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Welcome to the world of High Frequency/Algorithmic trading. In this case, essentially every person that had a "stop loss" order was just hunted down by a wave
by joe-mccann 16y ago
Welcome to the world of High Frequency/Algorithmic trading.
In this case, essentially every person that had a "stop loss" order was just hunted down by a wave of HFT programs and all those stop loss orders were triggered, which send "market orders" which means, fill my order at the current market price.
When everyone does this at the same time, there are more sellers than buyers so prices drop dramatically. However, this presents an opportunity for HFT programs especially when they have similar strategies, meaning they all are doing the same thing, pushing the market in the same direction. Now, the HFT programs forced people to get stopped out, then they bid the market up and buy, which pushes it right back to the prior level.
Take a look at AAPL, RIMM, GOOG, SPY, etc. and you'll see it is all the same pattern.
- spif 16y agoVery interesting, so does that mean all those HFT programs managed to make/lose money or pretty much break even?
- alttab 16y agoI interviewed at a HFT once - and one of the things that stuck out to me was that one of the guys there said "its doesn't matter which direction the market moves, just that it moves." HFT computers identify "direct arbitrage," and make a profit off of someone else's loss.
- joe-mccann 16y agoThey make a ton of money on rebates: http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2009-47 http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2009-47
- alttab 16y agoI know people in the financial industry, and a HFT "blip" is not the cause of this.
- kyro 16y agoSo what is it then?
- jsm386 16y agoper mschwar99 below CNBC: Trading Error at Major Firm Blamed for Market Plunge: Sources (Story Developing)
- joe-mccann 16y agoHonestly, if you don't know that CNBC is to the financial markets as what the Hee Haw is to the news, then I can't help you. CNBC does NOT know what the cause of this was. The exchanges will come out with some "computer glitch" story or the "fat finger" excuse, but neither of those are true. FWIW, the fat finger excuse is, in a nutshell, some trader accidentally pressing the wrong button on the trading desk. The market was at a technical support level with various moving averages, timelines, etc. all coming into play. Many people had/have stop losses because the market was/is looking due for a correction. Algo/HFT pounced on this, collectively, and thus the massive drop. Trust me, if you are buying into what CNBC tells you, you are really missing the truth...
- krschultz 16y ago"A possible culprit for the drop was a trader error in which someone entered a "b" for billion instead of an "m" for million in a trade. Multiple sources confirmed the report to CNBC and CNBC.com" http://www.cnbc.com/id/36998463 http://www.cnbc.com/id/36998463 That sounds hard for me to believe, but thats one rumor. That wouldn't account for the 10% drop but it might have put initiated the drop and then caused other people (and computers) to panic and sell.
- InclinedPlane 16y ago
- mschwar99 16y agoCNBC now reporting on air that a human error by a trader at a major firm triggered the interday low. Breaking News of cnbc.com reads: Trading Error at Major Firm Blamed for Market Plunge: Sources (Story Developing)
- jfornear 16y agoThe rumor is that the Citi e-mini desk sold $16B of futures ($SPY) by mistake and meant to do $16M. (I don't buy it. CNBC is propaganda.)
- chasingsparks 16y agoI don't see how the order could even be placed. An emini contract has a 50x multiplier for SPY. That's about 50,000 per contract; that's a lot of contracts. I don't think such an order could be entered without error at Citi's desk and it would damn sure never pass checks at the exchange. Even if it was not flagged as odd, they would still be required to have on hand around 1.6 billion in collateral at very high leverage.
- eatmyshorts 16y agoOf course, a brokerage like Citi will run most of their trades larger than 1000 lots through their program trading, which splits the order into lots of smaller trades of 100-200. I agree that it sure sounds suspicious, but I seriously doubt the exchanges saw a single bid for 1.6b shares of the e-mini.
- wr1472 16y agoPlus what system makes you type in "billion" or "million" instead of "1000000000" or "1000000"? I call B$ on this.
- mixmax 16y agoI call B$ on M$
- 16y ago
- rjett 16y agoIs there anywhere we can see the amount of stop-loss orders that were executed over the course of the day (and maybe who filled them)?
