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The Market Recovered From The Flash Crash Not Due To Buying But Lack Of Selling And A Short Covering Ramp

Tyler Durden's picture




 

The folks at Nanex have done another very interesting forensic analysis looking at the volume on either side of the flash crash, i.e., between 14:43 and 14:45 when the most vicious part of the selling took place, and on the rebound, between 14:46 and 14:49, when the bounce to unchanged took the market right back up. Not at all surprisingly, there is a huge mismatch, at least on the SPY (which, however, being the most traded security in the market, is a pretty good representation of overall volume trends): selling volume is orders of magnitude, and far more concentrated than the bid side on the bounce. This leads Nanex to conclude that "Basically, when the shelling stopped, there was no one left standing with good
pricing information -- and when the shorts went to cover and buy back stock
they found prices rocketing skyward with almost no effort
." In other words, if anyone wanted to created a short covering squeeze by pulling all the borrow (wink wink State Street and BoNY) they could have immediately undone all the damage associated with the 1000 point drop in the Dow. Incidentally, this is precisely what set off the market on its steady bear market rally back in March of 2009 - a concerted effort, orchestrated by the State Streets of the world, to pull every single financial stock's borrow, creating the biggest short covering spree in the history of our broken stock market.

More from Nanex:

This is a 1-second chart of the Spyder ETF (symbol SPY) showing the
sell-off and recovery on May 6, 2010. We included the tick volume (the count
of the number of trades for each second
) plotted at the bottom. What this
chart shows is that the recovery occurred not due to strong demand, but rather
because there were few sellers left. If it were due to strong demand, the
volume would have been much much higher. This is a simple matter of supply and
demand.

In other words, nobody wanted to buy stocks at the bottom: and the rebound had nothing to do with HFT intervention as the now luckily retired Jim Simons claims, but merely a push to incite yet another flare up in short covering. What would be interesting is charting the VWAP on the SPY pre crash and post crash -  we are confident the differential would be well over 300 Dow points, once again confirming that supply and demand no longer matter in stocks whose prices can plunge at the whim of a few SPARC cores.

Below is the visual representation of the move:

 

 

 

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Thu, 09/16/2010 - 14:17 | 585862 Ragnarok
Ragnarok's picture

I thought everyone already knew that shorting was illegal?  I guess they had to be told twice.

Thu, 09/16/2010 - 14:18 | 585864 centerline
centerline's picture

The whole equity market, for over a year now, has not been about finding buyers... it has been about finding the sellers and squeezing them.

Thu, 09/16/2010 - 14:18 | 585866 prophet
prophet's picture

and that same dynamic helps explain why it is so easy to drive the market up (sideways) even with retail outflows 

Thu, 09/16/2010 - 15:14 | 585984 Dont Taze Me Bro
Dont Taze Me Bro's picture

Did you guys just saw what happend in Natural Gas market? Was that flash crash?

Thu, 09/16/2010 - 14:19 | 585867 frankTHE COIN
frankTHE COIN's picture

When a few have to liquidate there will be enormus selling pressure...and no bids in sight. It will then stick.

Thu, 09/16/2010 - 21:39 | 586931 rosiescenario
rosiescenario's picture

...and with mutual fund cash levels where they are, any sort of redemption wave will get very ugly very quickly...it will make '87 look like a day on the beach....

Thu, 09/16/2010 - 14:20 | 585869 goldmiddelfinger
goldmiddelfinger's picture

 AAII individual investor sentiment survey means the poll's bulls are at the second-highest level in the past two years, at 50.9%. The bears - who reached their own second-highest reading a few weeks ago - are now down 7.4 points to 24.3%.

Thu, 09/16/2010 - 14:20 | 585870 NOTW777
NOTW777's picture

awesome santelli rant for the obamacheerleader burnett

Thu, 09/16/2010 - 14:24 | 585874 Mercury
Mercury's picture

You mean the smart algos didn't kick in after recognizing value in the cratered market and then buy it back up to near even? - saving the day as it were?

I'm shocked.

Thu, 09/16/2010 - 14:36 | 585912 ThreeTrees
ThreeTrees's picture

Skynet is...not?...aware.

Thu, 09/16/2010 - 14:22 | 585877 prophet
prophet's picture

anyone notice how Chase's retail banking site has been mostly unavailable for the last 40 or so hours?  Even has an apology on the main page but problems persist

Thu, 09/16/2010 - 14:26 | 585885 RicktheDick
RicktheDick's picture

It's actually been going on for the past three days. To this point, JPM hasn't officially stated what the problem is... Form your own conclusion. 

