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Ear to the Ground

The Sale That Dropped 600 Points

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Posted on Oct 1, 2010
Wikimedia Commons

A chart of the Dow Jones industrial average May 6.

We knew capitalism was crazy, but it turns out it took only a single sale of $4.1 billion in futures to put into motion a series of events that culminated in the “flash crash” of May 6, during which the Dow Jones dropped 600 points in just a matter of minutes.

The sale, which was discovered after a months-long investigation and long-awaited report from the SEC, concludes that the crash was not a result of market manipulation but rather the regular trading of futures made possible through aggressive deregulation. —JCL

The New York Times:

A single sale of $4.1 billion in futures contracts by a mutual fund touched off a series of events that led to the so-called flash crash, the sharp stock market decline that shook investors and markets on May 6, federal regulators said on Friday.

In a long-awaited report, the Securities and Exchange Commission and the Commodity Futures Trading Commission said they had identified the sequence of events that erased more than 600 points from the Dow Jones industrial average in minutes on the afternoon of May 6 before the markets recovered just as quickly.

Significantly, the report found that the plunge was not caused by any market manipulation but by a single firm trying to hedge its investment position, if in an aggressive and abrupt manner.

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basho's avatar

By basho, October 2, 2010 at 1:30 am Link to this comment

‘More SEC BS. How can a trade that represents only 2.5% of the ES futures traded that day, cause a 600 point DJIA drop? This is an SEC cover-up of High Frequency Trading (HFT).’

you got it!

Stuxnet?
if not, then soon.

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Napolean DoneHisPart's avatar

By Napolean DoneHisPart, October 1, 2010 at 9:23 pm Link to this comment

Or what Eric said 8^)

High Frequency Trading (HFT):

In the U.S., high-frequency trading firms represent 2% of the approximately 20,000 firms operating today, but account for 73% of all equity trading volume.[19]  As of the first quarter in 2009, total assets under management for hedge funds with high frequency trading strategies were $141 billion, down about 21% from their high.[20] The high frequency strategy was first made successful by Renaissance Technologies.[21] High frequency funds started to become especially popular in 2007 and 2008.[20] Many high frequency firms are market makers and provide liquidity to the market which has lowered volatility and helped narrow Bid-offer spreads making trading and investing cheaper for other market participants.[20][22][23]

High-frequency trading is quantitative trading that is characterized by short portfolio holding periods (see Wilmott (2008), Aldridge (2009)). There are four key categories of high-frequency trading strategies: market-making based on order flow, market-making based on tick data information, event arbitrage and statistical arbitrage. All portfolio-allocation decisions are made by computerized quantitative models. The success of high-frequency trading strategies is largely driven by their ability to simultaneously process volumes of information, something ordinary human traders cannot do. Various types of high-frequency strategies are covered in Aldridge, I., “High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems” (Wiley, 2009).

http://en.wikipedia.org/wiki/Algorithmic_trading#High-frequency_trading

Oh yeah, click on the youtube link first and then read the lyrics while you listen to the song… yeah that’s what you were gonna do, I know.

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Napolean DoneHisPart's avatar

By Napolean DoneHisPart, October 1, 2010 at 9:09 pm Link to this comment

Perhaps not the sale, but the initial ‘reaction’ to a large futures trade for a steep devaluation seemed to had created some other puts and calls and the algorithmic system it is, reacted ridiculously.. stop loss orders on GTC set not only for day-traders but swing-traders, mutuals, etc., triggered a further spiraling and the subsequent anticipation of an overbought boom after a major bear and everyone ‘in the moment’ quickly reversing position… it is, after all, the fastest shell game in town… all numbers on a digital display, and its everyone’s guess bull or bear; all risk liquidation who is not informed on big capital’s move!  Consider 1929.

This song comes to mind-

On a warm summer’s evenin’ on a train bound for nowhere,
I met up with the gambler; we were both too tired to sleep.
So we took turns a starin’ out the window at the darkness
‘Til boredom overtook us, and he began to speak.

He said, “Son, I’ve made a life out of readin’ people’s faces,
And knowin’ what their cards were by the way they held their eyes.
And if you don’t mind my sayin’, I can see you’re out of aces.
For a taste of your whiskey I’ll give you some advice.”

So I handed him my bottle and he drank down my last swallow.
Then he bummed a cigarette and asked me for a light.
And the night got deathly quiet, and his face lost all expression.
Said, “If you’re gonna play the game, boy, ya gotta learn to play it right.

You got to know when to hold ‘em, know when to fold ‘em,
Know when to walk away and know when to run.
You never count your money when you’re sittin’ at the table.
There’ll be time enough for countin’ when the dealin’s done.

Ev’ry gambler knows that the secret to survivin’
Is knowin’ what to throw away and knowing what to keep.
‘Cause ev’ry hand’s a winner and ev’ry hand’s a loser,
And the best that you can hope for is to die in your sleep.”

And when he’d finished speakin’, he turned back towards the window,
Crushed out his cigarette and faded off to sleep.
And somewhere in the darkness the gambler, he broke even.
But in his final words I found an ace that I could keep.

You got to know when to hold ‘em, know when to fold ‘em,
Know when to walk away and know when to run.
You never count your money when you’re sittin’ at the table.
There’ll be time enough for countin’ when the dealin’s done.

http://www.youtube.com/watch?v=8tSo4IICBTY

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Eric L. Prentis's avatar

By Eric L. Prentis, October 1, 2010 at 5:19 pm Link to this comment

More SEC BS. How can a trade that represents only 2.5% of the ES futures traded that day, cause a 600 point DJIA drop? This is an SEC cover-up of High Frequency Trading (HFT).

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