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2010 flash crash

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The May 6, 2010 Flash Crash[1] also referred to as The Crash of 2:45, the 2010 Flash Crash or just simply, the Flash Crash, was a stock market crash on May 6, 2010 involving U.S. corporate stocks, followed by an almost immediate rebound. It was the second largest point swing, 1,010.14 points,[2] and the biggest one-day point decline, 998.5 points, on an intraday basis in Dow Jones Industrial Average history.[3][4][5]

File:Chart dow dip2.top.gif
The daily chart of the Dow during the Flash Crash

Background

Program trading

Initial reports indicated that the event may have been triggered by a "fat-finger trade", an inadvertent large "sell order" for Procter and Gamble stock, inciting massive algorithmic trading orders to dump the stock; however, this theory was quickly disproved after it was determined that Procter and Gamble's decline occurred after a significant decline in the E-mini S&P Futures contracts.[6][7][8] The "fat-finger trade" hypothesis was also disproved when it was determined that existing CME Group and ICE safeguards would have prevented such an error.[9] Some analysts were skeptical of this hypothesis, suggesting that deliberate market manipulation could be to blame.[10] Others have said it may have been tied to short positions, in the form of put options, taken on the S&P 500 just before the crash[11] or a movement in the U.S. Dollar to Japanese Yen exchange rate.[12] Both the regulatory agencies and the United States Congress announced investigations into the causes of the crash.[13]

The cause of the drop remained unknown, but investigators focused on a number of possible causes, including a confluence of computer-automated trades, or possibly an error by human traders. By the weekend, regulators had discounted the possibility of trader error and focused on automated trades conducted on exchanges other than the NYSE. Others speculate that an intermarket sweep order may have played a role in triggering the crash.[14]

On May 11, The Wall Street Journal suggested that a large purchase of put options by the hedge fund Universa Investments shortly before the crash may have been among the primary causes.[15]

On May 14, reports appeared suggesting that the event may have been triggered by a single sale of 75,000 e-mini contracts valued at around $4 billion by the Overland Park, Kansas firm Waddell and Reed on the Chicago Mercantile Exchange.[16]

Aftermath

Stock market reaction

A stock market anomaly, the major market indexes dropped by over 9% (including a roughly 7% decline in a roughly 15 minute span[17][18]) before a partial rebound at approximately 2:45 pm eastern time on May 6, 2010.[5] Temporarily, $1 trillion in market value disappeared.[19] While stocks markets do crash, immediate rebounds are unprecedented. The stocks of eight major companies in the S&P 500 fell to one cent per share for a short time, including Accenture, CenterPoint Energy and Exelon; while other stocks, including Sotheby's, Apple, and Hewlett-Packard, increased in value to over $100,000 in price.[20][4][21] Procter and Gamble in particular dropped nearly 37% before rebounding, within minutes, back to near its original levels. The drop in P&G was broadcast live on CNBC at the time, with commentator Jim Cramer declaring live, "That is not a real price. Just go buy Procter & Gamble. When I looked at it, it was at 61, I’m not that interested in it. It’s at 47? Well, that’s a different security entirely."

Congressional hearings

The NASDAQ released their timeline of the anomalies during U.S. Congressional House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises[22] hearings on the flash crash.[1] NASDAQ's timeline indicates that NYSE Arca may have played an early role and that the Chicago Board Options Exchange sent a message saying that NYSE Arca was "out of NBBO". The Chicago Board Options Exchange, NASDAQ, NASDAQ OMX BX, and BATS Exchange all declared SELF HELP against NYSE Arca.[1]

S.E.C. Chairwoman Mary Schapiro testified that "stub quotes" may have played a role in certain stocks that traded for 1 cent a share.[23]

According to Schapiro,
The absurd result of valuable stocks being executed for a penny likely was attributable to the use of a practice called “stub quoting.” When a market order is submitted for a stock, if available liquidity has already been taken out, the market order will seek the next available liquidity, regardless of price. When a market maker’s liquidity has been exhausted, or if it is unwilling to provide liquidity, it may at that time submit what is called a stub quote – for example, an offer to buy a given stock at a penny. A stub quote is essentially a place holder quote because that quote would never – it is thought – be reached. When a market order is seeking liquidity and the only liquidity available is a penny-priced stub quote, the market order, by its terms, will execute against the stub quote. In this respect, automated trading systems will follow their coded logic regardless of outcome, while human involvement likely would have prevented these orders from executing at absurd prices. As noted below, we are reviewing the practice of displaying stub quotes that are never intended to be executed.[24]

