More On The Day The Markets Went Nuts

Posted yesterday: 8 Points And More On Yesterday Plunge

from TraderMike: May 6, 2010 Recap: The Day the Market Broke

• There’s a lot of talk about some fat-fingered trades and technical issues causing that steep drop but I think that’s masking deeper, fundamental issues. Currencies were trading wildly all day, well before the 2:30 debacle in the stock market. Even Dennis Gartman said he’d seen nothing like those currency moves in his 30+ years of trading. I watched a lot of CNBC tonight and most of the talk is about what can be done regulation-wise to prevent the kind of slide we saw today. It made me flash back to October 2008.

Yves from Naked Capitalism : On the Fat Fingered Trade and Market Freakout

• 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).

Here's another version:

• Fil Zucchi at Minyanville:
  
  'Since everyone has an opinion on yesterday's 5 minute plunge, let me offer this:
  
  •We've oft discussed that a tell-tale sign of risk withdrawal is a rising JPY/USD
  •Currency movements are measured in 1/100 of a cent
  •Between 10:50 and 14:00 yesterday, the JPY/USD rose 307 bps.; that's the kind of move people usually position for over a year period, not 3 hours
  •Between 14:00 and 14:10 the JPY/USD gained another 100 bps. ; the S&P 500 (SPX) fell a modest 6 points in that time frame
  •The plunge in the equity markets began in earnest at 14:10, after traders were already disorderly buying JPY/USD
  • After 14:10 the JPY/USD gained another 150 bps. And that's when the SPX went into a tail-spin
  
  Interpret the data as you wish, but the JPY/USD signaled crash-like risk aversion before the SPX went off the cliff. Maybe panic caused a "fat finger", but to these tired eyes, the selling was no mistake.'
  
  Oh ye crazed randomwalkers, no doubt some revisionist rationale will be provided as to why the models don't, can't, and won't explain this latest 'reality' show.
  
  The initial mongering (PHD and the like) crowd will hold up as a sticks-and-glue proof, that the bubbles in your soda pop do in fact explain the bubbles in your portfolio, something called the Generalized Auto-Regressive Conditional Heteroskedasticity Model and its variations. Seriously, you can look it up!
  
  My retort? Got fractals?
  
  What has been will be again, what has been done will be done again; there is nothing new under the sun.
  
  The Band of the Hand can only create a Potemkin demand...
  
  As in, the Atlanta Fed confirming that the major contributor to income growth during the past several months has been transfer payments.
  
  As in, that birth death model... it ain't payin' no taxes!
  
  Bread and Circuses divert folks from staring at the 'chickenless' pot...
  
  As in , no Fed audit, no breakin' up the banks, but hey we might limit ATM fees to 50 cents!
  
  And soon coming to the cineplex near you, the horror film, 99 Weeks Later.
  
  They will inflate until they can’t. Inflation rewards those that have their wealth first. All roads lead to deflation. The stock market will bottom when no one cares. Much like the aristocracy when the barbarians are at the gates… you save the silver (banks) first. They will destroy the village (dollar and markets) in order to save it. After the deflation is overwhelmed, the West will never be the same.
  
  In 1982 S&P bottomed at 6.6 P/E, a 15% earnings yield...
  
  In 1974 S&P bottomed at 7.9 P/E, a 12.66% earnings yield...
  
  In 1932 S&P bottomed at 5.6 P/E, a 17.86% earnings yield...
  
  And 2012 is 40 days and 40 nights from 1932 dontchaknow...
  
  History ingeminates and the truths you hold to be most dear are lies told to you by liars.