Thu, 09/16/2010 - 14:28 | 585891 HelluvaEngineer
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I'm telling you: somewhere in an office in India there are 100 developers scrambling to figure out how the site even works.

Thu, 09/16/2010 - 14:31 | 585900 goldmiddelfinger
goldmiddelfinger's picture

The Babbling Bank America site has been more impenetrable than a jug of anti-freeze for years.

Thu, 09/16/2010 - 21:44 | 586944 rosiescenario
rosiescenario's picture

...India, that would be a step up...no, they went with the low bidder from Nigeria.

Thu, 09/16/2010 - 14:36 | 585913 williambanzai7
williambanzai7's picture

Something is screwed up big time. Data lost, fraud, mistaken entries...who knows what

Thu, 09/16/2010 - 14:43 | 585923 prophet
prophet's picture

and just on time for their new Online Service Agreement to become effective this coming Sunday

Thu, 09/16/2010 - 14:52 | 585932 Ragnarok
Ragnarok's picture

I've been commenting on this the last two days as well.  And as H of a E points out above, they have been mum on the reason/cause.

Thu, 09/16/2010 - 21:42 | 586938 rosiescenario
rosiescenario's picture

....they also just informed my wife that a check issued to her by the State of CA would have to be held for 11 days to clear....of course there might be a sound reason for that, but I doubt the bank has adopted that as a formal policy....

Fri, 09/17/2010 - 01:33 | 587241 StychoKiller
StychoKiller's picture

The economy is soooo bad...when an American gets a check returned for
"insufficient funds" he has to call the bank and ask if they mean him or them.

Thu, 09/16/2010 - 14:26 | 585883 goldmiddelfinger
goldmiddelfinger's picture

Watched Peter Orzag on Charlie Rose last. We have no future. The Mayan calender is right.

Thu, 09/16/2010 - 15:12 | 585982 Yophat
Yophat's picture

LOL....I'd put more money on Daniel with Ezekiel 4:6 formula insertion than the Mayans....plus its not the end....just the beginning of a new calendar!  We'll see the kart topple by the end of next year....as for the rest of the world....it will probably take another year or two on top of that!  Dynamic times!

Thu, 09/16/2010 - 14:31 | 585898 Cognitive Dissonance
Cognitive Dissonance's picture

In a shameless plug for my own work, ZH'ers might wish to go back and re-read my little "fictitious" short story about the Flash Crash. It seems it's not so crazy after all.

http://www.zerohedge.com/article/call-%E2%80%93-fictional-look-25-minute-market-crash

Thu, 09/16/2010 - 14:55 | 585948 SheepDog-One
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Shameless! LOL, good work CD.

Fri, 09/17/2010 - 01:35 | 587243 StychoKiller
StychoKiller's picture

Ya know, I "thought" my tin-foil beanie was on tight enough, chin-strap and all -- then you have to go crank it up a notch -- BAM!

Thu, 09/16/2010 - 14:35 | 585904 Threeggg
Threeggg's picture

I am just amazed at how the newly Installed Throttling Circuit Breakers are working for the market.

Just a quote from Greenspan yesterday

“Fiat money has no place to go but gold,”

From the NewYork Sun

http://www.nysun.com/editorials/greenspans-warning-on-gold/87080/

Nice

Thu, 09/16/2010 - 16:04 | 586109 iota
iota's picture

a few journalists, like Glenn Beck, who are students of history

 

...

 

Thu, 09/16/2010 - 14:49 | 585935 espirit
espirit's picture

SkyNet to design and implement SkyNet circuit breakers to prevent errant SkyNet malfunction.

Our mantra is "When the Trade Doesn't Go Our Way, We Cancel Them All".

Thu, 09/16/2010 - 14:50 | 585936 HarryWanger
HarryWanger's picture

Speaking of "flash", look at the market leader AAPL in the past 20 minutes pull the entire market with it. Looks to be closing at all time high more than likely. 

As I said, you will not see the markets fall when the 3 largest market cap on the planet is breaking out to new highs.

Thu, 09/16/2010 - 14:55 | 585945 rubearish10
rubearish10's picture

Dude, RIMM is reporting tonight uhhhhhh...

Thu, 09/16/2010 - 15:03 | 585963 HarryWanger
HarryWanger's picture

And exactly what does that have to do with AAPL?

Again, the only reason I point this out is to show the disconnect between the market and the economy. As goes Apple, so goes the market. 

