Il crash del 6 maggio 2010

[Fleursdumal]

Il "Flash Crash" del 6 maggio 2010

in US stanno indagando a fondo sulle cause del crollo del pomeriggio del 6 maggio
la cosa buffa è che ancora non si è capito bene la causa ultima

CSI: Chicago

Posted by Izabella Kaminska on May 14 10:22.

The Chicago Mercantile Exchange has published its account of what happened on May 6, and considering that trade in the exchange’s e-mini S&P 500 future is now thought to have potentially triggered the sell-off, it makes for interesting reading.
And yes, it does read a bit like the script to a CSI episode — busting trades and all that.
This, for example, is how the CME presents “the incident”.

The Incident - Let us focus on the period from 13:30 to 14:00 (CT) during which time the incident in question occurred. CME stock index futures were declining after 13:30 (CT) followed by spot equity markets including Proctor & Gamble (PG), 3M (MMM) and Accenture (ACN). June 2010 E-mini S&P 500 futures traded at its low of 1,056,00 by 13:45:28 (CT) and then started to climb. But PG, MMM and ACN continued to slide even after futures hit their low and began to reverse upwards.
They were put into a reserve mode by the New York Stock Exchange (NYSE) per its Rule 1000(a), Liquidity Replenishment Points, at 13:45:52, 13:50:36, 13:46:10, (CT) respectively.
Still, these stocks continued to decline as orders were re-routed to possibly less liquid security trading venues which may not have been entirely coordinated with NYSE Rule 1000(a). As depicted in Exhibit 1 of our Appendix, PG printed a low of $39.37 at 13:47:15 (CT); MMM printed a low of $67.98 at 13:45:47 (CT) while ACN printed a low of $0.01 at 13:47:54 (CT).
Note that those penny prints in ACN were being examined and busted by the trading venues in which they were executed. Nasdaq had announced that it would bust all trades that were more than 60% off the market.
Thus, CME E-mini S&P 500 futures were rallying upwards while PG, MMM and ACN continued to decline as indicated in the charts below. One might attribute this apparent temporary de-linkage between spot and futures markets to divergent institutional market structures amongst the venues at which the spot stocks are traded.
​

Here’s the forensic analysis to support it:

The primary purpose of the futures market, according to the CME, is to provide an efficient mechanism for price discovery. Hence “futures lead the cash index returns, by responding more rapidly to economic events than stock prices”.
The CME says this is why the E-mini S&P 500 future led the sell-off and also why the contract experienced a more orderly recovery – something which was not the case for the cash SPDR ETF. Note this chart below:

Which means the clue to what went wrong might lie in the liquidity:

As CME notes:

Liquidity is the key ingredient that lends efficacy to the price discovery function of futures markets. Let’s look at some indicators that may help us compare relative liquidity in E-mini S&P 500 futures and SPDRs.
(for example)
Trading volume of E-mini S&P 500 futures was approximately 300% to 400% greater than SPDRs on a notional basis from 13:30 to 14:00 (CT). At the peak of the incident near 13:45-13:50 (CT), futures volume was near 800% that of SPDRs. (Note that SPDRs are 1/500th the size of one E-mini S&P 500 futures contract so we have “normalized” SPDRs volume by dividing by 500 be comparable to E-mini futures.)
​

It’s harder to compare order book depth, according to the CME, but there are indicators that suggest the futures book was much deeper and resilient than the SPDR book.
Which means, if anything, futures moderated the abnormalities on the day. According to the exchange research, the Chicago market stepped in to offer a functioning alternative when cash markets had gone bananas.
It’s telling they say, for example, that futures trades were not “busted” in the same way as cash market ones were in the days following:

Busted Trades? – While the cash markets were still sorting out all the trades, and many trades remained unsettled as of May 10th, all futures transactions during this period had been settled and cleared. There were no instances of busted or even disputed trades in the context of stock index futures offered on CME Group exchanges throughout the period in question.
Were the futures market to have been unavailable during this period, it is unclear whether the spot or cash markets would have been able to shoulder the additional burden of risk transference demanded by market participants. As such, the incident might have had far greater implications.
​

As for the contentious issue of the role played by high frequency trading, the opinion of the CME is that algorithmic trading, if anything, helped to save the day.
As the group’s researchers found:

Certain HFTs were active in both spot and futures markets during this period as an ordinary course of business. However, there is no visible support of the notion that algorithmic trading models deployed in the context of stock index futures traded on CME Group exchanges caused the market fluctuations in question.
Rather, we believe that automated trading contributes to market efficiencies, generally bolsters liquidity and thereby contributes to the price discovery function served by futures markets. This view is supported in the academic literature where one study found that “the move to screen trading strengthens the simultaneity of price discovery in the cash and futures markets and lessens the existence of a lead-lag relationship.”4 Another study concluded that their “results are consistent with the hypothesis that screen trading accelerates the price discovery process.”5
—-
Rather, we suggest that HFTs may have had the effect of providing a buoyant function in the market.
​

Conclusion? HFT and futures innocent.


