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On the Fat Fingered Trade and Market Freakout

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We’ll know in due course, now that an investigation is underway, why the equity markets in the US went into complete freefall for about twenty minutes, with the Dow dropping 998 points. Per Bloomberg:

Larry Leibowitz, chief operating officer of NYSE Euronext, said trades sent to electronic networks fueled the drop. While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the decline snowballed as orders went to venues lacking liquidity to match them, he said

Yves here. Um, he seems to be saying there were more sellers than buyers, which we already knew. The idea that a fat-fingered trade out of Citi was the cause has been denied by the bank. The downdraft did have the look of a monster sell order, but the more credible explanation is that it was either a sudden rise in yen or the euro hitting the magic number 1.225 to the dollar that set off algorithmic traders. And enough of them look to similar indicators and technical levels that it isn’t hard to see this as the son of program trading, mindless computer-driven selling when the right triggers are hit.

But another side effect of today’s equity market gyrations is further distrust in the markets, particularly by retail buyers. I am told that various retail trading platforms were simply not operating during the acute downdraft and rebound. I couldn’t access hoi polloi Bloomberg news or data pages then either. The idea that the pros could trade (even if a lot of those trades are cancelled) while the little guy was shut out reinforces the perception that the markets are treacherous and the odds are stacked in favor of the big players (even though we all understand that, it isn’t supposed to be this blatant).

But the bigger issue, despite the stomach-knot-inducing drop in equities, is the wild gyrations across pretty much all markets. The credit markets were is disarray BEFORE equities took their cliff dive. Japan has pumped $21 billion of emergency liquidity into the market overnight, its biggest operation since 2008.

The Reserve Bank of Australia warned of the possibility of a sharp economic contraction…..and they are right. This is classic Keynes liquidity preferences. Keynes, a successful speculator, identified a crucial link between financial markets and real economic activity. When investors en masse retreat to the sidelines and prefer to hold cash or similar highly liquid instruments, the loss of risk capital and restrictions on lending are a blow to the productive economy. Accordingly, the G-7 has a conference call set, presumably which will lead to at least coordinated statements, perhaps some concrete action, to calm markets.

But how much can they do? Even if the eurozone manages to convince the markets for now that it has a credible plan to halt contagion (better frankly to clearly separate Greece, which is going to look ugly no matter what, from Spain and Portugal if at all possible), it is embarking on a deflationary path. That is going to affect the US on a host of fronts: via the impact on companies that do business in Europe (more than you think), via the decline in US competitiveness thanks to a weak euro. Think China will be willing to revalue the renminbi with the dollar strong? Don’t hold your breath.

The real question is what the ECB does, and Trichet’s refusal to commit to action on Thursday set off the currency moves that appear to have triggered the equity plunge in the US. Reader Hubert, who is no fan of the Anglo-Saxon “kick the can down the road” credit system, nevertheless believes that the least bad way of the current mess is for the ECB to deploy its balance sheet: “Politicians are behind the eight ball here. Either they subvert the ECB here and now in 2010 into this giant SIV or the Eurozone is going to blow up.” If enough investors believe that, bond spread widening and capital flight can make it a self-fulfilling prophecy.

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58 comments

  1. Justin

    Imagine peer to peer anti-virus, quicker at detecting threats but disastrous when a critical majority false positives a core system file.

    Any system that correlates and propagates behavior will amplify effects.

    1. doggyDish Party


      trades sent to electronic networks fueled the drop. While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the decline snowballed as orders went to venues lacking liquidity to match

      Fools give you reasons, wise men never postulate. One thing for sure — if you put in a limit order to buy 19% below market value before market down-spike-s, you may just become the proud owner of a bargain security. Does market invariably drift lower following an up-spike? Drift upward following a down-spike? Why does that occur? Because the cascade of stop-loss-orders tick off for the losers? Because the limit-buy ticks off for the winners? Limit order is more powerful than swamp-magic. Don’t worry about *why* but concentrate on making money with limit order.