Featured on Zero Hedge. Dissecting The Crash

• Having seen the capitulation unfold second by second and then listen to CNBC come up with every excuse under the sun just got under my skin. I've decided to chart some of our one second analytics charts of the capitulation unfolding on our screens. The chart below (more to follow) captures the moment of the final capitulation, before the reversal today. The idea that it was a 'fat finger' error is ludicrous; unless the fat finger hit every market in the world virtually simultaneously. Liquidity simply left the world financial markets for about four minutes this afternoon. The bids just vanished. And what else vanished? Remember the vaunted supplemental liquidity providers, led by Goldman Sachs. Remember that they are paid to "provide liquidity" through their predatory high-frequency algos, they are not required to do so. So when the S@#$T hit the fan they just disappeared. In one second more or less someone (and yes, under these circumstances, human beings take control of the machines) made the decision to pull the bids on every equity in the S&P, every financial futures contract, every FX contract in every market in the world. This kind of thing just doesn't happen in a pure auction environment; there just isn't a tight enough communication link between the parties to allow the decisions to propagate within the same second -- even with HFT algorithms. No. Some human made the decision to pull the bids; all of them, all at once. If that is not a condemnation of the concentration of financial power and the systematic risk it engenders I don't know what is.
  
  As you look from the top to the bottom of this chart (1 second histograms) you will see first the TICK of all US securities falling rapidly; then as it hit -3700 (that's a record 3700 stocks ticking down vs up), look down the chart and see what happens. The markets freeze; there are no bids anywhere. There is virtually no trading, no shares changing hands (e-mini time and sales will show 8 or 10 contracts at each level for some moments here, but that is virtually nothing).
  
  The next graph is the ESM10 e-mini contract. At 1444 and change it just drops like a stone. The EURJPY below it goes into free fall at exactly the same second. The USDJPY below it drops but then holds steady for nearly a minute (carry unwinders are at this point looking for dollars ANYwhere, even against the YEN).
  
  At about the same moment the 10yr US treasury futures contract catches air; the money has to go somewhere. Gold ironically does is behind the 10yr futures in getting rocketed. This is the kind of thing we take a couple of hours to deconstruct; more on this in a follow-up post. But notice that we have the same phenomena here: there are suddenly no offers for either the treasuries or gold. (note I am comparing apples and oranges here; GLD vs 10yr FUT; this bears further analysis; if the lag bears out, but then switches out at some other point in the (near) future we would find this extremely significant)
  
  Now, next you see Procter & Gamble. I included this because it was the focus of the idiotic (and I mean this with all the love in my heart for the CNBC 'analysts'; it must be tough when you don't have a teleprompter). Supposedly there was a 'glitch' that caused PG to trade hugely down. In reality it simply behaved in unison with every other instrument in the entire global market at that moment. The bids were gone. Nevermind that the NYSE didn't trade that low; they only control a quarter of the action anyway; ask someone what their supplemental 'liquidity providers' were doing at that moment.
  
  You can see by looking at the $TICK above that not all stocks traded quite the same. There are courageous (read foolish) retail traders out there that actually put a bid in when they disappeared everywhere else and got hit.
  
  Otherwise, in every other market, NOTHING got hit until nearly SIMULTANEOUSLY the bids were back in the market, albeit at a hugely lower price (vice versa for GLD and treasuries). At this point, in most (non retail markets) there was such a huge spread that it took nearly 3 minutes (minutes!) for the bids to find someone to buy from -- at this point the sellers, algos watched by humans, are anticipating a snap-back and are not going to sell cheap. The drop into the abyss is over and 'normal' trading resumes, on about 14:48. Volumes, and the order book flow were a sight to behold. Hopefully it was a once in a lifetime event; but don't hold your breath.
  
  Finally notice that the EURUSD and AUDUSD are slightly late to the game to recover. Although the auction resumes about the same time, they continue to print precipitously longer. This is all the confirmation of Cluesix' AUD analysis I need. No one is talking about it today, but after Asia tonight they will; Asia (and even China) are next

Aslo on Zero Hedge: Here Is Who Traded What And How Much Yesterday

Last but not least, here's a recommended posting from Macro-Man. Do give it a read. :D

The Sea-Change