FT Alphaville CSI: Chicago

 

[gipa69]

in US stanno indagando a fondo sulle cause del crollo del pomeriggio del 6 maggio
la cosa buffa è che ancora non si è capito bene la causa ultima

CSI: Chicago

Posted by Izabella Kaminska on May 14 10:22.

The Chicago Mercantile Exchange has published its account of what happened on May 6, and considering that trade in the exchange’s e-mini S&P 500 future is now thought to have potentially triggered the sell-off, it makes for interesting reading.
And yes, it does read a bit like the script to a CSI episode — busting trades and all that.
This, for example, is how the CME presents “the incident”.

The Incident - Let us focus on the period from 13:30 to 14:00 (CT) during which time the incident in question occurred. CME stock index futures were declining after 13:30 (CT) followed by spot equity markets including Proctor & Gamble (PG), 3M (MMM) and Accenture (ACN). June 2010 E-mini S&P 500 futures traded at its low of 1,056,00 by 13:45:28 (CT) and then started to climb. But PG, MMM and ACN continued to slide even after futures hit their low and began to reverse upwards.
They were put into a reserve mode by the New York Stock Exchange (NYSE) per its Rule 1000(a), Liquidity Replenishment Points, at 13:45:52, 13:50:36, 13:46:10, (CT) respectively.
Still, these stocks continued to decline as orders were re-routed to possibly less liquid security trading venues which may not have been entirely coordinated with NYSE Rule 1000(a). As depicted in Exhibit 1 of our Appendix, PG printed a low of $39.37 at 13:47:15 (CT); MMM printed a low of $67.98 at 13:45:47 (CT) while ACN printed a low of $0.01 at 13:47:54 (CT).
Note that those penny prints in ACN were being examined and busted by the trading venues in which they were executed. Nasdaq had announced that it would bust all trades that were more than 60% off the market.
Thus, CME E-mini S&P 500 futures were rallying upwards while PG, MMM and ACN continued to decline as indicated in the charts below. One might attribute this apparent temporary de-linkage between spot and futures markets to divergent institutional market structures amongst the venues at which the spot stocks are traded.
​

Here’s the forensic analysis to support it:

The primary purpose of the futures market, according to the CME, is to provide an efficient mechanism for price discovery. Hence “futures lead the cash index returns, by responding more rapidly to economic events than stock prices”.
The CME says this is why the E-mini S&P 500 future led the sell-off and also why the contract experienced a more orderly recovery – something which was not the case for the cash SPDR ETF. Note this chart below:

Which means the clue to what went wrong might lie in the liquidity:

As CME notes:

Liquidity is the key ingredient that lends efficacy to the price discovery function of futures markets. Let’s look at some indicators that may help us compare relative liquidity in E-mini S&P 500 futures and SPDRs.
(for example)
Trading volume of E-mini S&P 500 futures was approximately 300% to 400% greater than SPDRs on a notional basis from 13:30 to 14:00 (CT). At the peak of the incident near 13:45-13:50 (CT), futures volume was near 800% that of SPDRs. (Note that SPDRs are 1/500th the size of one E-mini S&P 500 futures contract so we have “normalized” SPDRs volume by dividing by 500 be comparable to E-mini futures.)
​

It’s harder to compare order book depth, according to the CME, but there are indicators that suggest the futures book was much deeper and resilient than the SPDR book.
Which means, if anything, futures moderated the abnormalities on the day. According to the exchange research, the Chicago market stepped in to offer a functioning alternative when cash markets had gone bananas.
It’s telling they say, for example, that futures trades were not “busted” in the same way as cash market ones were in the days following:

Busted Trades? – While the cash markets were still sorting out all the trades, and many trades remained unsettled as of May 10th, all futures transactions during this period had been settled and cleared. There were no instances of busted or even disputed trades in the context of stock index futures offered on CME Group exchanges throughout the period in question.
Were the futures market to have been unavailable during this period, it is unclear whether the spot or cash markets would have been able to shoulder the additional burden of risk transference demanded by market participants. As such, the incident might have had far greater implications.
​

