Origins of the Flash Crash

Yesterday, we looked at Quote Stuffing and other HFT oddities. Today, I want to direct your attention to an indepth WSJ article about the flash crash:

“Philip Vasan, who heads the Credit Suisse prime-brokerage unit catering to hedge funds, began hearing from fund managers who were ratcheting back on trading because, they told him, stocks were behaving strangely. The funds were acting like “a dog that growls before an earthquake,” Mr. Vasan told several clients.”

When we moved to cash, it was because (in part) of how squirrely the markets were.  That is an apt description of strangely behaving markets: A dog that growls before it bites.

Back to the Journal:

“When the quake hit on the afternoon of May 6, the Dow Jones Industrial Average suffered its biggest, fastest decline ever, and hundreds of stocks momentarily lost nearly all their value. So many things went wrong, so quickly, that regulators haven’t yet pieced together precisely what happened.

A close examination of the market’s rapid-fire unraveling reveals some new details about what unfolded: Stock-price data from the New York Stock Exchange’s electronic-trading arm, Arca, were so slow that at least three other exchanges simply cut it off from trading. Pricing information became so erratic that at one point shares of Apple Inc. traded at nearly $100,000 apiece. And computer-driven trading models used by many big investors, apparently responding to the same market signals, rushed for the exits at the same time.

Three months later, many market veterans have arrived at a disquieting conclusion: A flash crash could happen again because today’s computer-driven stock market is much more fragile than many believed. Many investors, still gun-shy, have been pulling money out of stocks.”

It is your weekend home work assignment . . .

Legacy of the ‘Flash Crash’: Enduring Worries of Repeat
WSJ, AUGUST 6, 2010

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