      Don’t get confused!
      Get even
      !

  2. Abhishek

    The whole financial system is not sustainable in its current form . The main problem is that while capital is free to move globally , its regulation is local in nature.Unless you reform and regulate this globally we will continue to face such problems.

    1. jfree

      The last banking crisis was very much a result of “globalized regulation” — by BIS capital rules re mortgage-backed securities and by the repeal of Glass-Steagall (a direct requirement of the 1997 WTO Financial Services Agreement).

      Globalization is very much the problem here. NOT the solution.

  3. sq

    How can NASDAQ cancel just some trades?

    Suppose you bought at 14:45 at -61% and then sold into the close. NASDAQ just canceled your buy. You think your quick in and out made you some $, but NASDAQ decidedly unilattaly to open a short position for you.

  4. maff

    It seems like a good end-game quant strategy to me. Kick off algo selling, take out all the snoozing investors stops on the down side then buy back up to where you started. Hey presto, profit! Moral of this story? If your clock speed is less than 1THz don’t be looking to make productive investments in the western world right now.

  5. ds

    what is all of this talk on cnbc about the ‘b for billions instead of m for millions’ error? I am not too familiar with trading systems on the customer side, but is there any equity trading platform out there which requires someone to type “$1 million” or “$1 billion”, literally, in order to execute a trade? Sounds really far fetched to me.

    1. curmudgeonly troll

      Pretty common to be able to type 14.2m instead of 14200000 (which makes it easy to fat-finger an extra zero)

      I speculate there were some poorly coded algos that then said sell now at any price, possibly matched by VWAP algos that said mirror what everyone else does to participate at 10% in every trade, that sent some of those prices to a penny or less.

      Thus, in a nervous market a typo could conceivably trigger a tsunami of immediate sells.

      1. Matt

        Amen, In all conjecture: HFT algorithms requiring liquid markets to function are stationary targets for predators. Let the NYSE halt trading in Accenture for 90 seconds and we see how much liquidity the dark pools are providing. And then the dark pool proxies bad mouth the NYSE for halting trading.

  6. IF

    It is very hard to disagree with most of what you say. I have Greece written off, but hope there can be a line drawn around many other countries. Making the ECB a SIV is the nuclear option, isn’t it? This will draw the Euro further down. Oh, how competitive the German worker will be!

    That said, I made a tiny bit of money today, very unexpectedly. Nevertheless I am very angry at what happened today. It used to be that such action was at worst limited to the stock of a single company. Now the US market as a whole as been shown to be a casino. And canceling trades? WTF. I am speechless. Might have been my conversion to the tinfoil hat crowd.

    1. MindtheGAAP

      “have Greece written off, but hope there can be a line drawn around many other countries.”

      Sorry, but this line-in-the-sand is a pipe dream. Virtually every European country has a financial system that’s leveraged to the hilt, and every country is up to its eyeballs in debt.

      The focus now should be on how to mitigate the fallout instead of trying to prevent it from spreading, because spread it will.

    2. KJMClark

      Greece and Portugal are small potatoes and should be jettisoned without a fight. Italy, Spain, and Ireland are TBTF and should be defended at all costs. The only problem with that is (according to that great NYT chart), Spain holds 1/3 of Portugal’s debt – $86 billion worth.

      But really, the best hope for Euro survival is a drastic reduction in the Euro’s value overall. Which is happening. What does that mean for the US recovery? Probably heading back down around or soon after the mid-term elections. It’s amazing to watch all these democracies imploding into indecision at the critical time.

      1. MindtheGAAP

        “But really, the best hope for Euro survival is a drastic reduction in the Euro’s value overall.”

        Against what? If it continues to fall against the Swiss Franc, then everyone goes bankrupt anyway–first central and Eastern Europe, and then everyone who lent to them, and then the counterparties of those lenders.

