

Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?  - grellas
http://online.wsj.com/article/SB10001424052748704879704575236771699461084.html?mod=WSJ_hps_LEFTWhatsNews

======
rfreytag
"Instead, the picture is one of a highly rare confluence of events, some
linked, some unrelated, that exposed weaknesses in the stock market large and
small." Please can we stop calling these "highly rare"? When market crises
happen every few years - they aren't rare.

Here is a list off the top of my head:

\- Nixon Wage and Price Controls of 1971 (coupled to floating the dollar see:
<http://en.wikipedia.org/wiki/Price_freeze>)

\- Oil Crisis of 1973 (<http://en.wikipedia.org/wiki/1973_oil_crisis>)

\- Third World Default (hit major US banking hard in the mid 70's. I remember
Walter Wriston then head of Citibank [then First National City Bank], lobbying
a great deal in the press on this subject at the time, see: ).

\- The Sterling Crisis of 1976
([http://en.wikipedia.org/wiki/Pound_sterling#The_1976_sterlin...](http://en.wikipedia.org/wiki/Pound_sterling#The_1976_sterling_crisis))

\- Stagflation Crisis last 70's(<http://en.wikipedia.org/wiki/Stagflation>)

\- Farm Debt Crisis of late 70's (tied to Carter Grain Embargo in 1980:
<http://www.socialistaction.org/news/199910/farmcrisis.html>)

\- Reagan/Volker Recession of 1981-1982
([http://www.economist.com/blogs/freeexchange/2010/03/volcker_...](http://www.economist.com/blogs/freeexchange/2010/03/volcker_recession))

\- Latin American Debt Crisis of 1982: (triggered by too much lending by major
1st-world banks to 3rd-world nations see:
<http://en.wikipedia.org/wiki/Latin_American_debt_crisis>)

\- Japanese Asset Price Bubble of 1986-1991 (mostly property producing the
lost generation: <http://en.wikipedia.org/wiki/Japanese_asset_price_bubble>)

\- Black Monday in 1987 (<http://en.wikipedia.org/wiki/Black_Monday_(1987)>)

\- US Savings and Loan Crisis of late 80's
(<http://en.wikipedia.org/wiki/Savings_and_Loan_Crisis>)

\- Black Wednesday (Sterling leaving the ERM with Soro's help in 1992, see
[http://en.wikipedia.org/wiki/Pound_sterling#Following_the_Eu...](http://en.wikipedia.org/wiki/Pound_sterling#Following_the_European_Currency_Unit))

\- Swedish Banking Crisis and Run on Swedish Currency of
1992([http://en.wikipedia.org/wiki/Economy_of_Sweden#Crisis_of_the...](http://en.wikipedia.org/wiki/Economy_of_Sweden#Crisis_of_the_1990s))

\- Mexican Peso Collapse of 1994
(<http://en.wikipedia.org/wiki/1994_economic_crisis_in_Mexico>)

\- Euro collapse (late 90's)

\- Asian Financial Crisis of
1997(<http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisis>)

\- Russian Financial Crisis of 1998
(<http://en.wikipedia.org/wiki/1998_Russian_financial_crisis>)

\- LTCM in 1998 (<http://en.wikipedia.org/wiki/Long-Term_Capital_Management>)

\- Peregrine Fund Collapse in 1998
(<http://en.wikipedia.org/wiki/Peregrine_Investments_Holdings)>)

\- Argentine Economic Crisis of 1999-2002(there are so many Wikipedia finds it
necessary to put a date on this one see:
[http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999...](http://en.wikipedia.org/wiki/Argentine_economic_crisis_\(1999%E2%80%932002\)))

\- Dot Com Crash starting in 2001
(<http://en.wikipedia.org/wiki/Dot_com_crash>)

\- South Korean Crash of mid-2000's (reading the Buffett bio _Snowball_ he
enjoys learning about and finding good buys in the Korean market, see:
<http://en.wikipedia.org/wiki/The_Snowball> I cannot find a more specific
reference to the South Korean Crash at this time)

