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| I'm gonna shamelessly steal a comment from another blog.
"Rich-
EuroZone markets close around noon, Eastern. The "flash crash" was about an hour and forty minutes later. So, I get your train of thought but I don't think so. I've made some disjointed statements about this earlier, and probably should lay some things to rest, as well as open a new can of worms. So, let's go.
The actual timing of the event on May 6th is , in my eyes, significant of nothing, other than it occured during market hours. The market opened, s&*t happened, and it closed. Where that middle event occured is between me and my laundress.
Setting a background to the event of May 6th, when the lows were set in March of '09, market participants, knowingly or not, experienced a shock inflicted on them for almost six months straight. They, by in large, decided to sit out from that point forward. The volume of the exchanges reflects this. They were done. Too afraid to sell and in no big hurry to grab a falling knife. They instinctively knew that this was different. The market participants remaining, however, were a completely different type, traders, not investors. And more particularly, the so-called "liquidity providers" in the form of HFT systems. Computers, located as close as physically possible to the electronic platforms that control trading on the various exchanges, were coded to accept "flash" orders (essentially, show me what the customer wants to do first, before executing their order.) The other little twist is that these computers are allowed to trade in fractions of a penny, where as all other market participants may not. The point is that the volume of mom and pop, and their mutual funds, were no longer trading. Trading volume has dropped like a stone through this whole episode, and hasn't changed.
Back to may 6th.
The market was already down over 300 points by the EU close, a brief uptick at that point, probably due to some short covering from the continent. No big deal. The HFTs had, in the months since the March lows, been establishing themselves as the entire volume of trades in certain stocks and EFTs. I'm sorry, but there is no reason for Citigroup to be a quarter of the volume of the NYSE's daily volume for days on end. Add in four more stocks and you have 80% of the trading volume. Makes no sense at all. Now we're going to get complicated.
One of the primary design features of the ETF market is the ability to buy one thing, and own a distinct portfolio under one share of the fund. That's from your side of the fence.
There are two little secrets to ETFs you should know. One, hedge funds like to use them as cheap "exposure" to the market and hedge funds are the primary users of HFT (High Frequency Trading) systems. If you own ETFs, chances are, if it's a popular one, your fellow share holders are computers who can buy and sell their positions in under a second, and do. A lot.
The second hidden secret of ETF's is the super genious managers do NOT like to set up the expense of automated stock trade execution with each and every ETF sold. So they don't bother, they do something cheaper, and it allows them to keep the already billed executions for themselves. They create synthetic portfolios for their ETFs that might only have two or three stocks that represent their target portfolios, but trade enough of those three and you'll get the same reaction as if you owned them all.
When so few people are actually trading the market for investment purposes, May 6th was inevitable (looking at it from here, BTW).
So, given that background, here's what I think went down.
The market was down pretty steeply that day, lots of reasons, none good. As the market volume dropped in line with prices, the HFT presence was approaching 95% or so of the volume. The market hiccupped again at 1:20 or so, and the HFTs were net long. The computers started to sell out their positions, to no one. Worse, they owned those "exposure" ETFs which, as most similar institutions, were not wanted anymore. The momentum built , the computers pushed, and the sane traders sat on their hands. The selling started to accellerate and the synthetics pushed individual issues, like PG down to $37.
This lasted for about twenty minutes. A thousand points down and then right back up as some savvy traders KNEW this was beeing mispriced.
So, long view, it was a programmed sell order that forced the big event by the nature of HFT systems.
I hope that's what you were asking about..." | |
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Useless Rhetoric-we are swamped in it.