  7. a

    “Keynes, a successful speculator,”

    Um, not everyone has a father-in-law to make good your debts when you go bankrupt.
    http://www.maynardkeynes.org/keynes-the-speculator.html
    There would be lots of people who would be successful speculators if, every time they went belly up, someone made could their losses so they could try again.

    “Reader Hubert, who is no fan of the Anglo-Saxon “kick the can down the road” credit system, nevertheless believes that the least bad way of the current mess is for the ECB to deploy its balance sheet…”

    I love it! In a thread on a US market crash the solution is…for the Europeans to deploy the ECB’s balance sheet. Let the f*cking markets crash. We’re in a depression no matter what. Deploying balance sheets and deficit spending ensures that it’s the lower classes who will bear the greatest burden, while asset holders, i.e. the rich, get off.

    1. a

      “someone made could their losses so they could try again” ==> “someone made good their losses so they could try again”

      Sorry.

    2. Yves Smith Post author

      Bogus. Richard Rainwater also LOST money for the Bass family during his first two years with them. Sid Bass decided to keep him on anyhow. Rainwater then made an extensive study of successful investors (meeting many in person) and the rest is history. You would also deem Rainwater to be an unsuccessful investor based on his early losses.

      And Keynes did repay the loan he got to tide him over his early losses.

      More important, this amounts to an ad hominem attack. It was Keynes’ experience with the market, something most economists lack, that gave him insight into how it affected the real economy.

      1. a

        “More important, this amounts to an ad hominem attack.”

        Which is appropriate when you use a “pro hominem” argument, pronouncing Keynes a “successful” speculator to use as a basis for taking his advice.

        “It was Keynes’ experience with the market, something most economists lack, that gave him insight into how it affected the real economy.”

        Bollocks. Keynes had more experience in the market than most economists, but that only says something how little market experience economists had and have. Again, you’re trying to use a “pro hominem” argument, arguing that Keynes made money in the market, therefore we should listen to his advice.

      2. MindtheGAAP

        Yves,

        Do you know of any reference material on Rainwater? The only thing I’ve read about him came from Train’s “Money Masters of Our Time”, but I found him to be an interesting personality, and I liked his manner of investing (the part that I read about, anyway)

        Thanks.

        1. chicago mike

          here’s the gospel according to Rainwater circa 2005:

          http://money.cnn.com/magazines/fortune/fortune_archive/2005/12/26/8364646/

          here’s an update on his prophecies, circa ’08:

          http://money.cnn.com/2008/10/01/news/economy/rainwater_okeefe.fortune/index.htm

          I recommend reading this from the NYT:

          http://www.nytimes.com/1999/10/30/us/midas-touch-was-billionaire-s-gift-to-bush.html

          From which I quote:

          “Mr. Bush, for his part, invested $385 in 1991 in a group set up by Mr. Rainwater to provide consulting services to the Americredit Corporation, a company that secures car loans to high-risk borrowers. Three years later, when the investment paid off, Mr. Bush received $45,512.”

          and . . .

          “. . . between 1991, the first year that Mr. Bush publicly released his tax filings, and 1994, he earned about $270,000 from investments involving Mr. Rainwater, according to data provided by Mr. McCleskey. And in 1998, when all remaining Rainwater-related investments were sold, Mr. Bush made from $355,000 to $415,000, public filings show.

          “The Texas Rangers provided Mr. Bush his biggest payday from deals involving Mr. Rainwater, some $14.9 million based on a total investment of $606,000.”

          I can’t find my notes from Molly Ivins’ book on Bush, but she rips on Rainwater too, deservedly IMHO. He was instrumental in putting Bush in the White House, and then made a good sum of money betting on Bush’s ruinous policies. Now THAT is trading….

    3. Toby

      I agree with a: what is it we are trying to rescue here? And whether Keynes was a genius of the stock markets or a spoilt rich kid is neither here nor there in the final analysis. What matters is addressing the question of what is damaged, how is it damaged, and if it can be fixed.

