Dissecting The Crash

Tyler Durden's picture

Here are two accounts dissecting in detail the events from yesterday. One is from Dan Hinckley at Wild Analytics, the second from Dan O'Brien.

Anatomy Of A Capitulation

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.

That's all I have for tonight; things are busy here; I will try to
follow up with some more second-by-second charts and a more detailed
forensic with volume, moneyflow/agression and an order book analysis. 


"Mega-Drop - Just What the Computer Ordered "
"What goes up must come down."  You have heard this phrase - right?  Well, it doesn't only apply to gravity - it also applies to computerized trading.

If you didn't know how the recent 1-year rally has occurred, you either haven't been reading my notes or I haven't been clear enough.  I will try to be blunt: the massive 12-month rally, in my seasoned opinion, has occurred almost entirely due to program/algorithmic trading in New York.  Despite the chronically low volume, prices continued to increase.  This is quite similar to stating that GDP will increase forever based on the new drug - hopeium - alone.  Neither will last.

When the housing market was going gangbusters, nobody in Washington DC gave a damn.  Representative Ron Paul often brought up the sickening calamity-to-be of FNM and FRE, but was often rebuked by Barney Frank who told Representative Paul that FNM and FRE were just fine and nothing bad would happen.  Yeah --- not so much!

The same is happening with stock trading right now: as the indices go higher - nobody gives a damn how or why...it's all good as long as share prices increase.  I have written repeatedly on the preposterous LACK of volume on rally days, yet nobody but myself and a few other blogs bothered to discuss this.  Why?  The lame steam media didn't care, so neither did many others, thus the lack of attention.

There were accusations on the floor today of a bogus 150k to a 500k "fat finger" mini S&P trade that caused the drop.  There were others on television who blamed it on a bad trade in Proctor & Gamble.  However it may have started it's irrelevant; what happened after that is important. I believe it was very similar to the 1987 crash where "portfolio insurance" brought down the market.  Once the market dropped enough, this "insurance" triggered wave after wave of sell-stops that drove the market lower. 

I believe this happened today via our friends in the "too big to fail" community...their tradng desk algorithms to be exact.

According to Bloomberg...Computerized trades sent to electronic networks turned an orderly stock market decline into a rout today, according to Larry Leibowitz, the chief operating officer of NYSE Euronext. While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the sell-off snowballed because of orders sent to venues with no investors willing to match them, Leibowitz said in an interview on Bloomberg Television.

Reuters says the following...A spine-chilling slide of nearly 1,000 points in the Dow Jones Industrial Average, its biggest intraday points drop ever, led to heightened calls for a crackdown on computer-driven high-frequency trading.

The slide, which in one 10-minute stretch knocked the index down nearly 700 points, may have been triggered by a trading error. Major stock indexes eventually recovered from their 9 percent drops to close down a little more than 3 percent.

But the follow-through selling that pushed stocks of some highly regarded companies into tailspins exacerbated concerns that regulators can quickly lose control of the markets in a world of algorithmic trading.

"The potential for giant high-speed computers to generate false trades and create market chaos reared its head again today," Senator Edward Kaufman said in a statement.

"The battle of the algorithms -- not understood by nor even remotely transparent to the Securities and Exchange Commission -- simply must be carefully reviewed and placed within a meaningful regulatory framework soon."

How does Shitigroup shares trade nearly one BILLION times per day when the total for the entire market may be six billion?  Of course, the answer is computerized trading - where one bank buys the hell out of Shitibank and the other trading desk sells it back to the former...then they switch sides and do it again.  This happens so often that it can reach far more than 1/6 of the total volume...with NO CHANGE in the indices that day.

Not odd to the lame stream media....very odd to me!

Those of you who know me well know that I am a fan of computerized trading; however, I am a fan of Joe Six-Pack employing these methods - not the banking cartel. 

When the US Congress allows the banking industry to LIE about their balance sheets (FRE needs another bailout -- really???) it's bad.  But when these same @$$-hats in Congress allow JPM, Goldman, UBS, BAC and the others to use these illusory profits to gun the markets higher via program trading it's really bad...unless you are like me. 

If you are like me, and you can foresee the BLACK SWAN crash like we had today.  You are ready for anything.  In fact, you will profit from it like we did today.  But please, under NO CIRCUMSTANCES should you believe that a RIGGED market (like this CLEARLY IS) can and/or will last forever because it is going in you favored direction: up.  Moreover, you should also not complain when the heretofore magical no-volume rallies turn on you like a rabid dog -- rough!

