Monday I talked about the Flash Crash of 2010, and promised more information. Here it is.
The compiled evidence, in my opinion, is damming. It is also very long. I don’t expect anyone to read the entire thing in one sitting – unless it’s Sunday and you have several hours to devote to this. I want to mention I was on the couch watching the Flash Crash as it happened. To me – at the time – it was surreal.
- Where it Starts – This is not an isolated event, humans are involved.
- The Trading System – The trading system, like the government, can be gamed.
- Prior to the Incident – Market conditions had to be in place for this to happen.
- NYSE Circuit Breakers are Off – Only humans are in control of any major market move.
- Market Capitulation – Actions taken when humans give up on the market.
- Who lost money.
- The FLASH CRASH on CNBC – The train wreck in action.
- The FLASH CRASH Special Report – End of day round-up of events.
- The FLASH CRASH day on CNBC – CNBC adds context to the day, in six (6) segments.
- FOX News Version during the crash
- The FLASH CRASH CNBC Documentary (- 3+ hours) – May 6th 2010 CNBC Stock Market Flash Crash Full Video Coverage DVD #1
POST Event Anaylze and Confessions
- Jim Cramer with Jimmy Fallon on the Flash Crash – This is a few days after the event.
- Trader Relives Nightmare Three Years Later
- Professor Larry Glosten present the academic analyze.
- A HFT (High-frequency trader) confesses to some actions.
- What caused the flash crash of 2:45? – A European analyze of the incident. However, it appears the panel did not know much — three years after the fact.
Where it Starts
The bulk of the story that surrounds this is “Artificial Intelligence”. It starts with high-speed computers that “try” to predict the direction of a stock. And of course, since humans programmed them, all they are looking for is – will prices go up or will prices go down.
Add to this that computers can interpret public “news”. For instance, if a price influencer (like a CEO) says something that can trigger a human reaction (to buy or sell), then the computer will try to predict if the price of a stock (or stocks) will go up or will it go down.
The Trading System
The system works by a series of bids and offers. Any person can bid to buy a stock; any person can offer to sell a stock. No one is aware of who is bidding, or who is offering. No one is aware of what the volume is (how many stock are available).
Prior to the 1970s – when an electronic system was put in place, a “market maker” would sit in the middle of the exchange and hold a reserve of stock – to keep the market moving and keep the price stable. The market-maker makes money in the transaction difference. Humans still do this, but now machines do this also – either by algorithmic trading or
The market-maker looks at the “bids and offers” via quotes on the CQS (the Consolidated Quotation System) And the world looks at the CTS (the Consolidated Tape System), generally refereed to as the final, trade, or closing price.
Prior to the Incident
Markets had been moving lower for days previous to this. So much so that the Volatile IndeX (VIX) is seen on the screen “VIX up 30%”. We also see gold prices rise ($1200/ounce) and oil prices fall ($78/barrel).
During the video you’ll see a dizzing array of incidents, but things that proceed the Flash Crash including
- Earnings reports were out and lower.
- Retailer sales reports were poor. (old money, in many cases)
- Stocks for all Banks were trading lower. (old money)
- Japanese Yen & US Dollar are trading higher against all currencies.
- The Euro is trading lower against the Dollar.
- The Greek Public Strikes as a “new austerity package” had just passed hours before. (See May 6)
- A comment emerge from the previous day that intra-day lending was becoming unavailable to European banks, and there were signs of “Fragility in the credit system”.
- A lose in “basis points” as compare against the LIBOR was lending to the volatility.
- You’ll see, mentioned at the time, but not mentioned in the post-reports that there was “panic buying”.(6:30-end of 5of6) (repeated on 6of6 2:20)
- Lastly, a report that congress had just passed some new legislation that affected banks and their profitability.
NYSE Circuit Breakers are Off
It’s reported during the “train wreck” that the NYSE Circuit Breakers are Off.
It has been widely reported, and appears to be a matter of practice, if a human market makers capitulates (See: Stock market capitulations) – “stub quotes” are put in place. Those quotes are intended to be ridiculous. The practice is to set the capitulation quote at one penny ($0.01 – See: Accenture below) or one-hundred thousand dollars ($100,000) – neither is realistic for the NYSE.
If this happens – in practice, no humans are in place to slow down the system.
Who Lost Money
Most of the losers were retail investors with stop-lose orders in place. Almost un-reported was that Goldman-Sacks profitted. (See Far Below: High Frequency Trading and the 2010 Flash Crash)
The FLASH CRASH on CNBC
- FLASH CRASH! Dow Jones drops 560 points in 4 Minutes! May 6th 2010 – (9:36)
The dizzying array of headlines is in the “Breaking News” banner. I won’t repeat a headline, but many are (subtle variations). If I missed a reporter, please let me know.
- Erin Burnett (now with CNN)
- Michelle Caruso-Cabrera
- Jim Crammer
- Matt Nesto
- Scott Wapner
- Rick Santelli
- below the market price – time mark
- -$438 – start
- Gold Touches $1200 (You may miss this, but it will repeat.)
- S&P Financial Have Biggest One-Day Drop in Six Months
- More than 95% of S&P 500 Stocks are lower
- 35% of S&P 500 Stocks are Down 5% or more
- Five of 24 S&P Industry Groups have had 10% Corrections April 23 Close
- All 30 DOW stocks lower
- DOW Down more than 500 Points
- -$516 – 1:00
- Stocks Plunge on Greek Worries
- Rick Santelli, The Euro vs. the dollar just cracked under 126. I’m sure we’re hitting Sell-Stops. We’re hitting knock-outs on the over-the-counter market. (…). -(~1:12)
- Dow, S&P 500, NASDAQ have Biggest One-Day Drops in over a Year.
