WHAT CAUSED THE CRASH TODAY?
There’s all sorts of speculation over what caused the crash today. The answer is simple. Pure unadulterated fear. Everyone is looking for someone to blame, but we’ve seen this happen in markets for hundreds of years. It happened before there were computers and it now happens that there are computers. Today was a classic fear filled day. We saw huge downside in many debt and forex instruments before the crash and the equity markets were the last to capitulate. The bids fell off the board and the sellers just continued to hit the bids. There might have been some “fat finger” trades or some electronic trading that contributed, but this was primarily fear. Good old fashioned fear. This has always happened in markets and will always happen in markets. It’s as simple as that as far as I’m concerned.
Investors are scared out of their minds as China looks like it is slowing substantially and Greece and the EMU appear to be on the brink. There are real fundamental reasons for the recent declines in stocks. In addition, it’s important to remember that there are a mountain of longs that have piled into the market in recent weeks and months with the expectation of a nice easy recovery trade. That is clearly off the table and there is a huge trade being unwound here. Greed has quickly turned to fear.
Not sure fear explains Accenture trading to .01 today and PG trading to 39.
I agree, however don’t you think that the P&G behavior was odd?
That was a lot but there were tons of people stopped out and that was organic selling. Add in fat fingers and HFT’s and you get the meltdown we got.
Why doesn’t it explain it? The bids fell off the board. There were no buyers. Everyone was scared to buy. The only bids on the board were the specialist’s bids that they leave on all the time at pennies. That’s caused by fear. It has always happened. Just look at the charts from the 20′s when there were no computers. This has always happened. It’s pure psychology.
I don’t disagree – but 16B in emini’s sold in 2 minutes? That’s not a disappearing bid.
TPC: By the way, where’s the tip jar?!
I removed it. No need for tips. You can tip me by never pulling a Chris – that is, adding little value to the site while being totally wrong in your analysis and acting like a pompous ass while you lose money like it’s going our style because you don’t know the first thing about markets.
Thanks for the thought though. All I ask for is good comments and good discussions. That’s all. We’re all learning here and as far as I am concerned should all be trying to help eachother.
i don’t expect to see him around here any time soon.
TPC,
You and I saw through his act from day 1 when he would only comment on big up days. Then on the big down days he would talk about how he uses 1% stop losses. Ha. As if we’re total morons. This guy is supposedly trading the XLF with leverage and a 1% stop loss? What does he think we are? Morons?
He made his “i can assure you that i am max long (just 10% cash)” call on the DAY the market topped. The VERY day.
His stupid logic was low rates equals buy the banks. Well Mister Smarty Pants – how has that worked out in Japan over the years? His analysis was faulty from the beginning. We all saw through it.
fear…of course
http://blogs.wsj.com/marketbeat/2010/05/06/accenture-went-to-a-penny-at-248-pm/?mod=e2tw
lol
These sorts of things have always happened. Long before computers.
there was a -600 pt mistake in a -400 pt day.
tho u could buy p&g at 39 it was a glitch.
still 400 of fear n 100 more
its 1933, our version
more on the way,the green toilet paper unravels,or, someone wired the “.” key to the “,” in TPC terms
Agree with you 100% TPC, its actually shameful that the media or whoever is spinning this into something it is certainly not. Lets call it what it is, FEAR. And a lot of it.
Agreed on everyone’s input on Market Psychology and FEAR!
It’s ridiculous hearing the news and radio; they are all claiming Greece, Greece, it’s Greece’s fear. And the -900 point drop being basically a “fat finger” of a trader that punched in billion instead of million. — come on I can’t believe the public can buy into this kind of crap.
Since when do institutional traders place orders by spelling out M(B)ILLION.
I would also like to believe there are safeguards in place to prevent this sort of thing from happening. Seems farfetched at a minimum.
As the host noted – fear played a big part.
But however what IS different this time, and why the move was a little more violent than normal, is the slow but steady removal of human market making from the financial markets over the last 10 years.
At every turn, whether it be specialists in NY, options market makers in Chicago, or proprietary hedge fun traders in Greenwich – the computer has replaced the human. They were hybrid for a while, but now 80% or more of transactions occur via program trading.
When markets are calm, the appearance of a more liquid, deeper market is given. However, these computers cannot think -in the sense that a human, for all our flaws, can think.
It cannot weight properly various inputs that occur from deep in the bell curve. Thus you lose liquidity in times of stress. Computers cannot wing it, or estimate. They need data points to ground themselves.
At the end of the day, the human being still has a role in this industry, as anyone who sold aapl at 199$ can tell you.
I probably din’t articulate what I meant very well, but am very tired from the exhausting action today.
Also the worst damage was done in the broad index ETF’s. Makes me think they are running HFT to hedge their baskets.
Check out IVE and RSP.
Not sure if they are the chicken or the egg.
Great commentary. I agree whole-heartedly. People have always had a hard time believing in extreme volatility and are always looking for the scapegoat, whether that be computers (which they also blamed in ’87), trade errors, or what have you. By the way, I think it’s a travesty that the Nasdaq is cancelling all trades outside 60% down. Somebody provided liquidity to the market at 60%+ down, and now the exchange is saying no deal. The next market plunge is going to be worse, because why step in when that trade will only be invalidated?
Found this interesting view:
Market panics and bailout manias
Isn’t it likely that canceling trades would benefit some of the market makers, or the traders that submitted erroneous orders? Is the trade cancellation also a bailout and driven by some banks asking for it?
The Fed was showing congress what it can do if they pass the Fed audit bill.
With all of this fear, does the PPT have things under control today or are things setting up for another Black Friday?