Home > Economics, Trading > Stock Market Crash not a Fat Finger

Stock Market Crash not a Fat Finger

So there’s a report going around that a Citigroup trader hit the “b”illion button instead of the “m”illion and I just want to right off that bat make clear that not only do I not buy that story, but I am absolutely certain that it is not THE cause behind today’s collapse.  I believe today’s collapse is a confluence of factors that generated the perfect storm of volatility, chaos and panic.  Here are a few of those factors:

  1. Global fear levels are elevated amidst talks of a Greece default and trouble in Spain.
  2. Markets traded aggressively higher off of the February lows without a substantial pullback.  This led to large pent up selling demand.  People were waiting for the first downtick to sell, and when the selling begat selling.
  3. With high frequency trading accounting for an ever-increasing percentage of total market volume, when the volatility storm, hit the computers shut off.  I was staring right at it in the Level IIs…the bids in just about every stock disappeared.  There was no liquidity.
  4. Proctor and Gamble (PG) alone dropped almost $25 points from its intraday highs.  With the Dow being a price-weighted index–with each components $1 move correlating to 7.2 Dow points–PG alone accounted for 180 of the Dows nearly 1,000 point crash.  That’s insane for a stable company.   I’m not a huge Cramer fan, but I LOVE what he had to say live on TV: “if that stock is there just go buy it…that’s not real…just go buy it!”  Major props to Cramer for speaking some truth and bringing sanity to the panic.

Now just for some personal thoughts during all this and a rant: I got terribly scared today.  The speed with which the market dropped 700 Dow points, I could not help but think the worst.  My head was running wild.  Was there a terrorist attack?  A coup in Greece?  Hedge fund blowup?  Bank failure?  Sure enough there was not a single new story.  Nothing in the world changed!  Well not entirely true.  Trillions of dollars moved around, but absolutely NOTHING really changed.  The state of the economy and I’m sure investor and consumer confidence all took major hits today, but really, NOTHING CHANGED!  Sure it was perfectly explicable that there were sellers and the market went down today, but what happened?

I want to rant about #3 from my list of causes.  A considerable portion of high frequency trading is run by “supplemental liquidity providers.”  These SLP’s are supposed to be the good HFT programs which step in when bidders leave the market.  They are supposed to provide liquidity when there is none.  SLP programs run each and everyday and are incredibly profitable for their firms.  Sure enough, the largest such service provider and NYSE’s primary partner in the SLP initiate is none other than Goldman Sachs.  Where was the liquidity?  What happened!?!?  These SLPs run each and everyday, yet today when liquidity evaporates they’re not there?  I saw it.  There were NO BIDS!  Where were you Goldie when we need you?   Not necessarily saying it happened on purpose, but maybe just maybe we’d be better off bringing back a human specialist as opposed to a money-making machine.  HFT is not good liquidity and doesn’t seem to play itself out in a market-neutral manner.  It steamrolls on itself.

What an absolutely insane day.  I really cannot explain the emotions that run through while staring at capitalism spontaneously combust and rebound in a matter of minutes.  Yeah we had our 2008 when everything melted down, but that was a process.  There was news.  Things happened.  This was 2008 and 2009 combined into one 5 minutes bar on a candlestick chart.  What a joke.  If this was a computer glitch then bring back the specialists.  It makes everything seem so fake and unreal.  Since when was an economy measured by green and red digitized numbers flashing on a computer screen?  What ever happened to REAL things?  Innovation, production, etc.  Today was/is ridiculous and is a sign of the lack of progress we have made since this “financial crisis” began.

End Rant.

  1. May 6, 2010 at 10:50 pm

    Well the SLPs can only step in during times like this and use their own money and not clients money. But we all know the capital structure of these big banks lol, they are pretty much insolvent if it weren’t for the drastic measures that were taken over a year ago.

  2. May 7, 2010 at 6:50 am

    Insolvent or not, they can put plenty of VAR…I think they even get an exemption for technically taking on more risk with the SLP.

  3. May 24, 2010 at 2:52 pm

    I have been looking at Apple and Goldman Sachs mainly. The last Goldman swing helped me make a lot money with my puts but I kept Apple for the longer term, I think it has longer term prospect. Congratz for your educational articles and please wirte more.

    • May 24, 2010 at 3:22 pm

      Thanks for the comment Shelton, definitely will keep it up! I too really like Apple at these levels for a long-term investment. The company is in excellent shape from a valuation perspective and I think the growth will continue to be there with the company’s transition into the media/distribution line of business.

      I’m not quite as intrigued by Goldman Sachs because I think there are significant risks to any business that so heavily relies on trading for revenues.

  4. May 27, 2010 at 7:35 pm

    If only more than 39 people would read about this!

  5. July 21, 2013 at 12:32 pm

    Inspiring quest there. What happened after?
    Good luck!

  6. March 30, 2015 at 3:54 pm

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  8. June 28, 2015 at 6:40 pm

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  1. May 6, 2010 at 10:12 pm

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