Thu, 09/16/2010 - 15:24 | 586013 rubearish10
rubearish10's picture

Just thought it might be a long/short play, going into the number that's all. Probably not accurate. AAPL is a greta name. I use all their stuff.

Thu, 09/16/2010 - 15:38 | 586044 HarryWanger
HarryWanger's picture

If RIMM puts up lousy numbers AAPL stock benefits - it'll show more users moving to iPhone.

If RIMM puts up great numbers AAPL stock benefits - it'll show smart phone use is increasing for everyone.

Only thing they can say that would hurt AAPL is that the ENTIRE smartphone sector is pulling back. That's highly unlikely and thus AAPL stock ran up throughout the afternoon in anticipation.

Thu, 09/16/2010 - 16:42 | 586234 RockyRacoon
RockyRacoon's picture

AAPL sux. 

Just thought I'd throw that out there.  You know, to see what it feels like to troll.

I really don't know shit about AAPL, but I know how you love it.  That's enough.

Thu, 09/16/2010 - 16:49 | 586254 HarryWanger
HarryWanger's picture

I don't love it. It's a stock that's been on fire for the past couple of weeks. When it stops going up, I'll sell it. It's also THE single best indicator of where the market is going. 

It's not love it's being logical about buying and selling stocks. Quote all the economic data you want but if AAPL is going up, so will the market.

Thu, 09/16/2010 - 14:53 | 585940 HEHEHE
HEHEHE's picture

So what happens this time with little or no short interest?

Thu, 09/16/2010 - 14:57 | 585949 SheepDog-One
SheepDog-One's picture

Hmmm, what happens in a musical chairs game when the music stops, and there are NO chairs? We'll find out soon.

Thu, 09/16/2010 - 15:01 | 585960 goldmiddelfinger
goldmiddelfinger's picture

Time to load up for the 3:30 pop-a-roosky.

Thu, 09/16/2010 - 15:32 | 586025 goldmiddelfinger
goldmiddelfinger's picture

Right on Cue.

Thu, 09/16/2010 - 15:04 | 585965 TWORIVER
TWORIVER's picture

Oil falling, stocks to follow.

Thu, 09/16/2010 - 16:40 | 586226 RockyRacoon
RockyRacoon's picture

Gary Gensler blowing it out his ass right now on CNBC, interviewed by the pulchritudinous Maria B.  If smiles were dollars he'd be rich.

Thu, 09/16/2010 - 21:50 | 586952 rosiescenario
rosiescenario's picture

...ah, Maria Buttaroma...how I fondly remember her pumping Micron a few years back at every opportunity since hubby'shedge fund was stuck with a large position in it...on the MU msg board you could track her pumps...a few everyday, until of course, MU cratered.

Thu, 09/16/2010 - 17:35 | 586396 Quantum Nucleonics
Quantum Nucleonics's picture

One wonders what might have happened if the flash crash had occurred 15 minutes earlier than it did, and the 10% circuit breaker had been triggered.  30 minutes for everyone to stew on what had just happened.  I think we might have seen another 1000 point gap down rather than the quick rebound.

Thu, 09/16/2010 - 21:53 | 586959 rosiescenario
rosiescenario's picture

...right on point....you would have seen heavy mutual fund redemptions, and forced selling by those funds due to their non-existent cash levels, creating an additional market drop, followed by more of the same ...and voila...you have 1987 all over again, except this time the economy is in the tank and everyone's home is underwater.

Thu, 09/16/2010 - 18:18 | 586520 DavidC
DavidC's picture

All I can say is that if China (or whoever) wanted to drive this market down it would take very little to do it, given the insanity of these moves up on such little volume.

The Fed (or whoever) is insane if it really expects to keep pumping up the stock and bond markets - there will come a point in the not too distant future where the fundamentals WILL come into play and the result will be ugly - purely because these morons think they can hold back the tide (UNLIKE Canute, who sat in front of the waves to show his sycophantic courtiers that he was NOT in charge of the them).

DavidC

Fri, 09/17/2010 - 05:19 | 587363 Grand Supercycle
Grand Supercycle's picture

The mixed conflicting market signals return. It reminds me of periods in 2007/2008 during the market uncertainty and dislocation in addition to market intervention or rumours of market intervention (like the QE chatter now).

http://stockmarket618.wordpress.com

Thu, 10/07/2010 - 05:51 | 631599 Herry12
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I found lots of interesting information here. I love zerohedge.
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