\- Argentina devaluation of 2002
(<http://www.wsws.org/articles/2002/jan2002/arg-j08.shtml>)

\- US Real Estate Collapse of 2006
(<http://en.wikipedia.org/wiki/United_States_housing_bubble>)

\- Flash-Crash in 2010 (tied to potential Greek Debt Default and possibly some
financial hacking: see:
[http://theweek.com/article/index/202769/The_Dow_Jones_flash_...](http://theweek.com/article/index/202769/The_Dow_Jones_flash_crash_5_theories)
and
[http://online.wsj.com/article/SB1000142405274870487970457523...](http://online.wsj.com/article/SB10001424052748704879704575236771699461084.html?mod=WSJ_hps_LEFTWhatsNews))

Order is likely off and I am missing a few. I am finding a lot more but
welcome your suggestions and reorderings (email me, see profile, of you don't
want to post).

This Flash-Crash sounds just like a 0 day exploit to me. The solutions and
vulerability just like trying to keep an OS stable while running untrusted
code. As long as it is more profitable to destabilize our economic "OS" rather
than support it we'll see even more such snatch-and-grabs.

One solution: put all profits in interest-earning escrow for a week or so.
That will slow down the rate of an attack allowing it to be identified and for
an exploit to be closed.

P.S. Black Tuesday and Black Thursday commonly refer to events leading to the
Wall Street Crash of 1929
(<http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929>). And Black Friday
is the biggest shopping day of the year i the U.S. falling after Thanksgiving
Day on Thursday and the Weekend - so another important financial day.

~~~
borism
judging by your list, late 2000s were the most stable market we had in
decades...

~~~
rfreytag
The Real Estate Collapse has taken a lot of players to the sidelines along
with their empty pockets. Note that Buffett has been very busy lately.

NOTE:

\- I could not find specific dates for the California Real Estate Crash
(coupled to DoD funding cutbacks, maybe early 90's?). I remember finding
entire high-end strip malls empty in La Jolla, CA.

\- Also forgot to mention the Texas Oil and Real Estate Bust - mid 80's (I met
a realor from TX who was doing foreclosures back then that told me in 2005
that it wasn't going to happen again:
[http://books.google.com/books?id=http://books.google.com/boo...](http://books.google.com/books?id=http://books.google.com/books?id=DaIEl3w5EbMC&lpg=PA29&ots=L2ATVbIx3G&dq=texas%20real%20estate%20and%20oil%20crash&pg=PA29#v=onepage&q=texas%20real%20estate%20and%20oil%20crash&f=false))

\- Enron Scandal of 2001 (tied to Dot Com collapse, see:
<http://en.wikipedia.org/wiki/Enron_scandal>)

------
brown9-2
I have an issue with the description of such a fast and swift decline in stock
prices as pointing out "that there is a structural flaw" or that this was
something that was devestating.

The article closes with:

 _Around 3 p.m., the selling pressure abated. Just as swiftly as the market
fell, it recovered ground. One factor behind the swift recovery, traders say,
were funds that use computers and formulas to sniff out bargains in the
market. These funds swooped in on hundreds of cheap stocks, helping push the
market higher._

So at the end of the day, the market (investors, algorithms, traders, etc.)
saw bargains in under-priced assets and took advantage, making prices rise
back to something near the original level (but a few percentage points off).

In the end, the market still worked.

~~~
steveplace
Sort of.

If you were cognizant enough to "sniff out bargains," and you placed an order
to buy, odds are you didn't get filled. In fact, I call BS on anyone that said
they "bought on the dip" because it happened so quickly even if you put a
market order in on your Etrade platform (nearly all retail brokerages locked
up BTW) you wouldn't get the price you wanted. The structural flaw existed on
both sides of the market.

Everyone's focusing on the lack of bids on the way down, but there were lack
of offers on the way up as well. I would've expected more volume on a
capitulative move like that.

