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The 25 Minute Panic
From The Daily Capitalist
I have no real explanation for market behavior which caused the twenty-five minute 700 point DJIA drop and 600 point gain. I'm a macro guy. Let the traders figure it out. The most plausible explanation is that (1) the market is overvalued, (2) the markets are nervous, and (3) trading technology got way ahead of the exchanges. I don't buy the story going around that a trader typed in "billion" instead of "million" and brought the market to its knees.
I do recall several panics over the years which left people scratching their collective heads.
In 1962 the market cratered and went down about 25%. My mother told me sometime later that she had sold her stocks because she remembered the depression 30 years ago. I thought she overreacted and told her that we'd never have a depression again because the government was in charge. I believe I was reading Paul Samuelson's book in Freshman Econ 101.
In 1973-1974 the market went down 37%, but took a huge 33% plunge in H2 1974. This was the beginning of stagflation, Vietnam was still going on, and people were confused. For some reason people couldn't understand why we could have inflation and stagnation at the same time. It's kind of funny looking back because we had low industrial capacity during the 1974 recession yet we had inflation. That's confusing to Keynesians.
Then there was Black Monday (October 19) 1987: a 22% drop. Ultimately the market dropped about 37%. This one really felt like a crash. I recall a senior broker telling me about computer program trading that allowed funds to go liquid in an instant. So maybe it all started then. I don't really recall a good explanation of that crash. But I do recall the panic and the feeling: "what's happening?" It was one of those things that you just waited to see how it played out. Beginning of the End? Momentary blip? It's hard to know in the middle of it.
The one thing that is kind of interesting about The Great Crash of 2:42 p.m. is that it was only twenty-five minutes long. In Olden Days it would have cratered the market. But program trading, technology if you will, immediately saw the advantages of the decline and corrected the mistake (if it was one) and the market only closed down 3.2%. Not to say that program traders can prop up a market falling on fundamentals, but it did provide liquidity. Unfortunately, liquidity works both ways.
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The drop was caused because there was no support on the bid side. Simple.
Now, how many investors are going to think that this will repeat and put up their "sting" bids hoping that maybe they can get P&G at $45 only to see it end at $60 again?
I didn't make any money yesterday, but only lost a little because I don't have that much in, but given all I have read I am pretty damn sure this was not caused by a fat finger.
There are a lot of cross-currents in the market right now that will only get worse.
Market reforms are needed. If you are a trader don't risk much right now and my bet is on more downside.
Bloomberg just played this clip and told the TV audience that they can listen to the clip on zerohedge.com
Seems like it knocked the site offline.
<dupe>
But program trading, technology if you will, immediately saw the advantages of the decline and corrected the mistake (if it was one) and the market only closed down 3.2%.
I'm not sure we really know that, this a'int over yet and ultra-complex, interconnected technology is a bigger risk than it is value added right now.
"But program trading, technology if you will, immediately saw the advantages of the decline and corrected the mistake (if it was one) and the market only closed down 3.2%. Not to say that program traders can prop up a market falling on fundamentals, but it did provide liquidity."
ROTFLMFAO!
Yep, maybe they were/are programmed to "buy the dip" at $00.01 or in the case of TLP $00.0001 the stocks bottomed out and it was time to buy, buy, buy.
I wonder how many sheep got sheered in the drop and how they will respond.
MAY 1st:
"The weekly DOW chart shows an expanding wedge indicating a significant move is probable ... this remains an overbought bear market rally and the uptrend could falter at any time.
http://www.zerohedge.com/forum/latest-market-outlook-0#comment-326767
It was crazy but four of my standing buy orders tripped. I would have gone nuts if I looked at my holdings at 2:47 p.m. and thought I lost my shirt on the trades as three went to a penny or less before recovering. Instead, I was thrilled at 3:10 P.M. showing paper profits of between 5 & 57%. I think I got lucky and am outside the 60% window NASDAQ. If I understand the NASDAQ role back.
On review, it appears on my three stocks that there were very few standing buy orders and many stop loss orders along with poorly programmed buy/sell programs. But who the heck would program a computer to initiate buying at a penny or less?
It will interesting to see what sparked the buying on the return trip. Human traders who knew the fundamental values of companies had to be more then a few cents and bought a several thousand dollars worth for grins? Maybe, but how much cash/leverage does the average trader have and what bank/hedge fund employee has the authority to instantly pull the trigger on massive buy orders?
I think a lot of programmers will be up all night tweaking their algorithm's.
Check what happened to the Black Box Q funds in August 2007...
The most active investors in the market are machines.
ADVENTURES OF ROBO TRADER:
http://williambanzai7.blogspot.com/2010/05/robo-floor-trader.html
HFT TRADING ZONE:
http://williambanzai7.blogspot.com/2010/03/hft-zone.html