As for the contentious issue of the role played by high frequency trading, the opinion of the CME is that algorithmic trading, if anything, helped to save the day.
As the group’s researchers found:

Certain HFTs were active in both spot and futures markets during this period as an ordinary course of business. However, there is no visible support of the notion that algorithmic trading models deployed in the context of stock index futures traded on CME Group exchanges caused the market fluctuations in question.
Rather, we believe that automated trading contributes to market efficiencies, generally bolsters liquidity and thereby contributes to the price discovery function served by futures markets. This view is supported in the academic literature where one study found that “the move to screen trading strengthens the simultaneity of price discovery in the cash and futures markets and lessens the existence of a lead-lag relationship.”4 Another study concluded that their “results are consistent with the hypothesis that screen trading accelerates the price discovery process.”5
—-
Rather, we suggest that HFTs may have had the effect of providing a buoyant function in the market.
​

Conclusion? HFT and futures innocent.


FT Alphaville CSI: Chicago

Beh gli HFT non sono la causa ma sicuramente la loro assenza nel momento topico ha contribuito a prosciugare la liquidità su diversi titoli e mercati.

 

[Fleursdumal]

la roiter se ne esce oggipomeriggio nominando un money manager che avrebbe venduto 75000 e-mini s&p500 nei 20 minuti fatali





Reuters names e-mini ‘flash crash’ seller

Posted by Izabella Kaminska on May 14 17:11. A big exclusive for Reuters, which on Friday afternoon revealed the identity of the mystery trader CFTC chairman Gary Gensler said placed a disproportionately large sell order in CME e-mini S&P futures around the time of Thursday’s ‘flash crash’.
And it was not a high frequency trader or a hedge fund, but a money manager called Waddell & Reed Financial.
From Reuters:

Waddell sold on May 6 a large order of e-mini contracts during a 20-minute span in which U.S. equity markets plunged, briefly wiping out nearly $1 trillion in market capital, the internal document from CME Group Inc said. Regulators and exchange officials quickly focused on Waddell’s sale of 75,000 e-mini contracts, which the document said “superficially appeared to be anomalous activity.”
​

And they emphasise that:

Gensler said there was no suggestion that the trader, who he did not identify, did anything wrong in only entering orders to sell. Gensler said data shows that the trades appeared to be a bona fide hedging strategy.
​

Reuters sources the exclusive to an internal CME document which also named Goldman Sachs, Interactive Brokers, JPMorgan Chase and Citadel Group as active traders in the e-minis contract on the day. The document also named high frequency trader Jump Trading.
The 20-minute plunge in US equity markets on Thursday May 6 wiped out nearly $1,000 bn in market capital.
A joint SEC-CFTC inquiry has been launched to investigate the factors that led to the sell-off.


FT Alphaville Reuters names e-mini ‘flash crash’ seller

 

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Waddell & Reed Issues Statement - Yahoo! Finance

 

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Nasdaq: Here's Our Timeline of the Flash Crash - MarketBeat - WSJ

 

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NYSE plans to use "flash crash" to reclaim its glory - May. 12, 2010

 

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Flash Crash Four Days Later: Few Answers, Many Suspects - Deal Journal - WSJ

 

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Video - Nassim Taleb on the 'flash-crash' and why the Financial Crisis wasn't a Black Swan | Finance Focus | News & Blogs | MoneyScience

 

[gipa69]

What happened last Thursday?
As we wrote last summer in “Long story short: ship hit an iceberg and sank,” accidents never happen in isolation. Details are still developing but here’s our best information about what triggered the “flash-crash.”

• Stocks were slightly overvalued after hitting 19 month highs at the end of April
• After rising Monday, stocks settled back Tuesday, Wednesday and Thursday morning as resolution of the Greek debt crisis appeared uncertain and three Athenians were killed in domestic riots
• Investor confidence was further disturbed by a “hung” British electoral result and the continued inability of engineers to cap BP’s damaged oil platform in the Gulf of Mexico.
• Around 2:30PM selling surged in mini-S&P 500 futures (contracts traded on the Chicago Mercantile Exchange.) Later that day it was rumored that a clerk had entered a sell order of $16 billion rather than $16 million, but that rumor has not been confirmed.
• Trading programs, which arbitrage between stock futures and the constituent stocks kicked in, buying the future while simultaneously selling the stocks
• The surge in stock sell volume overwhelmed market making on the floor of the NYSE, causing “circuit breakers” to kick in, halting trading in numerous stocks for 90 seconds. Those orders then shifted to alternate exchanges.
• However, the circuit breakers don’t apply to trading on the Electronic Crossing Networks (ECN’s) or NASDAQ, where the sell orders from the NYSE found no natural buyers. Trades executed at 30%, 40%, 60%, 99% off previous levels.
• Exchange Traded Funds (ETF’s,) which price continuously off quotes from the National Market System (consolidated price feed from all exchanges,) plunged in value. Additional trade programs, which arbitrage between ETF’s and common, sold more stocks.
• The sudden price decline triggered numerous stop loss limit orders, which suddenly became market sell orders. An investor might stipulate a stop loss at $40, but when the stop is triggered, the order is filled at the prevailing market price, which could be substantially less, breaching even more stops.
• Shares of Procter & Gamble, which traded in a range of $62.50-$64 over the last month, fell to $39.37 in the blink of an eye. Shares of Accenture, a consultancy, which ranged from $40-$44 over the last month, fell to a penny!
• Between $700 billion and $1 trillion in market capitalization disappeared for about 30 minutes.