      This is in my opinion yet another manifestation of systemic breakdown. The markets are not ‘free’ (they never were), greed is not the deep-motivator of all human behaviour, there is uncertainty and information asysmetry, humans are irrational, and so on. We have a creaking, centuries old infrastructure, both physical and cultural, built atop a heap of fallacious assumptions and outright ignorance. The system that has grown up as a consequence of this is failing fast, and will continue to fail (catastrophe looms I fear) until the core issues are addressed, in as unbiased a manner as humanity can manage.

      Get Bernard Lietaer, the MMT people, plus others otherwise predisposed in a room together to hammer something out. We badly need a new direction and a system reset. One way or another change is coming. I’d like the smoothest version possible, not the roughest. And the roughest is what our inflexible adherance to the zombie system dooms us to.

      1. gigi

        We seem to have some engineering analysis here:
        - Toby said “What matters is addressing the question of what is damaged, how is it damaged, and if it can be fixed.”
        - a said “…while asset holders get rich”
        I agree.

        All contract law is being broken to protect debt holders. I am no party to bank borrowing, business borrowing, country borrowing, state borrowing, city borrowing, borrowing and more borrowing. Why should I bail out the bondholders? When they invested, they took the risk of default and part of the interest they make is to cover that risk. Don’t these “sophisticated” investors understand such a simple principle?

        The perception seems to be that if bondholders are not bailed out they will not lend and the economy will grind to a halt. I would like to see this thesis tested. I think that if countries and people are allowed to default, we will wind up with a healthier economy. The debt burden will be gone from people unable to bear it. Companies that are over leveraged will go under, the ones who are not will eventually prosper. Countries will be forced to allocate resources to governance openly instead of borrowing and hiding the expense. And bond holders will realize that they need to factor in credit risk when they lend. Oh, and BTW bond holders always come back.

        Yes, this will be ugly. But we need to end this bailout insanity. The market will end it for us eventually and the results will likely be worse.

        1. Skippy

          Shylock would rather our deaths, than his imposition.

          Skippy…it beats with in their chest.

        2. The Rage

          Please, gigi, keep it up. You are setting the stage for national socialism. The bailouts exist because of the monopolized creation the capitalists have created for themselves. Without it, everything collapses.

          It just wouldn’t be the overleveraged businesses, but “healthy businesses”, “devaluing labor as they just sit around with nothing to do”, new business creation would collapse

          Even when recovery did come, it wouldn’t come back like you expect. The current credit creation mechanism is the only thing keeping you from starvation. Americans aren’t going to cut their standard of living for developing countries anymore. Your ideals would create our enslavement. Your internationalism is a disgrace.

        3. Naive_person

          Hmm, should I continue to agree to advice of pseudo-scientific economist/policy types who will declare victory no matter the outcome “because of course things would have been worse”. Advice that strangely enough always asks me to make a sacrifice even though I am not responsible? Or should I take my chances doing what I think is right and fair? Man, I’d sure like to know when all this nonsense started. Anyways, Gigi I agree.

        4. Glen

          Agree, bailouts have to stop. People made bad investments, they are not getting their money backunless they want the whole world to come apart at the seams like Greece. And good luck with that, it would be a whole world of pissed off people willing to hang the bailed out screw ups from the nearest light pole.

  8. jm

    We know that several hedge fund operators (e.g., Paulson) figured out ways to make money by getting other market participants to hang themselves.

    We also know that there are a lot of computerized trading operations out there executing trend-following algorithms and/or front-running others’ trades. And, of course, stop-loss orders are always there. This creates potential for a downward positive (i.e., regenerative) feedback loop.

    Did someone perhaps figure out a way to dupe the trend-following and front-running algorithms into thinking that the market was headed down rapidly, so that they would join in the party and push it down even more rapidly, generating huge profits for someone short the market?

