Flash Crash Erased $1 Trillion with $4 Billion Trade

Flash Crash redux – late last week, the SEC released a 117 page report suggesting that the flash crash resulted from a $4 billion sell order in S&P futures, from mutual fund manager Wadell & Reed (WR). Apparently, WR put this order in the market via a computer algorithm which was meant to execute the order, regardless of the price. This apparently fed the market’s slide on that fateful May 6th date. The nature of the sell program was such that a good portion of that $4 billion order was executed after the market made a low, and in fact was rallying back. It is quite remarkable that $1 trillion of market capitalization can be erased by a very modest $4 billion order. It just goes to show that when markets sell-off, that it does not take much to exacerbate a negative environment.


Apparently, many stocks traded down a great amount that date, and many trades were cancelled by the exchanges. If you were legitimately buying stocks during the sell-off, it seems like the wrong signal to send, to cancel such trades. What will happen if we have another sell-off, and buyers do not step in, because they are concerned that their buys will be cancelled? Cancelling trades is creating a precedent which will hurt the markets the next time such an event occurs.


And on the topic of crashes, did anyone pick up the story about how Progressive Energy, symbol PGN, dropped from $44 a share to $4 a share in a very short time period on September 27th. Apparently, this occured as orders entered through electronic trading platforms took the price down 90%. Prices immediately bounced back.


The long and short of this topic is that with the proliferation of electronic trading platforms dominating the stock markets, the stability which old style market makers brought to the exchanges is now being eliminated, and the markets are becoming more dangerous and volatile. And despite what the SEC and exchange officials say about how they are addressing the problems with electronic trading platforms, the fact that PGN traded down 90% in a short period of time, only last week, tells me that these problems have not been fixed.


* A reader sent in a comment yesterday that he agreed with what I wrote about in yesterday’s blog, until the point about the timing of Chris Carolan’s spiral calendar prediction, for a turn this week. The reason why the timing aspect is important, is because one could go broke waiting for a strategy to work out if your timing is dead wrong. Amongst my readers who agree with my general bearish view of things, most will universally agree that the persistence of the intervening rallies has been persistent and difficult to manage. Which brings me to the idea of trying to find ways to time turning points as available methods presents itself. I have been following the work of Chris Carolan for over 10 years, and I have discovered that when his methods work, they work with amazing precision. So it is with this in mind that I present conclusions which the spiral calendar research is making today: that turn is imminent in many markets. The same goes with the Elliott Wave analysis, which I have been following and using for the last 25 years, and find that when it is right, it is remarkably accurate and prescient. However, no method is ever 100% right, so it is with this caveat that I present what I think are reasonable thoughts about the markets in todays environment, as I agree with these conclusions that a turn in many markets is imminent.


Such a move could have started today, as stocks, currencies and precious metals all made new highs early in the day, and then reversed lower off these highs. We will see tomorrow if the sell-off today was the start of a reversal, or if it is a head fake, before the markets continue higher.


* The Yen – This morning Japanese officials were on the tape saying that they were not going to devalue the yen and engage in a currency war with other countries. Yet, they are trying all sorts of things to encourage the yen to cheapen. Let me ask you this, if the Japanese are trying to make the yen cheaper so their export engine does not suffer, what would you call it? I call it a currency/trade war. 


Nonetheless, the Yen rallied on this announcement, which the markets must have interpreted to mean that the Japanese government was going to let the Yen continue to increase in value. As I have elaborated in past blogs, I remain bullish on the Yen (versus the dollar), for fundamental reasons which I have elaborated on in past blogs. As I write this, the yen is at 82.38, which is at a 15 year high, and just a few percent of the Yen’s all time high around 80.