- S&P 500 have Biggest 3-Day Drop since March 2009
- (NASDAQ has Biggest 3-Day Drop slide March 2009)
- (Averages Down for Third Day)
- -$586 – 2:00
- (Dow has Biggest 3-Day Drop since Late January)
- Dow Laggards: B of A, Caterpillar, HP, GE (old money)
- S&P 500 Leaders: Fidelity National, Titanium Metals, MetroPCS, FiServ (new money)
- S&P 500 Laggards: JDS Uniphase, Office Depot, Time Warner Cable (old money)
- Many Retailers among Poor Performers as April Sales Fall Short of Estimates
- Stocks on track for First Two-Week Losing Streak in Two Months.
- Matt Nesto, ~50, 100, & 200 day moving average broke for the S&P 500.~ -(~2:15)
- Euro hits 14-month low against U.S. Dollar
- -$707 – 3:00
- Crude hits $78 per barrel
- VIX up another 30%
- Matt, ~NYSE Circuit breakers don’t kick in after 2:30pm~ (~3:20-3:30)
- Scott said, ~This is fear. This is classic capitulation.~ (See: Stock maket capitulations)
- -$860 – 4:00
- Dow breaks 10,000
- Michelle said, ~ We’re seeing Fragility in the Credit System (in Europe). ~
- -$995 – 5:00
- Erin, P&G is down 25% (P&G is a bellwether. Hence, Jim’s comment below.)
- Dow Down over 900 Points
- Jim says “Look at (P&G). Buy it! (3x)”. (~5:22-5:27) P&G suddenly starts to rise, almost is concert with his words. Fans of the Mad Money with Jim Crammer know, if he says buy three times – it’s usually in the lightning round of his show – and he means buy it now!
- The market the turns around.
- -$773 – 6:00
- (In a matter of seconds, you’ll see the market jump 220 points!)
- Stock Lose Gains for 2010, 2009
- -$683 – 7:00
- Peter (Costic ?) ~ Capitulation with no bid side. (..) There’s Void in stocks. ~
- Peter (Costic ?) ~ the one thing we can say is we have some serious volume ~.
- ~8:32 – Jim says, The system broke down.
- ~9:20 – Jim says, ~ It was there for a blink of an eye, maybe one of these fast pool traders got it. ~
- AUDIO from the S&P 500 futures pit at the CME during the “flash crash” of 2010 (Chicago Merchantile Exchange) – (3:38)
- May 6th 2010 CNBC Stock Market Flash Crash Special Report Markets In Turmoil – (4:03)
- Post analyse on the same day.
- Erratic trades
- Accenture (ACN) $40 dropped to $0.01 (one cent)
- NASDAQ Canceled trades (280+)
- Liquidity issues
- FLASH CRASH May 6, 2010 (Part 1 of 6) CNBC – (5:24)
- FLASH CRASH May 6, 2010 (Part 2 of 6) CNBC – (9:13)
- FLASH CRASH May 6, 2010 (Part 3 of 6) CNBC – (7:50)
- FLASH CRASH May 6, 2010 (Part 4 of 6) CNBC – (5:37)
- FLASH CRASH May 6, 2010 (Part 5 of 6) CNBC – (7:30)
- FLASH CRASH May 6, 2010 (Part 6 of 6) CNBC – (8:39)
- Flash Crash May 6, 2010 Fox Business – (6:29)
- May 6th 2010 CNBC Stock Market Flash Crash Full Video Coverage DVD #1 (~3:17:15)
- Jim Cramer & JImmy Fallon on the Flash Crash (3:05)
- This was with Jimmy Fallon on the tonight show.
- Jim Crammer, “We have no answers at all.” – (~2:00)
- Toward the ends he talks about how “the market is rigged”. (~2:30)
- IBTtv – Flash Crash 2010: Trader Relives Nightmare Three Years Later – (5:03) Published on May 6, 2013
- Mark Otto of Knight Capital is interview.
- Mark explains traders realized they knew it was a system error.
- He also explains new rules – which require humans to be involved.
Larry Glosten: The Flash Crash – (19:30) Talk Given On December 6, 2011
- Columbia School of Business –
- Professor Glosten notes the timing coincides with Central Time vs. Eastern Time.
- He explanation is, of course, academic.
- However, in his explanation he shows the logical action – which helped break the market, and that is the “stub quotes” entered by the market makers. (~5:00)
- They are not high-frequency traders, but high-frequency QUOTERS. (~6:00-6:15)
- The market breakdown. (~12:15-13:45)
- No limit price on sell order placed at 2:45 (~14:30)
- Massive number of quotes and cancellation (~16:00)
- New rule added – Rule 13h-1. (~17:50)
- Consolidated Audit Trail was proposed as a new rule – Rule 613. (~18:10)
- Nanex.com see something sinister. (~19:10)
High Frequency Trading and the 2010 Flash Crash – Leak Sources News (~6:14) Published on Nov 17, 2013
- former HFT trader
- suggestion that Goldman Sacks may have profitted from this
- MORE (I could not review the Documentary at this link in time for publication): http://leaksource.info/2013/11/17/the-wall-street-code-documentary-2013/
- Secrets of a former high speed trader – CNNMoney (5:03) Published on Aug 12, 2013
- Comments on the video include:
- What caused the flash crash of 2:45? (7:36) Published on Oct 1, 2013
- Björn Hagströmer, assistant professor at Stockholm University, explains.
- Three (3) years after the fact.
The Flash crash of 2010 is not the first and only crash of this sort. Crashes of this sort happen all the time. They are discussed in the longer segments above.
And also here: TEDxNewWallStreet – Sean Gourley – High frequency trading and the new algorithmic ecosystem. (17:42) Published on Apr 12, 2012
I could not review this data.
The Microstructure of the Flash Crash