Yesterday, courtesy of Nanex, we provided a close look [3]into the internals of the flash crash that took place in yesterday's trading session of German stocks. What was made obvious, is that this crash happened as a result of the same sudden liquidity vacuum that took place in May 2010 in the NYSE, when the DJIA plunged by 1000 points on a surge in offers and no bids, leading to the infamous original flash crash (about which we warned in April of 2009 of course [4]) crushing the market, before a mysterious buying power emerged out of nowhere and returned it to an almost unchanged level. What we did not know, and what makes yesterday's German mini crash both delightfully ironic and supremely humiliating to the largest German stock exchange operator, the Deutsche Börse, is that it was less than one short weeks ago that the very same Deutsche Börse, in a direct reply to Nanex itself, stated that what we witnessed on Wednesday night couldn't possibly happen. Six days later, it did.
To wit, Nanex from April 11 [5]:
Dear Deutsche Boerse, Perhaps you didn't get the message: #HFT [6] caused the flash crashnanex.net/aqck2/4150.html [7]
— Eric Scott Hunsader (@nanexllc) April 11, 2013 [8]
And the Deutsche Börse response:
@nanexllc [9] We question that. Such kind of flash crash could not happen in Europe.
— Deutsche Börse Group (@DeutscheBoerse) April 11, 2013 [5]
Er... Big Öööööps! [3]6 days later [3]:
[10]
It wasn't just us. The very next day in Germany's Spiegel magazine [11]:
Speculators wonder about mini flash crash
Within minutes, the Dax rushed around 180 points down - and also in the afternoon deep in the red. The European Stoxx index also lost a flash in value. Dealer puzzle over the cause of the small flash crash. Was a computer error the trigger?
Within minutes, the DAX plummeted and caused a stir in the trading rooms. In the top of the benchmark index fell 2.2 percent - a total of 180 points - to 7514 meters, the lowest level since early December. Then the price started again, the moment he is still around 1.7 percent in the red. Also the Euro Stoxx 50 Show chart lost flash 1.7 percent in value.
Flash Crash call stockbrokers such rapid crashes. On 6 May 2010 about the Dow Jones index had given way within minutes to nearly a thousand points and briefly cared for panic in the stock market. On 25 August 2011 was briefly the German index DAX lost four percent . Compared to earlier crashes the crash of Wednesday morning was so comparatively small.
However, he took care of uncertainty in financial markets. Some dealers expressed the losses with growth concerns in the euro zone or together with increased uncertainty because of a missile strike in the southern Israeli city of Eilat. They spoke of a "lemming effect": one begins - and all drag. Other traders declared the crash a technical problem: a computer error or a mistake in an order.
The German stock market looks behind the price drop. There have been no irregularities, a spokesman said. Trade and systems functioned properly.
Only they didn't. And what happened, and what will happen again, is that for a moment, its was HFT OFF.
This time, just like in May 2010, we were lucky that the algos resumed working after just a few moments of inactivity.
But what about next time, and the time after that? What will the various stock market operators say when stocks go from top left to zero in a vertical line, and when "investors" realize it was all a myth from the very beginning?
Finally, how can anyone have any faith or confidence in markets in which the stock exchange operators themselves have no idea what is going on?