2010-05-11

Flash Crash Redux

The Wall Street Journal reports the details on why it was a panic.
Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?
On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later.

The trade by Universa, a hedge fund advised by Nassim Taleb, author of "Black Swan: The Impact of the Highly Improbable," led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank Barclays PLC—to do their own selling to offset some of the risk, according to traders in Chicago.
It was a big trade, but nothing out of the ordinary. The crash was caused by panic, no different than the rush to exit a burning building. Europe and the markets were burning and this trade what happened was a cascade of fear.
"Universa alone couldn't have caused the meltdown," said Mark Spitznagel, Universa's founder. "We had reached a critical point in the market, and it was poised to collapse." Barclays Capital declined to comment.
Exactly right. The market was ready to crash. And it still may be.
With the high-frequency funds either selling or pulling out of the market, Wall Street brokerage firms pulling back and the NYSE stock exchange temporarily halting trading on some stocks, offers to buy stocks vanished from underneath the market. Normally there can be hundreds of offers to buy the iShares Russell 1000 Growth Index exchange-traded fund, but at 2:46 p.m., there were just four bids north of $14 for a fund that had been trading at $51 minutes earlier, according to data reviewed by The Wall Street Journal.
Thus, the price of $14 wasn't necessarily the "real" price under normal conditions, but it was a price and the one that was offered during those 15 minutes of panic.

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