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Dissecting the Apple Flash Crash, or Why You Just Can't Trust These Markets
Apple had a mini flash crash yesterday, as you may or may not have
heard. The gist of the story is that the US markets have literally
become a casino, without the pretty waitresses to serve you drinks as
you gamble your hard earned loot. This thing with Apple is a little
different though. Apple is one of the most liquid (obviously not, but
alledgedly) and widely traded stocks in the US markets. It should be the
LAST company to have to face an absolute dearth of buyers as its price
drops on no fundamental news, whastsoever. Alas, that is exactly what
happened. Check the charts…
Click this chart to enlarge
Apple stock literally went without a bid, several times, as the
prices started to collapse. Oh well, so much for liquidity. Add to this
the nature of many who own Apple stock… To say they are passionate would
be a gross understatement. Apple derives nearly 70% of its profit from a
single product, a product that is besieged with competition left and
right, and from some of the most capable companies in the world. Margin
compression is as inevitable as the sum of 2 + 2 equaling 4. What do you
think Skynet will do once they get a fundamental head start on this
this senseless price action predatory puree? Seriously, as widely held
as Apple is, just suppose the machines get a whiff of weakness from a
report of the inevitable margin compression and go to town. There goes
the markets for a day, or two, or seven hundred and twenty, or however
long it will take for rational and sane investors to trust these
markets, ever again.
Related subscriber content:
Apple Earnings Guidance Analysis 08/12/2010
Apple business model note 08/02/2010
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Theory: HFT Wunder kids are experimenting with "kinder and gentler" flash crashes where they don't go down "quite as far" and thus blur the line between rigged and "normal..." Always remembering Danny Devito's famous words: "Never under estimate the other guy's greed..." HFT "light" might be coming to a theatre near you...
I am not questioning the merits of the Apple line up.
They have great products, always been a fan.
My point was, as a trader, I know folks that bought the stock in the 230s-240s.
They diligently followed, carefully placed stop losses, with room to wiggle because the stock can move quite a bit in a day; but to get stopped out in half a second on a 15-18 point cushion, only to return back to that opening price range in the other half second, is pretty sh@tty.
I've played the shares, calls and puts; made great money on the stock, but with this kind of crap going on day in day out (how many flash crashes has Tyler reported on in the last 30 days)- its keeping me out of a lot of plays, but more importantly there are folks out there just getting run over by this nonsense; fact of life- yes, it just pisses me off- that was my only comment on the matter.
Your point illustrates the fraud and unequal weights and measures of today's racket (market died decades ago).
DESIGNING AMERICA'S FUTURE
http://williambanzai7.blogspot.com/2010/09/designing-americas-future.html
Enough with the chit-chat, when do they report earnings?
I am not trying to side step whaty you said. You are just plain wrong. How can you say that they are not market leaders in their implementation? Who is the largest handset seller in the world? Nokia! Sounds like a leader to me.
Who had the smartphone record in the US until last month? Research in Motion with the Blackberry! Sounds like a leader to me.
It appears as if you are reading more from Apple marketing material than from actual market statistics. As Panafrican Funk explained in his reply, Microsoft didn't make hardware either, but by commoditizing the hardware platform and compressing margins while at the same time offering more apps due to the promise of wider distribution for developers, MSFT literally crushed Apple. So, you see, it can happen and it can happen due to a company that doesn't make hardware. If anything, particularly by such a company since it doesn't suffer margin compression from the hardware wars but conversely actually benefits from a higher revenue run rate and eventually wider margins as costs are distributed over a larger revenue base.
Android exists as it does because of the vulnerable points that have been exposed in the Steve Jobs/Apple business model. High friction vertical integration, proprieatary walled products, and a high reliance on narrow distribution channels in the US. Apple also has a much, much slower development cycle than Android, which will make it impossible to close any technological advantage that Android has or may gain.
Steve Jobs is an entrepreneurial god to many. He does no wrong.
@widowmaker
"Just how peachy do you think all those mom and pop investors that made a good call buying aapl a while back, placed a conservitive stop loss, only to get cleaned out in half a second so Wall Street can add an extra zero on their bonus check this quarter."
Man I feel lucky today. I bought an ipad a month or two ago and am amazed at how little is being spoken of this absolutely amazing device. To the point I thought I would buy some AAPL shares this month as they are for sure going to make a mint with it over the next year or two.... If the iphone made them what they are just by making a new phone, imagine what a device that eliminates: smart phones, the laptop and to many, even the home PC, is going to do to their bottom line!!!
Luckily I am a greedy bastard and thought silver is going to go up quicker than AAPL in the short term and went all in AG instead....
