Following is the ZH take on the SEC Report. They later posted a
chart of the S&P emini volume showing how comparatively little
75k contracts are in the usual daily trading volume for
this futures contract. While that trade might merit the honor of
being one straw on a camels back, it most certainly wasn't the last
nor the heaviest. The Report itself is informative, and
detailed, but certainly gave me no confidence at all that this
sort of event cannot or will not happen again.
Title: The ZH review of
This Has To Be A Joke
Posted by pthoreson on 1st of Oct 2010 at 02:24 pm
Following is the ZH take on the SEC Report. They later posted a chart of the S&P emini volume showing how comparatively little 75k contracts are in the usual daily trading volume for this futures contract. While that trade might merit the honor of being one straw on a camels back, it most certainly wasn't the last nor the heaviest. The Report itself is informative, and detailed, but certainly gave me no confidence at all that this sort of event cannot or will not happen again.
100+ pages of garbage, and yes, Waddell and Reed, and their destructive hedging trade of 75,000 e-minis is the culprit that apparently set everything off: "At 2:32 p.m., against this backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) [ZH: Waddell and Reed] initiated a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position." Apparently, its was all evil W&R's fault who traded in conjunction with an even more evil VWAP algo: "This large fundamental trader chose to execute this sell program via an automated execution algorithm (“Sell Algorithm”) that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time. However, on May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes." In other words, there never was, is and never will be any liquidity in the allegedly most liquid market - ES. Good luck to all those who hope to sell the second there is a second flash crash.
And here is the initial mention of HFTs:
HFTs and intermediaries were the likely buyers of the initial batch of orders submitted by the Sell Algorithm, and, as a result, these buyers built up temporary long positions. Specifically, HFTs accumulated a net long position of about 3,300 contracts. However, between 2:41 p.m. and 2:44 p.m., HFTs aggressively sold about 2,000 E-Mini contracts in order to reduce their temporary long positions. At the same time, HFTs traded nearly 140,000 E-Mini contracts or over 33% of the total trading volume. This is consistent with the HFTs’ typical practice of trading a very large number of contracts, but not accumulating an aggregate inventory beyond three to four thousand contracts in either direction. What happened next is best described in terms of two liquidity crises – one at the broad index level in the E-Mini, the other with respect to individual stocks.
Here is the SEC's justification for why HFT-Stop is now a prevalent phenomenon that can occur whenever and wherever the computer participants who account for 70% of the market so desire:
Based on their respective individual risk assessments, some market makers and other liquidity providers widened their quote spreads, others reduced offered liquidity, and a significant number withdrew completely from the markets. Some fell back to manual trading but had to limit their focus to only a subset of securities as they were not able to keep up with the nearly ten-fold increase in volume that occurred as prices in many securities rapidly declined.
HFTs in the equity markets, who normally both provide and take liquidity as part of their strategies, traded proportionally more as volume increased, and overall were net sellers in the rapidly declining broad market along with most other participants. Some of these firms continued to trade as the broad indices began to recover and individual securities started to experience severe price dislocations, whereas others reduced or halted trading completely.
In other words, nothing new, and the primary reason for ongoing market instability: HFT's dominance in the market and its ability to pull all bids whenever desired, will lead to ever more market crashes. Furthermore, HFTs were merely innocent bystanders in an evil ploy concocted by W&R and VWAP algos which incidentally have worked perfectly trilions of times before, but failed on this one occasions.
And yes, it is nobody's fault really. Here is how the SEC completely ignores the Nanex data that showed quote stuffing (wether involuntary or malicious) was a critical component of the crash.
Some market participants and firms in the market data business have analyzed the CTS and CQS data delays of May 6, as well as the quoting patterns observed on a variety of other days. It has been hypothesized that these delays are due to a manipulative practice called “quote-stuffing” in which high volumes of quotes are purposely sent to exchanges in order to create data delays that would afford the firm sending these quotes a trading advantage.
Our investigation to date reveals that the largest and most erratic price moves observed on May 6 were caused by withdrawals of liquidity and the subsequent execution of trades at stub quotes. We have interviewed many of the participants who withdrew their liquidity, including those who were party to significant numbers of buys and sells that occurred at stub quote prices. As described throughout this report each market participant had many and varied reasons for its specific actions and decisions on May 6. For the subset of those liquidity providers who rely on CTS and CQS data for trading decisions or data- integrity checks, delays in those feeds would have influenced their actions. However, the evidence does not support the hypothesis that delays in the CTS and CQS feeds triggered or otherwise caused the extreme volatility in security prices observed that day .
Nevertheless, as discussed in the Executive Summary, the events of May 6 clearly demonstrate the importance of data in today’s world of fully-automated trading strategies and systems. The SEC staff will therefore be working closely with the market centers to help ensure the integrity and reliability of their data processes, especially those that involve the publication of trades and quotes to the consolidated tape. In addition, the SEC staff will be working with the market centers in exploring their members’ trading practices to identify any unintentional or potentially abusive or manipulative conduct that may cause such system delays that inhibit the ability of market participants to engage in a fair and orderly process of price discovery.
There is no point to event comment on the preceding. By that we mean your confidence in stocks should now be back at 10 out of 10. Maybe even 11 out of 10.
Also, there is absolutely no explanation of why there was "buy side interest" to reappear at the very bottom. And yes, confidence is surging back.
Moral of the story: NO ONE MUST BE ALLOWED TO SELL MORE THAN ONE SHARE OF STOCK AT A TIME EVER!!! YOU WILL OVERLOAD THE MARKET, FLOOD THE NYSE'S LRP, CAUSE A LIQUIDITY CRISIS, DESTROY THE MARKET AND END CIVILIZATION AS WE KNOW IT
We are currently going through the full report below ( pdf ).