By Friday morning the respective heads of NASDAQ and NYSE were on CNBC blaming each other. Friday afternoon, NASDAQ canceled trades in 296 stocks and Exchange Traded Funds whose price was more than 60% off the 2:40PM quote. Interestingly, most of the canceled trades were ETF’s, which benefits hedge funds and high frequency traders. Meanwhile, if you’re an individual investor who had the misfortune to get stopped out 59% off the 2:40PM price, you are out of luck.
Where are the “grown-ups?”
We’ve written many times over the last two years that “grown-ups” no longer appear to be in charge of the financial system. We’re talking about people, whether government regulators or industry representatives, who have the wisdom to recognize that markets are not perfectly efficient, that leverage kills and that a little friction in the system is a good thing. The SEC in particular has to get its act together on.

• Establishing an uptick rule applied all markets including the NYSE, NASDAQ and the ECN’s. The rule could be as simple as “all short sales must be done 1 penny above the previous conventional sale.”
• Enforcing the SEC’s own rules on naked short selling. In principal, you can’t short stock without borrowing it first. In practice, this rule is widely ignored by high frequency traders who know their stocks positions will be flat by the end of the day. We saw last week and also during last year’s financial crisis that concentrated selling can take out support, allowing the short seller to buy back the position later in the day (hour, minute) at a substantial profit. If the seller first had to prove that he had borrowed the stock, the resulting friction would dilute the effectiveness of this tactic.
• Assessing responsibility for last week’s meltdown and handing out substantial fines in the $10 million range. Exchanges, banks, brokers, algorithmic traders need to understand that pain accrues to those firms who destroy confidence in the markets.
• Taking a hard look at whether the proliferation of ETF’s and High Frequency Trading firms is actually damaging long term confidence in the markets (we would argue, “Yes!”)
• Review whether the current NYSE circuit breaker limits are too wide (currently trading halts apply to 10%/20%/30% move in the Dow Jones Industrials.) On only one occasion in the last 100 years has the Dow fallen more than 20% - October 19th, 1987. On Black Monday, October 28th, 1929, the Dow declined only 13.4%. We’d be a lot happier with a 5%/10%/15% rule applied to a broader index like the S&P 500 or the Russell 3000 AND require alternate exchanges and ECN’s to also halt trading.

After every crisis Wall Street firms sponsor academic studies to “prove” that their particular strategy doesn’t destabilize the markets. These studies are always hopelessly naïve. Plenty of studies “prove” that the uptick rule is not needed. But if reinstating the uptick rule didn’t deprive certain firms of excess profits, then why would they lobby so hard against it?

 

[Fleursdumal]

focus sul ruolo degli ETF

Who exactly are authorised participants, anyway?

Posted by Izabella Kaminska on May 18 19:05. Paul Justice, an ETF strategist with Morningstar, pondered the causes of the May 6 ‘flash crash‘ in a recent article for the investment research firm.
His analysis paid particular attention to the role of exchange-traded funds in the sell-off, largely because ETFs made up over 70 per cent of the securities with cancelled trades on the day.
But Justice did not conclude that these funds were responsible for the trading abnormalities. Instead, Justice hinted that the reason why ETFs were disproportionately affected had more to do with the market makers and authorised participants (APs) charged with providing liquidity to the funds — as part of the ETF tracking mechanism — than the funds themselves.
As he noted (emphasis FT Alphaville’s):