Preaching to the choir, I just unwound [some of] my long AAPL position last week. "bulls and bears... pigs.."
You are absolutely right, and this week AAPL brings INTEGRATION into the home too... no more complexity playing your movies on your TV or music through your stereo, or netflix through your PS3 (Apple TV shipping now for $99 and no cellular plan).
Android has to accomplish this or they are dust. What's preventing them? Google has to rely on everyone ELSE (other vendors) to make this capability happen . Talk about risk out of Google's locus of control...
Don't tell Reggie he's betting on the come with a MSFT and GOOG pair, when AAPL is a full-house with 3 aces to the rest of us (who can't keep AAPL from chewing carpet share in our homes - today).
You won't regret your decisions (both of them).
P.S. The quotation should be attributed to a Mr. Griswold.
I understand flash reaction - wild crowd voting.
I do not understand stability. For example, why a website receives the same number of visitors every day plus/minus few %%.
If anyone can explain how stability is possible in voting with 1 bln participants.
Reggie someone needs to tell you in really easy to understand English that Android isn't anything other than a handheld platform(an OS), the reason that it is taking a lot of marketshare from the iPhone is because it is spread across multiple vendors. Apple not only makes its hardware, but also its software. They are unique at the consumer level in that regard.
While the moves the stock made are obviously suspect and worth analysis, your constant mentioning of Android as some sort of threat to Apple doesn't make any sense from a technical standpoint.
Apple is making their money selling hardware, Google isn't in this business yet, Google does software, and while they may cross paths when it comes to things such as mobile handset OSes, that doesn't mean all that much when you consider Google OS can be run across multiple platforms, while iOS can only be used on Apple produced hardware.
Try comparing Apples to Apples.
Yeah, uh, here's the thing, remember when Apple got it's ass kicked by Microsoft in the 80's and 90's? Now ask yourself, does Microsoft make PC's? That's what I thought, dipshit. And guess what? The same fucking thing is going to happen again, because Steve Jobs is too anal retentive about software. The IPhone is going to get slaughtered because it's going to lose on apps. This is blatently fucking obvious to anyone that understands that market.
Apple just doesn't compete against any ONE company. they compete against the market. To the extent that Droid OS phones are doing well against apple matters to apple, whether it is one company or several. The point is apple has awesome branding but the half life of a cool gadget is so quick these days, fast followers are pretty fricken quick.
More importantly, apples huge growth in customer base are no longer their die hard core apple fans. They are mostly attracted to the latest and greatest, NOT just what apple feeds them. Easy come, easy go. fickle. I am prime example. I bought an iphone 3gs at the time i needed a phone I thought it was the best available. My next phone? who knows? Lots of competition out there.
Research in Motion makes the blackberry and the blackberry OS6 and sells to consumers
Microsoft made the Kin and Windows mobile and sold to consumers
Ditto: Palm, Nokia, LG and Samsung
Why do people insist on talking down to others, even when they don't have a point?
Long story short; the system has become so blatently gamed that the confidence factor will cost (in the long run) Wall Street at least one generation which will have no confidence and continue to pump out billions of dollars each week out of the system. What is left is GS' Algo versus JPM's Algo versus Big Ben's printing presses.
Just how peachy do you think all those mom and pop investors that made a good call buying aapl a while back, placed a conservitive stop loss, only to get cleaned out in half a second so Wall Street can add an extra zero on their bonus check this quarter.
Clark, I don't know how to tell you this but there never was a "system," it's always been a game - always. Mom and pop just didn't know they were playing (which is called a "bonus" on the inside).
sad, but true.
You had me going when you put trust and markets in the same title -HA!
Reggie, markets have participants and price DISCOVERY, not electrons and benign price fabrication covering up systemic and pervasive (S&P) FRAUD.
Disclosure: Short the Fraud-500 (tm).
Flash crashes mean nothing to investors, may be even a plus as an opportunity to buy to buy cheap. For traders, yes a problem.
There's still "investors"?
1.1 million AAPL shares were traded in one minute. That wasn't an HFT accident. Someone must have gotten a large margin call (maybe a hedge fund short gold) and was forced to liquidate their most liquid holdings in a hurry in order to raise the cash.
Reggie's assertion is still true, though ("You can't trust these markets"). It's either HFT (predatory, or accidental noise amplification leading to dislocation), or there's no liquidity to handle a large position unwind.
The net result is the same: Don't trust you can unwind your trade. Don't trust your limits to trigger as you intended. Don't trust that your limits, when triggered, won't be arbitrarily "unwound" based on the capricious decisions of some market authority (most likely with you getting screwed).
This is outright raping of the retail class -- if you trust past market assumptions (price discovery, liquidity, intersection of buyers-and-sellers in a transparent manner), you're nuts.
