MULDOON
That's right. But they never attack the same
place
twice. They were testing the fences for
weaknesses.
Systematically. They remembered.
-- Jurassic Park (1993)
There are strange whooshy feelings in capital markets these
days. I
wrote last weekabout the run on the shadow liquidity system
which, in part, led to the Big Whoosh: Thursday's "flash crash".
Except the run hasn't really stopped.
What is going on? It's a testing process. Markets -- and traders
-- are trying to figure out where the liquidity weaknesses are: How
far down, in what stocks, and at what times, do things have to be
bent/folded/spindled before they bust again? Where are the real
liquidity replenishment and cut-over points? At what point will
liquidity again disappear, in what stocks?
The market is, like raptors in Jurassic Park, testing the
fences. It has discovered a major set of coupled, equity-related
weaknesses in the shadow liquidity system, in the absence of a
central market limit order book, in the best price national market
system, in exchange-traded fund arbitrage, and in off-exchange
trading networks. It will try to exploit those weaknesses again,
which is the other side of why I hear non-stop from opportunistic
sorts who have already positioned themselves accordingly in distant
put/call land on the SP500.
Rather than thinking of the "flash crash" as an outlier event,
think of it as a feasibility test. There are inflection points in
the trading curve -- time, price, and action -- where the system
breaks down, and they are systemic problems not easily resolved by
new rules. In the interim, raptors will, like today, continue
pinging the fences, systematically, looking for that same
weakness.
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Raptors at the Liquidity Fence, and the Big Whoosh
Posted by hillsyde on 15th of May 2010 at 04:15 pm
ELLIE
The fences are electrified, right?
MULDOON
That's right. But they never attack the same place
twice. They were testing the fences for weaknesses.
Systematically. They remembered.
-- Jurassic Park (1993)There are strange whooshy feelings in capital markets these days. I wrote last weekabout the run on the shadow liquidity system which, in part, led to the Big Whoosh: Thursday's "flash crash". Except the run hasn't really stopped.
What is going on? It's a testing process. Markets -- and traders -- are trying to figure out where the liquidity weaknesses are: How far down, in what stocks, and at what times, do things have to be bent/folded/spindled before they bust again? Where are the real liquidity replenishment and cut-over points? At what point will liquidity again disappear, in what stocks?
The market is, like raptors in Jurassic Park, testing the fences. It has discovered a major set of coupled, equity-related weaknesses in the shadow liquidity system, in the absence of a central market limit order book, in the best price national market system, in exchange-traded fund arbitrage, and in off-exchange trading networks. It will try to exploit those weaknesses again, which is the other side of why I hear non-stop from opportunistic sorts who have already positioned themselves accordingly in distant put/call land on the SP500.
Rather than thinking of the "flash crash" as an outlier event, think of it as a feasibility test. There are inflection points in the trading curve -- time, price, and action -- where the system breaks down, and they are systemic problems not easily resolved by new rules. In the interim, raptors will, like today, continue pinging the fences, systematically, looking for that same weakness.