  9. Skippy

    LOL dueling algos with a sprinkle of Yen Amperage and a dash of gag by one big customer.

    The joint probability distribution of the number of nodes of fan-out k in random recursive circuits. For suitable norming we obtain a limiting multivariate normal distribution for the numbers of node of fan-out at most k, where we compute explicitly the limiting covariance matrix by solving a recurrence satisfied among its entries

    or

    is everyone’s *Norm* the same a[i]ll the time.

    Skippy…if I could only play the part of Spartacus…sigh.

    PS. trees and clean running water on arable land is better though.

  10. purple

    Like previously written, models were based upon similar trigger points and all sold at once. Has to do with exchange rate volatility, and this is the reason for G7 – lords of finance – meeting (i.e. China not necessary).

  11. RueTheDay

    There’s no way in hell this was simply the result of a single trader fat fingering a sell order for PG stock. I think there was some sort of glitch, but it’s not what the CNBC crowd are trying to make it out to be.

  12. charles

    Your reader Hubert has a curious view, though widely circulating in the anglo-saxon press, of the possibility
    of the ECB using the nuclear option. First of all,it already
    broke its book last monday with the acceptance of ‘junk’or
    ‘near junk’rated Greek bonds, second the direct purchase
    of sovereign bonds is explicitly forbidden by its statutes.
    Thus, unless today’s Eurogroup decides otherwise ( see
    the letter sent ‘jointly’ by the German Chancellor and the
    French president ahead of the summit to Mr Barroso and Mr
    Van Rompuy: http://www.bundesregierung.de/nn_1272/Content/DE/Pressemitteilungen/BPA/2010/05/2010-05-06-brief-englisch.html ), they seem to have other priorities in mind
    when it comes to the ‘urgent structural reforms’ they are urging for.

    Imho, if they intend to break the rules of the ECB, I trust
    the Germans will stongly oppose, time will tell

  13. Mickey Marzick in Akron, Ohio

    Let’s see what transpires today… If the market tanks today then the “glitch” spin would appear to be a stretch. Why the market continues to tank would then be the billion dollar question.

    There’s a political game going on as well. Momentum for financial reform, dismantling TBTF, and auditing of the FED may have “roiled” – pissed off more like it – the market gods. Who blinks first – markets or governments -will become clearer.

    In the short term who can weather the storm and inflict the most pain without threatening their long term interests? CAPITAL ON STRIKE is not without risk, particulalry long term. But if the house comes down all bets are off. Suave qui peut?

  14. sg hammer

    My ‘Delineator’ showed an end to the up cycle on March 19th and that any subsequent move in price above that day was unsustainable and an opportunity to lock in profits. Markets give you several chances to sell at higher prices, and few opportunities to buy at lower prices. The warning signs are there if you know what to look for.

  15. chad

    This is exactly why I’ve been completely out of the market for the past year or so. I don’t trust it at all.

    I can make a more consistent return doing odd programming jobs on the weekend then I can in the markets.

  16. gnk

    I believe that the ECB should not deploy it’s balance sheet, i.e., QE forever. It is but a temporary bandaid that delays and magnifies the ultimate collapse.

    Something should be deployed, yes. And that’s gold. Remonetize at a high value. Back to basics.

    This is inescapable. The Keynesian and Monetarist quacks have caused enough destruction. Get their grubby hands off the steering wheel!!!! We’re heading for a cliff.

  17. Jerry

    Yves…enough is enough….so I would like to move dollars into another currency….any suggestions and how do I do this????

  18. Doug Terpstra

    Thank you, Yves. The “fat-finger” human-error theory sounded rather hokey, if only because it was first floated on CNBC: “nothing to worry about here; just a typo; the fundamentals of our economy are sound; no cause for panic…” Rather as you say, …”it isn’t hard to see this as the son of program trading, mindless computer-driven selling when the right triggers are hit.”

    And that is a scarier scenario as you note, with terrible lasting damage to the fundamental notion of free enterprise. It’s rude wake-up for any remaining credulous small investors, that the market is a house-rigged casino.