Circuit breakers

Officials announced that new trading curbs, also known as circuit breakers, will be tested during a six-month trial period ending on December 10th, 2010. These circuit breakers, would halt trading for five minutes on any S&P 500 stock that rises or falls more than 10 percent in a five minute period.[25][26] The circuit breakers will only be installed to the 404 NYSE listed S&P 500 stocks. The first circuit breakers will be installed to only 5 of the S&P 500 companies on Friday June 11, to experiment with the circuit breakers. The 5 stocks are EOG Resources, Genuine Parts, Harley Davidson, Ryder System, and Zimmer Holdings. By Monday June 14, 44 had them. By Tuesday June 15, 223 had them. By Wednesday June 16, all 404 companies had circuit breakers installed.[27]

On June 16, 2010, trading in the Washington Post Company's shares was halted for five minutes after it became the first stock to trigger the new circuit breakers. Three erroneous NYSE Arca trades were said to be the cause of the share price jump.[28] Another mini flash crash occurred on June 2 involving shares of Diebold which dropped briefly 35% and triggered circuit breakers.[29] These events are taken as evidence that the problem of flash crashes has not been solved and more are to be expected.[29]

See also

Wikinews has related news:

References

  1. ^ a b c Nasdaq: Here’s Our Timeline of the Flash Crash, wsj.com, by Matt Phillips
  2. ^ The Dow's Top five intraday point swings
  3. ^ Jane "The markets' wild ride," Montreal Gazette, May 7, 2010. Retrieved May 9, 2010
  4. ^ a b [1] Lauricella, Tom, and McKay, Peter A. "Dow Takes a Harrowing 1,010.14-Point Trip," Online Wall Street Journal, May 7, 2010. Retrieved May 9, 2010
  5. ^ a b Glitches send Dow on wild ride CNN Money
  6. ^ P&G error started rout but money managers expect “slow but upwards equity markets to continue” Read more: http://opinion.financialpost.com/2010/05/07/pg-error-started-rout-but-money-managers-expect-slow-but-upwards-equity-markets-to-continue/#ixzz0n
  7. ^ Stock market: Is anybody in charge? - Chicago Sun-Times
  8. ^ http://blogs.wsj.com/marketbeat/2010/05/20/secs-schapiro-heres-my-timeline-of-the-flash-crash
  9. ^ http://www.commodityonline.com/news/What-went-wrong-with-US-futures-on-Thursday-28089-2-1.html
  10. ^ CNBC's Bartiromo: 'That is Ridiculous. This Really Sounds Like Market Manipulation to Me'
  11. ^ Was The Market Mayhem A Mistake? Maybe Not., Liz Moyer, Forbes.com
  12. ^ The Yen Did It?, by Bruce Krasting, seekingalpha.com
  13. ^ After Stocks Blow Fuse, Circuit Breakers? Investors.com
  14. ^ Accenture’s Flash Crash: What’s an “Intermarket Sweep Order” Wall Street Journal
  15. ^ Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?, Wall Street Journal, May 11, 2010
  16. ^ [2]
  17. ^ SEC Chairman Admits: We’re Outgunned By Market Supercomputers, Wall Street Journal, wsj.com
  18. ^ SEC Testimony Concerning the Severe Market Disruption on May 6, 2010, SEC, May 11, 2010 (pdf)
  19. ^ Senators Seek Regulators' Report On Causes Of Market Volatility, Wall Street Journal, May 7, 2010
  20. ^ Grocer, Stephen (May 6, 2010). "Six Mega Drops of the Flash Crash; Sam Adams Goes Flat". The Wall Street Journal. Dow Jones. Retrieved May 6, 2010.
  21. ^ "Dow average sees biggest fall in 15 months". Christian Science Monitor.
  22. ^ Live Blogging the Flash Crash Hearings - Wall Street Journal
  23. ^ Accenture for a Penny: MarketBeat’s Investigation Continues!, Wall Street Journal, by Matt Phillips, MAY 12, 2010, 3:01 PM ET
  24. ^ Testimony Concerning the Severe Market Disruption on May 6, 2010, Mary Schapiro
  25. ^ Six-month test period for US trading curbs-sources, Reuters, 5-18-2010
  26. ^ Rules to Limit Stock Trading Amid Market Volatility, nytimes.com, by Edward Wyatt, 5-18-2010
  27. ^ CNBC.com NYSE Says Circuit Breaker Will Be Finished Next Week
  28. ^ Washington Post Co. stock first to trigger SEC's new circuit breakers
  29. ^ a b CNN. "X". Retrieved June 22, 2010. {{cite web}}: |author= has generic name (help)
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