~~~
brown9-2
Well I think if the rise was too fast too take advantage of, the opposite must
be true of the way down, no?

I remain very doubtful that very many people were hurt by this action in the
market.

~~~
yummyfajitas
Many retail investors stupidly placed stop loss orders which hurt them on the
way down.

Very few people placed "don't miss out on a gain" order.

------
lutorm
I don't know much about trading but would there really be any real harm in
artifically slowing down trade, like only executing trades once per day?

These events all seem like mass psychosis to me, it's not like anyone can
objectively evaluate the condition of the economy in the two minutes that is
"a lifetime of trading". I thought for a market economy to work well, the
actors need to rationally evaluate the consequences of their actions given all
possible information. That's going to take some time for everyone, if trades
happen faster then it's just basal instincts like fear that will govern the
action.

The market is supposed to reflect the state of the economy, but somehow it's
all backwards and more like the economy reflects the state of the market.

~~~
chasingsparks
People experiment with things like that often. Search JStor for market
structure or market mircostructure (especially O'Hare).

Even in conventional markets there are periods of auctioning and alternative
pricing structures. I studied it a while back, but the gist is that single day
trading does not nullify panic or mania. At best, it is identical to
continuous trading but it is most likely worse. Continuous trading works very
well. The problem that is increasingly causing damage is the strong
interdependence. Isolated manias and panics may actually be a good thing; when
it represents a global tide however...

------
johnnyg
When I first heard of this I thought "well, bugs in software are like
asymptotes, you can always close the distance by half but never get there".

I read that a few of the gray haired market geniuses were blasting the
exchanges for failure to correct "basic electronic errors" and had to chuckle.
No one can understand even the basic functions of everything!

Now its been days and no specific mechanical/process culprit has been
identified. As trades are interconnected, it seems impossible to cover
something like this up. Everyone wants to point a finger and be done.

Perhaps the answer isn't a "Black Swan" but that confidence is really that low
and things are really looking that bad.

Buy Gold?

------
URSpider94
I'm disappointed that the exchanges have decided to nullify the trades
conducted during this period. If hedge funds and quants are going to put semi-
autonomous trading programs into the market, they need to have accountability
for their actions. Eliminating the consequences for this kind of out-of-
control trading creates moral hazard, in the same way as bailing out housing
speculators who now can't pay their mortgage. If we declare a re-do every time
the computer trading systems create an automated melt-down, then there's no
real incentive to put buffers in place to prevent recurrence.

~~~
yummyfajitas
People engaging in program trading generally want the exchange not to nullify
trades. Trade nullification is unpredictable, and program traders want the
markets to obey a set of predictable rules.

The main beneficiaries of the broken trades are retail investors who placed
stop loss orders. Many high frequency firms are actually hurt by this, namely
the ones who bought at the bottom and sold near the top. Their buys were
broken, but their sells were not.

------
ivenkys
Another theory of why the Yo-Yo effect happened on the Stock Market , the
reality though is no-one really seems to know.

These are all conjectures, there is no proof.

------
VBprogrammer
This feels a little like trying to figure out which butterfly caused the
hurricane.

------
lrm242
Finally, a decent, well research piece of what might of happened.

------
joubert
What do people think of the Black Swan theory?

~~~
retube
I think it's a good concept. Taleb has built a career off of this one idea,
and although I find him generally conceited and quite smug, he is definitely
on to something with this. Just look at recent events: BP oil spill, the
meteoric rise of twitter from nowhere, Iceland volcano etc. The trouble is, of
course, that you never know when/where the spike event will occur. He made a
lot of money by holding far out-of-the-money options. You bleed a small amount
of cash in time-decay, but when the event happens, you make a lot back. You
could do a lot worse than putting 5 - 10% of your portfolio into such a
strategy.

Edit: I believe taleb lost money several years running doing this. He made it
all back and more when the market crashed in 87.

------
borism
QOTD: '"Black Swan"-linked fund may have contributed to "Black Swan" moment'

talk about self-fulfilling prophecy...