    So instead of human error, we now witness the ‘rise of the machines’, where artificial stupidity trumps human judgment. If it can crash the market based on arbitrary triggers, imagine what same artificial stupidity will do when it controls our nuclear arsenal, the terminator scenario.

  19. RueTheDay

    There’s a bigger question here. As a society, we have allowed the financial markets, particularly the secondary markets, to grow so large on the grounds they are necessary to provide liquidity.

    How long will we continue to worship at the alter of the false liquidity god when the stocks of Fortune 500 companies with huge floats can go +/- 60% within minutes, when broad equity indexes can drop 10% in seconds, when sell orders are met with ZERO BID, etc.?

    1. Jerry

      Do the wall street run the corporations or do the corporations run the wallstreet….What I mean is my life going to be destroyed because the market blows up…is that what is holding up our economy….so when I leave for work and the market crashes, I have no ability to feed or take care of my family because most businesses close?? Do I prosper or drown because of this casino????? Or am I naieve to think I have some control of my financial wherewithall???

  20. J2

    I don’t think you portrayed the plunge accurately.

    The market didn’t plunge 998 points in twenty minutes. I believe the DOW was down -300 prior to the rapid downturn. So during the 20 minute period the market dropped more than 600+ to -998.

  21. Doc Holiday

    Fat & Greasy Fingers Covered in …

    See: A price shock that lasts only
    twenty minutes has, for a brief period of time, a very strong impact on
    market volatility. Then over a much longer period (typically up to six weeks)
    it has a very weak, but persistent market impact.

    http://fxtrade.oanda.com/documents/R-Olseninvisiblehand.pdf

    These hedge fund people need to be in prison, with zero computer access!

  22. Doc Holiday

    More Fat Finger Snaxs

    Featuring Richard Olsen of Oanda Corporation
    “We want to create tools of finance that are as slick and elegant as the most sophisticated tools of technology,” he says. Toward that end, Olsen Ltd. operates a feature called a BoxOption, which allows traders to define a specific strike range in time and price with a mouse click

    Olsen responds that exposures at
    most banks are dominated by just a few
    risk factors. “Limit it to instruments
    where you have big exposures – you
    don’t have to run it across your whole
    book,” he says.
    http://www.algorithmics.com/EN/media/pdfs/risk_highfrequency.pdf

    JSTOR: The Annals of Statistics, Vol. 34, No. 1 (Feb., 2006), pp. 493-522
    In the light-tailed case, the limit theory is based on the CLT for stationary ergodic finite variance martingale difference sequences. In the heavy-tailed case such a general result does not exist, but an analogous result with infinite variance stable limits can be shown to hold under certain mixing conditions which are satisfied for GARCH processes. It is the aim of the paper to give a general structural result for infinite variance limits which can also be applied in situations more general than GARCH.

  23. Joshua Hayes

    The conspiracy theories and the thinking that “you cant beat them” is the reason less than 1% can make a living playing this game. All the way out here in Maui and yet I have been making a living in this market for 15 years by simply studying the past 130 years of the stock market. I suggest many of you read some books on:

    Jesse Livermore
    Nic Darvas
    William J. O’Neil
    Peter Lynch
    Richard Wyckoff
    Gerald Loeb
    Jack Dreyfus
    Bernard Baruch

    and pick up the book written in 1841 PROVING that NOTHING ever changes “Extraordinary Dellusions and the Maddness of Crowds” by Mackay.

    By refusing to study history and the markets greatest winners you all keep yourself in the “poor me: everyone is out to get me mentality.” Stop blaming others and making up conspiracy theories and learn how the markets work. From March 2009 till May 2010 we basically had a straight uptrend minus two pullbacks. Now it is time to short the rallies. This is not rocket science but many of you refuse to learn from the greatest traders of all time and history.