ETFs are no longer the product of a cottage industry that can accept such inefficiencies, even if the majority of their investors were not directly impacted and the blame lies with a third party. This is a trillion dollar industry whose promising future is predicated on the influence it can impart on its market participants in an immediate and definitive fashion.
Much can be learned from the situation, wrongs can be made right, and the industry can emerge stronger than before. We expect the product providers to take a leadership stance in promoting a more efficient marketplace, and we believe they should start with the Authorized Participants and market makers that so often make a profit providing liquidity during periods of normalcy.
If those parties are going to be paralyzed in the face of adversity, then the product suppliers will have to qualify every statement they make regarding the liquidity and price efficiency of ETFs.
​

Which, in other words, means the ‘flash crash’ may have shown ETFs to be particularly vulnerable in the event large sell-offs and liquidity lapses precisely because of their structure’s dependence on market makers and authorised participants.
No definitive research into the biggest names operating in this area, however, has ever really been conducted (at least, we haven’t come across any – do let us know in the comments if we’ve missed some essential reading).
And considering that ETFs are supposed to uber ‘transparent’ products already, it’s actually pretty hard to get hold of authorized participant names associated with individual products — you usually have to make direct requests to ETF providers on a case by case basis. Prospectuses, more often than not, do not identify APs from the onset.
Sporadic reports, however, suggest it’s actually only a handful of institutional names that are linked to the AP role in the US, and about 40-50 more obscure electronic trading firms that fulfil the market making function — as and when they please, we might add.
Electronic high frequency ‘market makers’ are drawn to trading ETFs because of the potential to make frequent small profits from index arbitrage.
An interview conducted by ActiveETFs with Paul Weisbruch, the VP of ETF/Index Sales and Trading at Street One Financial — a so-called ETF liquidity provider — presents some interesting insights.
For example (our emphasis):

You mentioned the term “authorized participant”.Is there a difference between a “market maker” and an “authorized participant”?
Paul: Yes, there’s a fine distinction between the two. Some authorized participants may not be market makers in a given ETF. And some market makers may not be authorized participants (APs), that’s one caveat. However, there are some firms that act as both market marker and authorized participant.
Really, it varies from firm to firm and ETF to ETF. Both participants though are essential to the liquidity and the open-endedness of ETFs and the mechanics that make them trade efficiently.
Authorized participants are the ones who can actually trade the underlying basket versus the ETF itself and then they would convert those to new shares and vice versa would redeem them if someone was coming to them with a sale.
So they actually have permission and have gone through a filing and paperwork with the ETF company themselves, whether it be iShares, ProShares, First Trust, what have you, to have permission to be an AP.
So there’s a handful of APs out there and mostly they are the large banks – the usual suspects like the Merrill Lynchs, the Morgan Stanleys, Fortis Bank, Goldman Sachs, firms like that tend to be the APs.
Market makers, however, there’s a large number of market makers that are not APs. I would venture to say 40 if not 50 firms, that you probably haven’t heard of because they are basically electronic, prop-type trading market makers.
They’re very active in the underlying liquidity of ETFs, they are making two sided markets, bid-ask, and sometimes they’re just waiting for someone to come to them with an order and they’ll price it for you. Again, they have little interest in the whole creation/redemption process because they’re just trading, looking for small inefficiencies, trying to trade the underlying versus the actual ETF shares that are out there in the market.
​

And the following:

The ETFs still though have a bid/ask spread. So what does the size of that bid/ask spread depend on for an ETF? When would it widen?
Paul: It generally widens when there’s a lack of market makers watching the product and you’ll see this on newer ETFs. ETFs do require a certain amount of seasoning for the market maker community. Not every market maker will jump into a product and make markets actively on day one. So therefore you might see a 10 cents wide spread in a newer ETF because maybe there’s only a handful of market makers in it while in SPY and IWM, there may be hundreds of participants actively involved in it and watching it all day long.

But make no mistake, just because it has a wide spread does not mean it can’t be traded effectively. That bid-ask spread should be around the real NAV or IV of the fund at any given point of the day and that’s what’s important to understand. The bid-ask is not necessarily what you’ll pay or what you’ll sell for if you have an order. It’s kind of a framework around the actual IV(indicative value), so if you trade intelligently, use limits, have some idea what the NAV or IV is, you should generally do better than the actual bid-ask.
​

Understanding that ‘behind the scenes’ process helps to explain why ETF share prices went so uniquely haywire when liquidity lapsed and so-called ‘predatory market makers‘ disappeared from the market.
From now on, one might presume ETF providers would consequently be under pressure to stress-test their products against such potential liquidity lapses, and to disclose the findings to investors.
As Justice put it in his note, every statement pertaining to liquidity and price efficiency really needs to be qualified to investors.
More complete and active disclosures about funds’ authorised participants might also be of interest.


FT Alphaville Who exactly are authorised participants, anyway?