Thursday, May 6, 2010

US Stock Market Plunge and Snap Back - Algo Bots Gone Crazy or Cyber Terrorism?

(Yes, I have my tinfoil hat on...)

Not that they are mutually exclusive.

First it was a rumor that European banks stopped lending (did they?). Then it was a "fat finger" by a trader. Then it was a "fat finger" by a trader at Citigroup. Then it was NOT a Citigroup trader. Then it turns out that in addition to this alleged fat finger of someone, eight stocks which normally trade with modest volume and are not exactly household names spiked down to one cent or zero during the period when the entire market violently slid and snapped right back up.

CNBC's Bartiromo: 'That is Ridiculous. This Really Sounds Like Market Manipulation to Me' (Jeff Poor, 5/6/2010 Business and Media Institute)

"While everyone is scratching their heads and trying to figure out how the Dow Jones Industrial Average (DJIA) lost nearly 1,000 points before rallying back to lose only 347 points – it appears not to be limited to just one stock.

"On CNBC’s May 6 “Closing Bell,” correspondent Matt Nesto explained that investigators for both the stock exchanges and for Citigroup, the firm that some are pointing fingers at for a so-called trader error, have narrowed it down to a futures index called the E-mini S&P 500.

"“A person familiar with the Citi investigation said one focus of the trading probes were the futures contracts tied to the S&P 500 stock index known as the E-mini S&P 500 futures and in particular that two-minute window in which 16 billion of the futures were sold,” Nesto said. “Again, those sources are telling us that Citigroup’s total E-mini volume for the entire day was only 9 billion, suggesting that the origin of the trades was elsewhere.”

"Nesto named eight stocks that were hit with the supposed computer error/bad trade, if that’s indeed what happened, that went all the way down to zero or one cent, including Exelon (NYSE:EXC), Accenture (NYSE:ACN), CenterPoint Energy (NYSE:CNP), Eagle Material (NYSE:EXP), Genpact Ltd (G), ITC Holdings (NYSE:ITC), Brown & Brown (NYSE:BRO), Casey’s General (NASDAQ:CASY) and Boston Beer (NYSE:SAM)

"... Nesto calling these trades “bogus” drew backlash from the host and CNBC veteran Maria Bartiromo, who said those trades sounded like “market manipulation” to her.

"“ That is ridiculous,” Bartiromo replied. “I mean this really sounds like market manipulation to me. This is outrageous.”" [The article continues.]

Market manipulation? Hello Maria, where have you been all these years?

It was more like a complete breakdown of any order. For more, read Zero Hedge "The Day The Market Almost Died (Courtesy Of High Frequency Trading)".

So here's what happened to these eight stocks between 2:47 and 2:56PM EST today:

2:47 PM EST
ACN: went from $38 to $0.01
CNP: went from $13.15 to zero
ITC: went from $45.90 to $0.01
BRO: went from $18.07 to zero

2:48PM EST
CASY: went from $35.24 to $0.01
SAM: went from $54.32 to $0.01

2:50 PM EST
EXP: went from $29.41 to zero

2:56PM EST
G: went from $15.58 to $0.01

Dow Jones Industrial Average hit the low of the day (9,887) at 2:46PM EST. Nasdaq and S&P 500 hit their lows at the same time as Dow.

I think these are the examples of algo bots gone haywire, but whoever put in the initial bomb of selling 16 billion S&P e-mini futures, which came through CME, wasn't a bot. After the bomb detonated, all the algo bots decided to pile on to one side, in this case sell sell and more sell.

Whoever detonated this e-mini futures bomb must know the high-frequency quant trading programs very well, inside out. And in the last second the switch was turned off, and the market snapped back.

OK, tinfoil hat off.

To make up for the fear and loathing that they caused, they (whoever they are) are busy buying the stock futures so that the market will open high and cheerful tomorrow morning. Right now, Dow futures up 60, Nasdaq futures up 11, S&P futures up 6.5, according to Bloomberg.


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