  24. Hubert

    Yves,
    some ambiguity lost in the post.

    I am not sure if stuffing the ECB is the right way to go forward – I just think it is the logical one from a political standpoint as anything else will blow the Eurozone up. I do not think that a Portguese and/or Spain rescue will pass 7 parliaments – so the ECB has to become more a FED-like money-laundering institution. I do not know if they can do it quickly enough and I hope they can´t – but I guess they will. The ECB will probably look like a giant SIV in due course.

    Personally I prefer a big mess here and now to an even bigger mess two years down the road. If the Eurozone has to fall apart, let it happen “here and now” before all speculative capital in the world is positioned this way, takes home a few hundred billion in profits which some European savers/taxpayers have to bleed for later.

    The Euro-Domino theory is nonsense anyway. Most CDS run 5 years. This is burglar vs police. The police only has to get the burglar once within 5 years. The burglar has to win every time – the police has only to win once. Greece is a never-ending “save”.

    MOre to the point: As CDS are a perfect bear raid tool, Spain and Portugal will get attacked anyway, in fact they are attacked here and now. Instead Berlin/Paris waste amunition and goodwill for the least deserving entity: Greece.

    The one thing that could buy the ECB time would be to forbid cash-settlement for CDS, or demanding insurable interest. But, according to my sources, Berlin still does not understand this game. Maybe now they learn or maybe Paris knows better and teaches them. We will find out soon.

    1. Yves Smith Post author

      I’m sorry if I misrepresented your views. However, the eurozone “falling apart”, given that the members are bound by treaties, is not a “here and now” process. It would first have to be determined who would exit and how (will it be the weaker countries or the stronger? And are national government approvals required? I’d assume yes, which adds even more time to the process). Any countries that left would have to enter into plans to re-launch local currencies, it won’t be a fast process, it will grind out over a period of years.

      1. Hubert

        Yves,

        certainly no misrepresentation. Just feel some abiguity lost between what “should” and what “likely will” happen.

        The Break-up might come quickly any Treaties notwithstanding. That is the part many state officials do not understand. Once the ECB no longer takes Greek paper in repo and/or purchase, Greece is illiquid and cannot fund its budget. It would have to drop out and fund itself in drachma. The fact that the debt remains in Euro is a canard, as it will not be payed anyway. The Greeks can decide in which currency not to pay. Quite a luxury.

        But you might be correct. Greece and even Portugal dropping out ist not a break-up. More a kind of spin-off.

  25. eurostoxx

    I was able to trade futures on thursday during the crash and lets just say it was wild and really scary (I was long about 2 mins too early). Its crazy how correlated markets are these days and how quickly price moves can take place once they start to blow out.

    Most trading is and will continue to be dominated by computer programs but what most people dont realize is that this dynamic has fundamentally changed the structure of the markets. There are only a few major players in the market making business and when they start pulling back liquidity stuff goes wonky, especially if stop loss orders get hit concurrently(or someone tries to manipulate markets).

    Going back to thursday, it is clear that the EuroYen did have an effect on the stock market, as did the widening LIBOR – OIS spreads and jump down in US Govt yields. But really it doesnt take much to ‘push around’ those markets, especially after 2pm and considering how much the DOW/S&P was down already. There was a positive feedback loop between all those markets, and probably all of them had overshooting moves. But those moves only happened because at that point in time nobody in their right mind would want to be long risk. The algo’s didnt know if a bank just went bust, or a nuclear bomb went off. They just know what such a scenario might look like (in the markets in general) and for those few minutes, they saw it. One needs to remember is that basically this is how things are going to work now.

  26. The Derivative Project

    We had a position in Blackrock’s HYV that collapsed about 2:25 PM, EST, yesterday. As a retail investor, we inquired today with our provider Schwab who stated the “unusual” drop was caused by “the sell -off in the 10 year Treasury” and the drop in HYV correlated perfectly to that collapse. It was not a trade during the period of 2:40 – 4:00PM that is part of the “exception” for investigation. It was quick and HYV rebounded to a more normal trading pattern prior to the 900 point sell-off in the Dow. This makes absolutely no sense. SEC should also look at trades in Blackrock’s high yield funds.

