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
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.
10 second halt in Comex Silver Futures at 19:06:38 $SI_F— Eric Scott Hunsader (@nanexllc) July 6, 2017
And the result was a negation of prices below where presumably the"glitch" started.
update pic.twitter.com/KOMPVt96XW— Ryan Paisey (@RyanPaisey) July 6, 2017
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.