The Dow Free Fall
[Guest post by DRJ]
Yesterday the Dow tumbled One Trillion Dollars but they still aren’t sure what triggered the free fall:
“The day after $1,000bn was briefly wiped off the market value of US equities, traders were still trying to work out what caused share prices to plunge and then rebound so dramatically in a matter of minutes.
The conventional wisdom held that an incorrectly typed sell order – one that confused “billions” for “millions”, for example – was the likely culprit.
“The trigger for the sell-off was most likely some kind of errant order, a fat-finger typo, which set off a chain reaction of selling,” said Sang Lee, managing principal at Aite Group. “I would be shocked if that was not the case as the fall in stocks was so sudden and extreme.”
However, despite the persistence of this story, officials were struggling to idenfity a specific cause. “We still don’t know what was the initiating signal for the trading activity we saw on Thursday,” said Jeff Wecker, chief executive officer at Lime Brokerage. “The verdict is still out.”
Whatever the trigger, programmed trading had to be what drove the fall so rapidly:
“When the plunge came, traders said it was exacerbated by the rapid-fire computer systems that post prices and execute trades in microseconds. Such trading accounts for the bulk of volume in US equity markets and it served to reinforce a downward move that saw some stocks trade for a penny or less.
Because computers also serve to link markets, the panic spread to currencies and bonds. The yen soared in value against the dollar and the euro. The demand for government debt, a traditional haven during a crisis, soared, pushing the yield on 10-year US Treasury bonds sharply lower.”
The Financial Times summarized it as “trading gone wild” and a trader said: “We have detached finance from the real economy and created a monster.”
— DRJ
CNBC was pushing that pathetic “fat finger” nonsense yesterday. It’s BS–stocks are bought in shares, not in dollars; even a million-share sell of Procter and Gamble would cause the market to take a dump. A billion-share sell would have triggered the circuit-breakers.
Zerohedge is arguing the HFT game finally came around and bit people in the backside:
http://www.zerohedge.com/article/day-market-almost-died-courtesy-high-frequency-trading
Want to hear something really scary? This link has an audio clip of the floor when the market crashed.
http://www.zerohedge.com/article/panic-and-loathing-sp-500-pits
This wasn’t some “fat finger” screw-up; it was a full-blown nuclear meltdown.
Another Chris (35bdd0) — 5/7/2010 @ 4:30 pm“The verdict is still out.” ???
Must be looking for the jury…
gazzer (7588eb) — 5/7/2010 @ 5:01 pmI’m pretty sure it’s Bush’s fault somehow…
Sean P (4fde41) — 5/7/2010 @ 5:56 pmSomeone may have found a big hole in the exchanges and may have done some testing. They may not have known the hole was this big. I just hope the exchanges find the hole before the markets open on Monday.
Also a guest on CNBC today on Fast Money said Hedge Funds last week started accumulating extremely large short positions.
Next week should be very interesting especially when a stock like Accenture can go from $40.00 to 1 cent in a matter of 15 mins on very thin trading.
Sanmon (319c0c) — 5/7/2010 @ 6:00 pmIf they believe it was manipulation, the SEC should tear itself away from the port sites, and start looking on who was shorting what yesterday.
AD - RtR/OS! (044556) — 5/7/2010 @ 6:15 pmAssuming that the cause of the situation is as non-obvious as it’s been made to sound in the media, it’s interesting to contemplate the software at work in these trading systems from several aspects.
First, how much commonality is in use with the indices of securities or stocks being tracked, and the trading thresholds (or exotic filter functions) that were set to detect trading triggers and magnitudes? By commonality, I mean by design or by producer.
Secondly, what is the data sources used to drive these trades? Is there a small set of data feeds from which these systems take their input?
Third, how much transaction data logging is made of the external trade activities? How much record-keeping is done by convention or is required by law in terms of the responsible parties for the actual parameters of operation? I’d hope the former is already required by law, and should be available for inspection. The latter would be very interesting for law enforcement, at least as a start for their investigations.
As a last note, it’s interesting to contemplate what kind of requirements could be placed on the datafeeds or trading portals in terms of trading volume or volatility triggers – one possible approach that occurs to me would be to slow down trading by requirement. I’m not sure how that would be implemented, but I could picture several techniques.
JSinAZ (9535bd) — 5/7/2010 @ 8:07 pmOops…”porn”, not “port”.
AD - RtR/OS! (044556) — 5/7/2010 @ 8:17 pmThe problem is that it isn’t just the other day people have been talking about a sovereign debt crisis. I doubt if, in more stable times, the market would have panicked over a typo. Everyone was waiting for the manure to hit the rotating ventilation machine; everyone’s still waiting.
Would anyone besides myself feel more confident about the future if Democrats could start taking similar responsibility for the monster they’ve created?
Steve (9a21f4) — 5/7/2010 @ 10:37 pm