

Market Plunge Baffles Wall Street - grellas
http://online.wsj.com/article/SB10001424052748704370704575228664083620340.html?mod=WSJ_Markets_LEFTTopNews

======
fredmg
To protect against an unexpected market crash, traders have stop-loss orders
that can be executed automatically if the market starts to tank.

    
    
      Trader 1 puts in a order to sell everything if the market goes down by 4% in 1 hour.  
    
      Trader 2 knows that and wants to get out of the market before trader 1 does in a crash, so he puts in a order to sell everything if the market goes down by 3.9% in 1 hour.
    
      Trader 3, Trader 4, etc. continue this process.
    
      Then you have a day like yesterday when the market goes down by 2 percent and there is a lot of uncertainty about Europe, causing more people to put in stop-loss orders.  The one automatic order triggers hundreds more.  
    
      Now they are going to rollback some of these trades because it was an "Trading Error".   When Investors on Wall St. have trades that make money it is because of their skill and they get bonuses.  But when their own stop-loss program sells for a 70% loss they get a do over.

~~~
rbanffy
> But when their own stop-loss program sells for a 70% loss they get a do
> over.

There has to be a mechanism to undo cascade mistakes because, if someone
figures out a way (and that's rather easy) to induce mistakes and to profit
from them, it will shortly become the prevalent form of trading. We want
exchanges to foster investment on productive companies.

~~~
khafra
It's a market for intangibles; over the short term it's zero-sum. The only way
to profit is to induce mistakes; to get someone on the other side of a trade
that's profitable to you and damaging to them.

If algorithmic trading causes vulnerability to mistakes, they need to revise
their algorithms or factor in the risk of this type of loss; that's the way
free markets work. The externalities of a sudden crash suck, but other than as
a one-time emergency measure, rolling back all the trades isn't a good
solution. Wall Street firms should've learned something since 1987.

~~~
ams6110
My guess is that the algorithms are already being adjusted. My fear is that a
bunch of politicians who are as clueless as most everyone else are going to
try use this as yet another opportunity to grab the spotlight. Expect
congressional hearings.

------
jplewicke
The word on the Street right now is that NYSE moved some stocks from normal
electronic trading to human-mediated trading at 2:40 PM. They were trying to
slow down unusual trading activity in those stocks, and they thought they
could do that by giving their human market makers a bit of time to consider
prices and do the right thing. Unfortunately, when they stopped electronic
trading for those stocks, all the orders they would otherwise have handled got
sent to a bunch of smaller electronic exchanges that didn't have enough
liquidity. That started to tank a few specific stocks scarily fast, which
triggered a bunch of stat-arb trades and plunged the indices down. Once that
got bad enough, all the liquidity providers got spooked and backed out of the
market for about 10 minutes. Felix Salmon has a good writeup at
[http://blogs.reuters.com/felix-
salmon/2010/05/07/deconstruct...](http://blogs.reuters.com/felix-
salmon/2010/05/07/deconstructing-the-crash/) .

This isn't necessarily everything that happened -- there's a ton of other
rumors flying around about the yen carry trade and a lot of other random
stuff.

------
ivenkys
Here is the movement of Accenture as given by WSJ:

"With Accenture, for example, 20,365 shares changed hands at around $39.98
during the minute of 2:46 p.m., then another 68,516 shares were traded at $38
per share during the minute of 2:47. But then in the 2:49 p.m. minute, 66,277
shares traded at one cent. By 2:50 p.m., the stock was back up to $39.51."

The trade at 2:50 pm is the is the one that intrigues me , i can understand
how the other ones can be blamed/attributed to HFT algorithms , but how does
one explain the bounce-back at 2:50 from one cent to 39.51 ?

~~~
yummyfajitas
One or more large investors believed that the correct price for Accenture was
about $40. When they saw it available at prices between $0.01 and $39, they
bought and bid it up.

~~~
ivenkys
That's my problem with this - why would i pay $40 for something that is
available at $0.01.

Yes i might believe it is worth $40 but when i am getting something for much
cheaper than that surely i would just buy and wait for it to go up, in which
case the price rise should also be in stages, which it is not.

------
bengebre
It's really fascinating (horrifying?) that some of these ETFs went to zero for
a moment. I can't understand how they cancel all these trades though. Seems
like the biggest accounting nightmare ever.

~~~
randallsquared
It actually seems like standard procedure. They reset the market after 9/11,
too. Basically, it seems like any time something really unusual happens, it's
an excuse to go outside the rules. Back when I was involved in digital gold
currencies, this kind of thing seemed pretty standard across the board: banks
would just reverse transactions, freeze accounts, etc, any time there was
anything unusual, and it seemed like our whole business was unusual, so we
were in constant fear that money we'd received and disbursed would suddenly be
unreceived after the fact. It was a nightmare, though; you got that part
right.

