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Wednesday, April 24, 2013

Flash Crash

Joshua M Brown, The Reformed Broker, April 23rd, 2013.  If the perpetrators made any money off of this, they must have been very nimble.

flash crash 2013

It lasted three minutes and shaved about 150 points off the Dow Jones Industrial Average in the blink of an eye.

Near as we can tell, it all began when the Associated Press had its Twitter account hacked. An erroneous message went out that the White House was bombed. This was quickly debunked by members of the President's staff and several reporters for the AP and markets got back to normal sort of.

But what was seen cannot be unseen and we got a quick reminder about how close we always are to a market panic or meltdown - whether thanks to false news, real news or no news. Market structure is a joke at this point, the amount of volume accounted for by bots that shut themselves down automatically at the hint of turbulence is just absurd.

We did it to ourselves. We made it unprofitable for humans to make markets, which reduced the interest in small cap research and the IPO process. We further exacerbated things by allowing the exchanges to go for-profit - the only revenue stream they could find was selling access and data and capabilities to parasitic tech firms. They took the money - now it's the only money they actually make other than renting out the trading floor for cocktail parties and the Westminster Dog Show.

So now we have this atmosphere where a tweet from a hacked account can temporarily wipe out half a trillion dollars of wealth in minutes. Hope you're enjoying this!
Some other thoughts:

* Check out the chart below, this thing stopped dead right at the bottom of the opening gap (last night's closing level) on the S&P! Chart courtesy of my friend Stefan Scheplick:

scheplick

* People with stops in got screwed, supposedly those sales are being honored.
* Gold didn't rally when we though the White House was bombed. The Yen and the Treasury complex did. What did you learn?

* I have no idea how Wall Street's rank-and-file can function without access to social media, it's getting embarrassing that they have to pretend they're not using it. On the twitters, we noticed the commotion, the market's  reaction to it and the debunking of it before the news anchors could even be rushed into makeup. Maybe they'll read about it in the newspaper tomorrow.

* The fact that the bots shut themselves down is another reminder that the liquidity they provide is bullshit liquidity than no one really needs. As it's been phrased before, they provide a glass of water in a monsoon, but when you really need them to absorb sell orders, they're on the sideline, buffering. It's a joke.

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