Said another way, if you are happy with Goldman and JP Morgan's trading desks gunning the market higher by simply trading back and forth to each other - then you better damn well be happy with the Black Swan event: a CRASH caused by the same computers.

I am under no illusions.  I know the market is rigged.  I trade it as I see it.  I, however, am a professional and I feel bad for all the rubes who believe in the nonsensical drivel like - Goldman Sachs is doing God's work.  (I still can't believe the CEO of GS said that.)

How does all of this happen?  Well, you can thank the Federal Reserve...
1) The Fed prints fake money out of thin air...
2) Large banks and hedge funds borrow money from the Fed at near-ZERO interest rates...
3) These institutions buy Treasuries with a guaranteed 4% return, thus guaranteeing the banks massive and risk-free profits on the backs of the middle class (remember, you're not allowed to earn an interest rate on your savings accounts!)...
4) These institutions then swap Treasuries with the Fed for cash...
5) These same institutions (banks) then take the cash and gun the stock market higher with its FREE MONEY from the government...I meant free money from you. By the way, were you asked to vote on this?  Frankly, it's better than free money - they're being PAID to do this...
6) Banks pay the very clown-posse that cause the 2008 crash (and today's) the largest bonuses...EVER...with your tax dollars.

Oh, but don't you worry folks, surely this is a one-day event.  The high frequency trading desks and algorithmic desks/programs will be plugged in before Friday's open.  You can go back to Dancing With the (B-list) Stars and American Idol.  Benron Bernanke and Tax-Cheatin-Timmy will have it all fixed up by morning.

Nothing to see here.  Move along.

Trade well and follow the trend, not the so-called “experts.”

Behold the age of infinite moral hazard!  Today is the 399th day of legalized accounting fraud on a grand scale.  April 2nd, 2009 was the day CONgress forced FASB to suspend rule 157 in favor of deceitful accounting.

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Mako's picture

I have no idea why trades are being reversed.   There simply was no market to sell into.

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MarketTruth's picture

Ahhh yes, FASB to suspend rule 157. Mark to make believe. it is MAY folks, sell the paper junk and buy physical gold then go away for the summer as countries financially collapse.

Moonrajah's picture

The whole situation is so way past bizzaro-land and firmly entrenched in the hands of a select few who game the game and don't give a rat's @ss about anything or anyone else, it's depressing. Where are the pitchforks goddamit? Or do we have to import those as well?

Waterfallsparkles's picture

Not suprising to me.  Watching the melt up with the frontrunning of every buy offer push the Market higher.  The Computers did the same thing on the way down pulled Bids on each sell order.

I just knew this would happen with Computer Frontrunning on the way down just like on the way up.  Instead of providing liquidity the HFT Computers withdraw liquidity and jump ahead of everyone else, what ever direction the Market is trading.

belogical's picture

Great Tyler, but the math adds up this way to me. Big vote in the senate. Looks like enough senators have balls to do something for change. Hmmmm, what do we do. We already paid them, so bribery won't work. I know lets tank the market like we did in March last year and in 2008. That will scare the shit out of them and they'll do what the want. Sound good Lloyd, Jamie, everyone on board, ok now were is that switch.

brooklynlou's picture

First rule of Ponzi schemes is make sure the rubes don't know its a Ponzi scheme. Yesterday, whoever caused the f'up basically showed the world that the market is a scam. That algos and scripts dictate the pace far better than any commissar.

I hope the opposite may happen; that the bribed may grow some balls when the realize the smartest men in the room can't figure out where the button for the fries is, but I'm too cynical to wager on it.

laurelweiner@yahoo.com's picture

the so called glitch took the spx to 50 ma---EXACTLY!

M.B. Drapier's picture

So: robots or conspiracy? Surely this demands a reader poll.

Mako's picture

Algos, I would say it's a fact at this point.   Tyler has done a good job of detailing how these things would turn out. 

You really don't have a market anymore.  Wait till you see gold move $100s in minutes in both directions. 

