse the trade.
Alot of traders use the tape to enter or exit a position.
That would take extra resources to code, test, and monitor. Probably get manually over-ridden most of the time anyway.
Yes. There is no "picking up where we left off" before the so-called "glitch". This was price discovery occurring like it has done in every plunge in decades past. It just happens minutes, instead of over the course of hours. The gov't will trot out a Boogieman (high frequency trading) to appease the masses who somehow think the markets were fairly priced in this horrific, deteriorating economy.
Look, the further we kick the can down the road, the nastier the washout. We kicked the can all through 2009, so we got a wipeout nastier than 2008. If we keep kicking the can down the road, we'll eventually get one where the bid goes away and STAYS away.
The same computers are, therefore, also responsible for getting the market back up over 11,000 from 7500. Did people smartly take their profits in light of this hideous economy, or did they just assume it would keep going and throw caution to the wind? People are making the same mistakes they made in 2008 and 2009. They’ll ride this all the way down and demand a gov’t bailout.
In the end, people can’t blame computers, they can only blame themselves, because, frankly, humans can control their greed where computers can’t.
The circuit breakers were not tripped at NYSE. The LMM’s used their prerogative to go into a slow market on whatever stocks they were making markets in.
All the exchanges operate on the same circuit breakpoints. If NYSE stopped, everyone would have stopped.
I agree with everything you wrote.
I'd add that I think the swiftness and severity of market reactions in this era of electronic trading is a good thing.
The market's message, so to speak, is disseminated worldwide within moments. That allows for a more timely adjustment by everyone in the world. Of course, politicians can choose not to accept the reality. Temporarily, that is, until the bid stays at zero, as you chillingly put it.
Agreed.
I guess something is to be said for human judgment at work in the specialist system, but it seems like a relic of the twentieth century. If no one bids more than $30 for P&G, that is the price at that moment, regardless of book value, P/E, etc.
The floor trading on the NYSE had better prices continually throughout this period. For example, Proctor and Gamble never traded on the floor under about 5 points below the 2:30 price - when it dropped 6 times that amount on some of the electronic trading systems. Why? Because there were human specialist marker makers doing their job.
There has been an attempt to replace the tried and tested human methods of trading with purely electronic ones in the interest of speed and efficiency. And at normal levels of volume that works. But sometimes it just doesn't, and the old way is much, much better.
The current rules allow the electronic systems to ignore the best floor price in fast markets, trying to get trades executed as rapidly as possible instead of at the best price available. That is a mistake in a purely technological trade off, and Thursday showed why it is a mistake. A faster execution does not equal more liquidity.
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