Silver Flash Smash was a 'Glitch'- SKG Comment

Vince Lanci's picture

Last night, unofficial comments from sources were framing the flash crash event as  a 'glitch'  and  they were  ' all over' solving it. This implies there was no person or fat fingered banker spoofing the market. It also implies that the "problem" was electronic. Indeed we think it was. But electronic in what way?

Here is an excerpt from our original coverage as it happened

5 Minutes and 10% lower

Close up of 5 minute Futures chart with a low of $14.34

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Spot Silver dropped 6% before snapping back. 

 

Best we can tell, after the CME reopen of futures someone or some THING sold approximately 8,200 contracts into the market in a 5 minute period.

The market immediately snapped back giving the impression this was possibly not an intended trade. But anyone who says  they do know what happened at this point is just speculating.

Was it a predatory algo(s) that sold faster than CME's own servers could react by putting up bids on its own electronic book?  That would be a predatory entity that is now expanding its abilities to overload the very servers that update order books. Perhaps inadvertantly, but there you have it. If that were the case, then the weapon is now bigger than the market.

Perhaps a new algo was unleashed for testing and did glitch, selling when it shouldn't have. If that is the case, than some geek is getting his butt chewed.

Back  to the rebalancing of a specialist book idea. As ludicrous as this sounds, it is not unheard of. If you are old enough, you will recall that specialists had the right to stop equity markets and halt trading until they rebalanced  order books. In effect, their order flow was coming in faster than they could handle.

In fact, the CME did halt trading for 10 seconds last night, presumably to address this 'glitch' as people are calling it. This is not unlike the old days when specialists  used to stop markets to rebalance their order books.

 

And the result was a negation of prices below where presumably the"glitch" started. 

 

This is conjecture, but not a wild one.  If a group of competing algos were  stop hunting during thinly traded markets as they commonly do, then it is conceivable  that their races to sell- trigger stops-cover (rinse  repeat) could have created a snowball  effect of  self reinforcing momentum.

Imagine a Citadel, DeShaw and Six Sigma algo fest where one triggered the others own sell signals. The  resultant race to the bottom could be  enough to make any exchange order book struggle to update itself to absorb the nanosecond deluge of selling. 

What we do know is that CME announced it was adjusting all trades below $15.54 to be raised to that price. This is an admission of either an electronic glitch likely exposed by a predatory algo or algos  intentionally stop fishing, a new algo that was tested and failed miserably, or a human who typed in the wrong price, ignored repeated terminal safeguards and sold down to $1434.

In 2 of the above possibilities, the glitch would be  the result of prices being distorted  faster than CME's own servers could rebalance. And raising the flow of the selloff would seem  to indicate that is likely. This would  be the right thing to do especially if resting orders did not get filled between the low of $14.34 and the new adjusted  low of $15.54. We applaud  CME for doing this.

But equally troubling is what that in turn implies. Specifically, that predatory algos are either indifferent to the collateral damage they do the very bourse that supports them, gives them a way to make a living, and likely rebates them for volumes. Or something worse we do not speculate on here.

Assuming it is the former, then CME  must protect its franchise. For this type of increasing activity is undermining the integrity of its markets. And while the physical is good, paper is bad crowd would rejoice at this as further confirmation of the lack of claim futures has on the  pricing mechanism of metals, it would be tragic; for the integrity of all markets in precious metals  would then be in trouble as all transparency would be suspect.  

We want CME to fix  it if it is somehow broken, punish those who are predatorily undermining markets and relying on their tech to make money with no regard to the market structure itself and possibly directly attacking the very order book infrastructure  CME protects. if you truly want free markets, then  you want this fixed.

Otherwise you may be a luddite hoping for fat middle aged men on the LME with flags  and cigars determining prices for  your Gold. it is a capitalistic and a moral imperative for this to  be addressed and stopped. This is a war of escalating arms. And when there  is no one left to spoof on exchanges because people  are afraid to leave resting orders because those orders will get filled surreptitiously or traded through unfilled,  then  the exchanges  are at risk of being destroyed from the inside out. 

?

Excellent live charts   HERE

From a zerohedge commenter who is obviously experienced in the way of the Algo.  He may not be right in this case, but he is spot on in how the mechanism works.

No one "dumped" 450mm notional. When a large stop was triggered the algos immediately went to work and ran the weak handed bids and overnight stops..... they sold it and bought it the whole way down, fighting each other the entire way. Citadel, two sigma, and deshaw etc... it's not a level playing field.... look at CL tonight! Two stop hunts triggered but not enough

And there you have it. in a matter of seconds thousands of contracts traded electronically, much of the price action was removed, and  there may have been a glitch somewhere but with whom we do not know. Confidence restored. 