+1
Reggie,
Your analysis is rudimentary at best.
When the big block order came to sell those 1MM shares across the 1min bar, it wiped clean all the bids the programs had up. Now, 1MM shares coming in at ~$280 a piece is a LOT of money. Think what you will about MMs, but no desk will have hundreds of millions on their book in a SINGLE stock at any one time. In this case, all the DMMs had their bids hit and then probably had to scramble manually to pick the rest up - which they DID, as you see the price recovered minutes later.
Really. When was the last time this happened in Apple stock?
Didn't the prices recover shortly after the last flash crash that dropped Accenture's price? That still doesn't negate the fact that it happened. Hey, I'm not an order desk pro, but I can recognize an inconsistency when I see it. There were several gaps in the time series with no bids at all. Hey, maybe I'm wrong. If so, I'm all ears, but you will have to make a convincing argument. That the stock recovered doesn't negate the fact that it moved in the fashion that it did.
Accenture isn't Apple so, as you surely agree, we must compare oranges to orange. Just take a look at a volume chart of AAPL and notice it only prints really high vol (1MM+ on the 1min) on either open or close - then sometimes whenever it releases its 10Q.
So right away, we know this type of volume is not common for Apple. We understand its atypical. Now, atypical volume usually brings in atypical moves.
Since you understand economics, you understand the supply & demand models. I don't care which HF youre up against, if youre trying to dump anything over 100k shares of AAPL in a single order (and here it was much larger than that), you WILL move the price. The supply of selling that many shares in one instance simply overwhelms the current orders on the market and hence moves the stock down, quite rapidly. The stock can be liquid as shit - which it IS. How exactly do we define liquidity in this case? Its very subjective: 'trader must be able to unwind x amount of shares without {grossly} affecting the price'. Well hey, with a $280 stock price, even 10k shares will wipe clean most bids on Apple. How often does retail have accounts with >$1MM buying power? Not many is my guess. Especially after the constant outflow from equities we're hearing. So there weren't any retail bids coming in to save the day here...
Not having bids up as the stock retreats lower is not the issue - this big dump which we keep analyzing cleared bids from its current state of where the selloff started to the ultimate low it reached at 275 (notice nice round #, because thats where some offers were eventually posted up).
My point is, you cannot suggest this was a flash crash as those usually appear on LOW volume - and that there is my biggest argument against yours (and ZHs) thesis on this price action.
Your articles on REITs were spot on and i enjoyed reading what i wasn't an expert on. In other areas however, it does not make you less of a man to admit you're simply not right in your analysis. Cheers.
Hey, I have no problem admitting that am wrong. I just need for you to show me where I am wrong. We are not there yet.
Did the last flash crash (the big one) occurred on high volume? If so, then flash crashes do involve volume, if not then you are right on that point.
The point of my article was that one of the most liquid stocks in the market exhibited no liquidity. I understand your point about liquidity being subjective, but I (and I believe most financial types) believe liquidity to be the presence of willing buyers and sellers in a market. In my opinion, it is counter intuitive to assert that "Not having bids up as the stock retreats lower is not the issue" when discussing the matter of liquidity. If anything, that is the PRIMARY issue. It is not so much that the price went down, it is that there were no bids for the stock - which translates directly into a dearth of liquidity. From where I stand, no bids = no liquidity. If there was demand for the Apple stock, at $270 and $280, exactly where were the bids?
Hey, there is a typo in your headline.
Reggie, usually you're spot on but your clearly out of familiar territory on this one. The volume spikes are evident. When markets move large amounts on large volume there isn't anything really suspicious. If the price movement happened on low volume then your premise would make a lot more sense.
ZH jumped the shark when it became a ".com" address. Gl everyone.
Think the low was actually 270.
.20 is too high.
.05 or .01 would be efficient.
So he question becomes what's the remedy....
Remedy....
Defragment the exchanges
Orders must be made good for a 1 second minimum
Banks allowed to service, not game RETAIL....
No account minimums
There should be maximum account sizes...the market
needs to be constructed for RETAIL...not a handful of large , concentrated accounts...
No short sale rules....but shorts limited by shares outstanding...no locate ...electronic tag....
................................
The list goes on and on...
But here is the deal....The exchanges and how they are regulated must focus on whatever it takes to get a BILLION RETAIL accounts pressing their own computer buttons....getting their info. from a wiki based format....WORLDWIDE....
Thus a new INTERNET based worldwide RETAIL securities exchange.....
And all participants pay the same rate....ie no more than 20 cents per hundred units....
"what's the remedy?"
A 50% decline in the major averages? Massive redemtions? Maybe even start procecuting Wall Street criminals.