My take away from my experience in that industry was that you can't actually
trust banks or other financial institutions to follow the rules; the best
thing you can do is to make sure you're lost in the crowd. Don't stand out,
and you won't get hammered down. These trades and this whole episode stood
out, so of course they're going to retroactively change it to the detriment of
anyone for whom it was a good thing.

~~~
studer
What rules are you referring too? Are you saying that Nasdaq violated their
own rules when they rolled things back?

~~~
randallsquared
Oh, not specifically and officially; I don't know what actual contractual or
legal rules surround this, and it could well be that trading is contingent on
a contract that allows them to do whatever they want. By "rules", I mean the
usual rules that people believe are in force, like "Once I buy or sell, it
stays bought or sold". In exceptional situations (like this one, or 9/11), it
always seems to turn out that honoring obligations was optional all along,
doesn't it?

------
andr
Theory:

1) Short DJIA.

2) Pick some stocks and place buy orders at $0.01.

3) Get a friend to fill those orders for you at $0.01, taking the loss. Call
it a trader error.

4) A lot of poorly written algorithms, which take into account the last traded
price, start selling to cover their stoploss orders (sell if the price < X).

5) Havoc ensues. DJIA is down. Cover your DJIA short and take the rest of the
day off.

~~~
yummyfajitas
Practice.

Assume the stocks you are manipulating are bid at 99.99, ask at 100.

3 - Your friend's first few sell orders at $0.01 or better are filled at about
$99.99.

Your buy orders go unfilled.

4 - If your friend sold enough shares, the algorithms notice someone
aggressively selling. They may undercut and sell at 99.99 or even 99.98.

The algorithms also place a few buy orders at 99.96-99.97.

5 - Your friend's trades (assuming he is placing multiple orders, and is
selling a lot) execute and drive the price down to 99.96-99.97 or so.

6 - The algorithm's _buy_ orders at 99.96-99.97, are filled by your friend's
sell orders.

7 - Price back up to 99.99.

8 - Algorithms eventually sell the shares they bought at 99.96 at 99.99.

Sum total: the algorithms made a few pennies off your friend. Your DJIA short
does pretty much whatever it would already have done.

~~~
andr
If you have direct market access you can match particular orders in the order
book, even if they are out of the money. Your friend would fill your $0.01
order at $0.01 and move the last trade price.

~~~
yummyfajitas
This is not technically possible for most matching engines. There is simply no
"fill order X bypassing price/time queue" message. In fact, NYSE doesn't even
tell you that order X exists and simply aggregates all orders into "Z shares
available at price Y".

Also, except in the case of certain rare events which cause high latency
(e.g., yesterday), it is also illegal to play games like this. For instance,
if the bid is 99 on BATS and only 50 on ARCA, and I want to sell, I can't sell
on ARCA. (I'm grossly oversimplifying, of course, but my simplifications don't
exclude the case of selling at $0.01 to fool the markets.)

------
sunkencity
Pretty interesting and weird. Some stocks lost 100% of their value in a matter
of seconds. Some analysists say it was because some high-frequency traders
pulled out when the market became too volatile and thus there were too few
buyers.

~~~
hugh3
I still don't understand why anyone would put in a "sell at any price" order.
If you sold Accenture at one cent because you put in such an order, well, you
bought yourself a lesson to _not do that_.

~~~
cschneid
Because they are treated differently on the market.

Market orders (sell at any price) are handled first, and then, limit orders
are. You can only guarantee one thing: either execution, or a price level. And
when you're dealing with stop losses, you want to guarantee the execution in
most cases.

~~~
cschneid
Also note that any reasonable broker has both StopLoss and StopLimit orders.
Where it's either a market, or limit order that only gets triggered when the
price goes to a certain level. (you can stop up too. "Buy if price goes above
X", useful for closing short sales, or just getting on a bandwagon).

------
projectileboy
At the risk of seeming too fluffy, did we just see the market equivalent of a
"rogue wave"? It would be interesting to see if there are any parallels
between the two phenomena.

------
startuprules
"The entire stock market rally which we have seen this year off the February
lows resembles a low volume Ponzi scheme, and formed a huge air pocket under
prices.

This US equity rally was driven by technically oriented buying from the Banks
and the hedge funds. There was and still is a lack of legitimate institutional
buying at these price levels. This was machine driven speculation enabled by
the lack of reform in a system riddled with corruption, from the bottom to the
top."

Translation: there's no real buyers in the market at the current price, so
when panic came, there were no buys to prop up the free falling

link:
[http://jessescrossroadscafe.blogspot.com/2010/05/plunge-1000...](http://jessescrossroadscafe.blogspot.com/2010/05/plunge-1000-point-
drop-on-dow-driven-by.html)

~~~
cynicalkane
If there were no buys to prop up the free falling, why did the markets rebound
almost instantly?

~~~
startuprules
government intervention via JPM trading desks and trades cancellation from the
exchanges

~~~
nostrademons
Do you have any evidence whatsoever for that? Or is it just a case of "when
something I can't explain happens, it's because the government did it"?