In any event we cannot know what happened. This  is because we are not privy to facts. And that encourages  speculation. So, if one wants rumours to stop,  one must give unvarnished truth as to what happens. To not do so is to risk market integrity. It is also to invite nonsensical speculation that somehow the algo  and the bourse are  codependent to the point that revealing the unintended but real problem will also reveal the conflict that our political bettors have  enabled with their complete  ignorance of markets. 

if our sentences are more run on than usual, please forgive us. it  was along night.

- Soren K.

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Gordon_Gekko's picture

"one must give unvarnished truth as to what happens"

It will NEVER happen in the United States. EVER.

hxc's picture

I'll bet you anything Trump will blow the lid off 9/11 if these creeps get too out-of-hand.

GoldenDonuts's picture

Wow the gold and silver paper markets sure have a lot of glitches.  It seems like every week there is another "glitch" that drives the price down.   Maybe the computer guys need some new russians who know what they are doing.  Or maybe just maybe the computers are working perfectly.

Gordon_Gekko's picture

"then  the exchanges  are at risk of being destroyed from the inside out"

I hope it happens to these utterly CORRUPT casinos exchanges...SOON. They DESERVE it.

Gordon_Gekko's picture

"CME  must protect its franchise"

HAHAHAHA....CRIMEX "reason for being" is to RIG these FAKE "markets".

Farqued Up's picture

Put your fiat in the stirrups and let them cut that bucker loose. As long as I buy and hold they can do what they want. I have faith that the ones with the shiny will be more prosperous than the ones with a fist full of fiat. I will try to buy every time they screw with it and may sell my house to get more shiny. Damn, don't throw me in that briarpatch!

mary mary's picture

I think it makes it easier for THEM that so many little people have chickened out and gone the Bitcoin route.  You can run but, sooner or later, one way or another, you won't be able to hide.

Dg4884's picture

This is only a test

-SKYNET

Gordon_Gekko's picture

It looks like they are desperate enough to try to recreate a 2013 type crash in the PM markets.

Conax's picture

They're still pounding, trying to capitalize on that 'glitch' they didn't do.

Just look at it.

JTBfromtheWL's picture

it was meant to happen, to stop everyone out of their derivative sillver. you know, the stuff commonly leveraged 100:1. It's traded on FX exchanges and bitcoin exchanges too. Good luck getting your cash back from the 'glitch' sheeple. Don't fly too high!

alpha-protagonist's picture

Was that $14.34 "glitch" an arbitrary one based on algos gone wild, or was it a shot across the bow for those who place value in PM?

Ban KKiller's picture

Silver is "just"  a hedge. See failed States...

SoilMyselfRotten's picture

I just know that one of these days these circuit breakers that they put in place to protect us from the downward plunges ahead will kick in.

aloha_snakbar's picture

Paper markets are a joke... and in the very near future will have NOTHING to do with physical PM prices...

Ajax_USB_Port_Repair_Service_'s picture

Bartertown will determine the true price of all PM's.

Vlad the Inhaler's picture

Pull back to the XAGUSD monthly chart.  It's pretty bullish.  They could have just been flushing some folks before the coming rally.

Quinvarius's picture

They are pumping a dry well looking for stops.  No one is long silver in the COT report right now.  I am pretty sure the Fed and Treasury started this pullback to cover the huge dollar devaluation taking place.  But now it is just the same traders who always make the mistakes at the extremes trying to chase and push.  The COT report is trading gospel in PMs.  Whatever happens, it is going higher than this.

Northern Flicker's picture

This is just a scam - can we go back to floor trading?

ali-ali-al-qomfri's picture

There is no floor, nor ceiling for that matter.

I'm not sure there are even walls......

LawsofPhysics's picture

Don't overthink this asshat.  There is no "market".

Conax's picture

Ah, I see... the bankers dindu nuffins.

They was just turnin they lifes aroun'..

wanderer9641's picture

Who benefited?

 

Dg4884's picture

Me.  My APMEX order is being delivered Saturday.

DjangoCat's picture

Missed this by two days, my order arrived today.  Meh.

Gordon_Gekko's picture

I have learned to scale down my purchases over the years whenever I see rigging intent in CRIMEX futures. You never know how low they gonna take it, and because its manipulated, it can rocket just as quickly.

Gordon_Gekko's picture

EXCELLENT! THIS is the strategy.

Beowulf55's picture

Not those that stood for delivery.........

Peterman333's picture

Sounds like some tomfoolery.

anarchitect's picture

If CME is going to reset order prices, they should issue a full explanation.  They're nothing more than a casino, and as such need to explain why payouts were modified.