Implicit simplicit's picture

The banks and the fed are in an oligarchial duet. The tune is supported by various debt instruments and quant easing synthesizers. The song is complicated, fragile and dischordant because of the weakness of the sound system currency, the extended stock market musicians, and the dishonest goverment conductor. The song is actually a derivative of a real song that strikes a dischordant note to many. When will it stop? Only when the musicians refuse to play and the the indigent slaves  shout "I really don't mind if I sit this one out, because my words are but a whisper and your deafness a shout"

exportbank's picture

It was "The Gods of Circumstance"

Moonrajah's picture

More like the Gods of Circumcision.

chindit13's picture

My memory is a little weak.  Can someone tell me if they busted the VW trades back in '08?

Well, I for one sleep a lot better at night knowing we have firms like JPM, GS, UBS and BAC to save us from......JPM, GS, UBS and BAC.  I feel the same way about a fund into which Spain pays to bail out.....Spain.  These gave me one of those lightbulb moments, and I am now I in the process of patenting a new blood transfusion technique where the physician inserts a needle into the patient's right arm and then connects it to another needle inserted in....the patient's left arm.  Voila! 

UGrev's picture

I'm bailing on this muffugga.. pulling my 401k today and buying silver/gold. I've had enough of this effin bullcrap!

Kina's picture

Surely this would constitute criminal/illegal behaviour? If the regulators will do nothing, where is the FBI? These guys and their bosses who flicked the switch gets to spend some years with big benny. Then again criminal behaviour is the new normal with the regulators and co part of the crime gangs.

UGrev's picture

//begin tin foil

Don't you find it oddly coincidental that the Obama administration states


  1. Drill baby Drill: Oooops.. rig goes down, major catastrophe.. sorry, no more drilling
  2. Calls for more regulation: No really, more regulation.. oh yeah? don't believe me?  BAM , 1000 point drop.. see? we really DO need more regulation. 
Create a crisis, offer a solution.  //end tin foil


lucky 81's picture

i agree. lets get the fbi in on this. they figured out that 911 thing. this should be no problem. an investigation into, well,, someone.

Kina's picture

I pulled everything out of the market and superannuation into cash a few months back and bought gold and silver. Just biding my time.

BeerGoggles's picture

on the fat finger, don't firms have risk management software to track their tarders? There's would that let a 1b trade through?

Grand Supercycle's picture


Posted 1 week before the recent crash:

"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.


tom's picture

Hinckley is close to the bone, O'Brien is off in left field.

When the market was already down 4% and fear was rampant, somebody very big went very short S&P futures, causing trading in all of America's top 500 stocks to shut down within the course of a couple minutes. What a stunt. Panic ensued, and predators ambushed.

It's absolutely obvious that the robots did not go rogue. The mainstream media that are today blaming the spike on robots are misinterpreting what the NYSE said. The NYSE blamed "computerized" sell orders, by which they mean sell orders put out on electronic exchanges, which has nothing to do with whether a human or a robot initiated the sell order. The NYSE is probably full of BS anyway - they probably just see an opportunity to blacken the reputation of electronic exchanges. If the audio file posted here that purports to be from the NYSE's S&P futures pit is real, and it sounds real to me, then a lot of the big shorting was done the old-fashioned way on the NYSE floor.

As for the robots, at least the vast majority by volume either shut themselves down, or were shut down by their attendants. I think at least most of them shut themselves down. Likewise, I think the pulling of bids by major market makers on all S&P index components was automatically triggered by the massive selling of S&P futures.

Could the big S&P futures short have been a fat finger? Fat fingers strike random securities at random moments, but this short struck exactly the right security at exactly the right time to cause the maximum amount of panic.

And what about those odd low prints in S&P index stocks? I bet our cowboys were on both sides of most of those trades, shooting out false prints in order to bring the index down in line with the futures. The cowboys made their money off the turkeys who oversold risk or overbought safety in bigger volumes at smaller price differentials. I suppose the cowboys roped themselves a few robots as well.

So who dunnit? Given their existing troubles I think we can rule out Goldman. Smells to me like a Steve Cohen job, but there are other candidates.


Grand Supercycle's picture


Posted May 1st - a week before the crash.

 '11,250 / 300 is an area of significant resistance and if this level can’t be breached it should signal the end of the March 2009 bear market rally - 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 - the VIX index continues to give bullish warnings which is bearish for equities - long term charts of key equity indexes continue to give bearish warnings and the March 2009 lows will be breached in my opinion - USD Index bullish warnings since 2009 on the weekly and monthly chart have not changed and further USD strength and thus EURO weakness is still expected '



BeerGoggles's picture

Tom, the emini limit is 2,000 contracts according to various sources.