Flash crash

Dow Jones index had today its biggest intraday drop in history. It was down almost 1000 points/10%, but managed to close "just" with loss of 3,24%.

There are various reasons circulating what caused the crash... I think that the market was ready for a correction for a long time, but buyers were still stepping in (when I say buyers, think about investment banks and hedge funds). The risk of spread of contagion from Greece to other countries not just in Eurozone is clearly visible, but Wall Street was pretty immune. But nothing last forever and this week investors realized that the risk is very clear and pretty high. Plus Trichet was extremely passive on the ECB conference and he even said that they didn't consider buying bonds. Well, markets didn't like it. What we saw was a panic which was then amplified by maybe a crash of a HFT system or something like that.

Lets see how this continues... But my guess is that this can go further.

Various comments about the crash from other bloggers:

Carry Unwind Magnifying Moves? - UrbanDigs

A: Tons of talk about this threat since middle of 2009. Has The Search For Yield ended with a fierce carry trade unwind?

When asked in November about what signs would indicate an that a carry trade unwind might be happening (5th comment), the response was:

Danny: Noah, what are some of the initial signs that may indicate the positive carry trade unwind is upon us?

Noah: the main sign will be a sharp, fierce rally in the US dollar and likely a similar fall in commodities/stocks. I wonder how metals will react as they may disconnect a bit given the nature of the crisis and actions taken across the world to stem it.

In Debt We Trust: The warning sign will be a jump in options volume for vix call futures.

So lets see here:

1. Sharp/Fierce rally in US Dollar - check!

2. Selloff in Equities/Commodities - check

3. Disconnect in Metals/Gold - check!

4. Jump in options volume for VIX calls - check!

Eurodollar futures plunging which will reflect a rising LIBOR rate. HY/IG getting hit. These are all clear signs of stress. Sometimes the best discussions on this site occur in the comment threads! Hopefully that continues and reader participation and opinions only grow from here!

PLUNGE! 1987 Style - Sudden Drop in US Stocks Driven by Program Trading and a Ponzi Market Structure - Jesse
US equities were gripped by panic selling as the Dow plunged almost 1,000 points driven by a cascade of 100 share high frequency program trading, estimated to have been about 80% of volume. Gold rocketed higher to $1,210. The stock exchange circuit breakers do not apply after 2:30 PM NY time.
This was highly reminiscent of the 1987 crash driven by a flawed market structure based on automated trading and bad theories.
The entire stock market rally which we have seen this year off the February lows resembles a low volume Ponzi scheme, and formed a huge air pocket under prices.
This US equity rally was driven by technically oriented buying from the Banks and the hedge funds. There was and still is a lack of legitimate institutional buying at these price levels. This was machine driven speculation enabled by the lack of reform in a system riddled with corruption, from the bottom to the top.
This is yet another indication that the US regulatory and market oversight organizations, especially the SEC and CFTC, continue to be disconnected from and remarkably ineffective in their responsibilities in guarding the public against gross market abuse, price manipulation, and insiders playing games with cheap money supplied by the NY Fed.
And as you might expect, the anchors on financial television are trying to excuse and blame the sell off on a 'fat finger' order that caused Proctor and Gamble to drop 20 points in 45 seconds. Or a typist inputting an order to sell 16 million e-mini SP futures, and typing "B" instead of "M." Oops. Crashed the free world.

"Ordinarily, the financial risk in a market, and hence the risk to the economy at large, is limited because the assets traded are finite. There are only so many houses, mortgages, shares of stock, bushels of corn, [bars of silver], or barrels of oil in which to invest.

But a synthetic instrument has no real assets. It is simply a bet on the performance of the assets it references. That means the number of synthetic instruments is limitless, and so is the risk they present to the economy...

Increasingly, synthetics became bets made by people who had no interest in the referenced assets. Synthetics became the chips in a giant casino, one that created no economic growth even when it thrived, and then helped throttle the economy when the casino collapsed."

US Congressman Carl Levin

Even if any of this was true, it was just the spark that caused the market to plummet because of its highly unstable and artificial technical underpinnings. There is no longer any legitimate price discovery. The US financial system is a casino, dominated by a few big Banks and hedge funds, the gangs of New York.
They'll never learn. Or is it 'we?' They may not really care.

WHAT CAUSED THE CRASH TODAY? - Pragmatic Capitalism

There’s all sorts of speculation over what caused the crash today.  The answer is simple.  Pure unadulterated fear.   Everyone is looking for someone to blame, but we’ve seen this happen in markets for hundreds of years.  It happened before there were computers and it now happens that there are computers.  Today was a classic fear filled day.  We saw huge downside in many debt and forex instruments before the crash and the equity markets were the last to capitulate.  The bids fell off the board and the sellers just continued to hit the bids.  There might have been some “fat finger” trades or some electronic trading that contributed, but this was primarily fear.  Good old fashioned fear.  This has always happened in markets and will always happen in markets.  It’s as simple as that as far as I’m concerned.

Investors are scared out of their minds as China looks like it is slowing substantially and Greece and the EMU appear to be on the brink.  There are real fundamental reasons for the recent declines in stocks.  In addition, it’s important to remember that there are a mountain of longs that have piled into the market in recent weeks and months with the expectation of a nice easy recovery trade.  That is clearly off the table and there is a huge trade being unwound here.  Greed has quickly turned to fear.

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Mean Street: Crash — The Machines Are in Control Now - WSJ Deal Journal

If you’re a Merrill Lynch broker, you better be praying that none of your clients were watching CNBC between 2 and 3 p.m. this afternoon.

Anyone who saw the Dow freefall 7% in a matter of minutes is going to require some convincing to hang onto any stocks. The Dow’s intraday drop of 998 points was its largest ever one-day point decline.

The early talk is that it was a trading error at Citi that got the panic going. Poor guy. He’ll be unemployed and in front of Carl Levin’s committee within a week. Then again, he works at a state-owned bank, so at least he’ll be better treated than Goldman Sachs’ “Fabulous” Fabrice Tourre.

Of course, it’s not just one guy’s fault. A panic is a collective undertaking and today there were plenty of reasons to freak out: the rioting in Athens, the impending collapse of the euro, more financial regulations down in D.C.

But please, why make excuses? Why do we pretend that people are in control, when they’re really not? The machines are.

We’ll have to wait for a full autopsy of today’s trading day. But it’s a safe bet that after the trader’s initial error, high-frequency trading computers remorselessly running their algorithms took over.

I’d be amazed if “high-frequency trades” don’t account for the vast majority of the executions that took place between 2:15 and 3 pm at the NYSE.

Of course, the bigger question will be not what caused the panic – but what, if anything, should be done about it.

As a believer in free markets, I think it is both useless and harmful to constrict computerized trading. But on days like today, it really puts that belief to the test.

The purpose of a stock market is to provide an orderly and efficient market for the free exchange of equity securities. At the core of the market, there must be a belief that the market is trustworthy, that it can match buyers and sellers, bids and asks.

Today’s market was neither orderly nor efficient nor trustworthy. It was just a bunch of computers making ugly, messy love with each other . And your money hung in the balance.