    Of course for the little investor, when we called today and said we had tried to go sell SDS during the phenomenal market drop, which was fact, but could not because Schwab’s online platform and phones were down, we were told by Schwab you are out of luck. “Schwab has no responsiblity” if you cannot trade if their systems are down. The little investor is shut out of the opportunity to trade to protect or enhance their portfolios.

    We hope the SEC looks at the raw facts,,,this most certainly appears to be a planned move to reap phenomenal profits. Once again the little investor was the one that was harmed. How can a retail platform like Schwab close their website and phone lines from 2:40 until 4:00PM EST and then tell the retail investor that is your tough luck. We are sorry but “our systems were down”, yet they refused to provide any back up phone support to enable the small investor to trade while their systems were “supposedly overloaded.”

  27. mrtmbrnmn

    the only answer that makes sense is usually the right answer. forget the market guff you are hearing. this plunge was not the result of fat fingers or e.d. (euro dysfunction). it was a dress rehearsal by al-qaeda of wall street (goldman, citi, jpm etc) for the moment still to come when they pull off the shock walletectomy of all time by stealing ALL the money in the world!!! you heard it here first!

    1. psychohistorian

      I do find it interesting in all these comments that there is no mention of the debate going on in congress about banking regulation at the time of the market fall.

  28. Richard Kline

    *Sigh* The problem with The Sick Man of Euro (Greece) is a political problem masquerading as a financial problem. The financial modalities to intervene in the short run, and to appropriately constrain domestic fiscal policies in the long run have been jealously guarded by the former sovereignties of the one-time nations of Europe, specifically being held out from the centralizing institutions and their treaty bases of the Eurozone so that formerly national authorities could continue to use them for their own, local political ends. That is the European way, but it doesn’t make for rapid decision making or clean and focused policy actions. More integration is the obvious solution, but to that the former nations of Europe are generally dragged kicking and screaming, and in any event dragged slowly at a pace that won’t produce new mechanisms in real time. And the present financial problems are real time problems.

    ECB intervention was the first best option for containing a speculative run against the euro using CDS as the modality and the periperhal cripples to start the process. But the ECB was specifically designed so as _not_ to be able or minded to interven early and often. But we are well past that due to the lack of common mechanisms, so losses are of course going to be far greater than they had to be. And no, the Germans don’t get any of this. What we are really seeing is still individual leaderships of the former nations of Europe maneuvering for their individual advantages without seeing that this is a self-defeating exercise. Myself, I don’t see this as a cause for despair: this is a learning experience for Europe as a whole: they are a whole, and cutting off the blood supply to their nose to spite their face just means shared pain and risk of gangrenous contagion. Europe learned that ‘national’ airspace management is a flop in an integrated transport regime. They are now learning the same in an integrated financial regime. And all of this talk about ‘the plunging euro’—to levels that were ‘normal’ not at all long ago, and which are very advantageous for the exporters amongst the zone members. The process looks ugly as hell, no question. I’d bet on the pound blowing up before the euro, though.

    Leave and go where, pray tell? Or better prey tell? If the spreads on Greece’s Euro debt are bad, what do you think they’ll be on drachma debt? No one is going anywhere via ‘the suicide option.’ Ultimate haircuts on existing Greek debt seem pretty likely, though.

  29. nivedita

    Yves you seem to be missing the point of Leibowitz’s comment. Don’t be so quick to dismiss that as just the usual journo explanation for the market falling. The reason orders were routed to ECN’s instead of executing on the NYSE was that the NYSE had switched to auction mode in many stocks, which meant its bids were no longer automatically executable. Because of Reg NMS that effectively meant the NYSE bid book was temporarily taken out of the market.

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