- cookiecaper 16y agoSo, wouldn't this constitute a major transfer of wealth from individual investors with stop-loss orders to institutional investors like Goldman Sachs et al whose computers detected the dip and bought the stock back up?
- joe-mccann 16y agoFrom a lofty level, yes.
- jarek 16y agoJust another day on Wall Street.
- jaybol 16y agoI knew Gordon Gecko had something to do with this.
- nandemo 16y agoA similar incident happened in Tokyo Stock Exchange a few years ago. (...) on December 8, 2005 in which a Mizuho dealer mistakenly sold 610,000 shares in J-Com, a recruitment business, at 1 yen instead of selling 1 share at 610,000 yen. The dealer, understood to be a 24-year old woman, immediately realised the mistake but was unable to cancel the trade because of a technical glitch in the exchange's trading system. Mizuho was forced to buy back the shares, leaving it with a 40.7 billion yen loss, prompting the firm to cancel year-end bonuses for all staff in the trading unit. Note in Japan executed trades cannot be canceled (though in this case the trader was supposed to be able to cancel the orders before they were executed). Many brokers made a big profit. Some institutional investors too. One particular day trader became quite rich and to this day is a sort of legend on internet trading boards.
- nandemo 16y agoEr, I meant some "retail investors too".
- lzell 16y agoA little off topic, but say I want to experiment with algorithm trading, what kind of APIs are available for trading? I assume they are pretty expensive for access, correct?
- fnid2 16y agoNo need to pay for the API, just the trades you make with it -- which could get expensive. Interactive brokers has an API for their software. It's fairly easy to use. http://interactivebrokers.com/en/p.php?f=programInterface&ib_entity=llc http://interactivebrokers.com/en/p.php?f=programInterface... They say it right on the web page and I'll repeat it here: Try it with paper trading first! Bugs in these kinds of algorithms are costly.
- ewjordan 16y ago+1 for IB - that's what I've been using for the past year, and they're quite solid from what I've seen. It's not a very elegant API (or trading platform [Java based + clunky] or documentation [brief at best], for that matter!), but they've got Java, C++, and Excel APIs that work, a solid selection of products, reliable performance (data kept flowing to me just fine throughout the whole mess today), and fair commissions (unless you're doing massive trades, it's usually around 2 bucks, so you can profitably offer liquidity against some pretty tight spreads). As far as algorithmic trading that's accessible to the average Joe, IB is as good as I've found. I think you need 10k to open an account, and have to maintain at least 25k to day-trade equities (a legal requirement, not an IB thing - you'll probably need at least this much if you're algo trading). Just don't expect hand holding. You're supposed to be an experienced trader to even sign up with them (for a few products, like options, you have to pass a ridiculously easy test to trade them), and they won't save you from yourself - they'll happily let you buy 500k Euros with only $20k in your account, so be warned: if you'd made that mistake today, you'd be flat broke right now, though IIRC they do close out positions for you so at least you shouldn't end up too far in the red once your account is dunzo... ...which, to reiterate fnid2's point, it will be, unless you make sure to paper trade your damn code first! I'd also suggest that until you're really sure it's working, you never ever EVER leave it running unless you're watching it like a hawk. And code yourself a big bright red "PANIC" button that closes all your positions and shuts everything down, because you're going to end up in a situation some day where things go wonky and you just want to get out, but you'll have a dozen open positions and you don't want to have to click around to close them all. Also, it's always a good idea to put in "everything's gone to hell" stops and place orders that time-out, even if your strategy doesn't require them (algo strategies don't typically use actual stop orders for exits): you never know when your connection might die, and you really don't want to end up stuck with nasty positions that you don't even have any way to track or close out b/c your cable went out...the positions that you hold when doing algo stuff can on occasion end up frighteningly large, which is only acceptable if you're holding them for very short period of time.
- edge17 16y agoAAPL, RIMM, GOOG, etc have the same pattern because they're part of the composition of the major indices, so their typical behavior is to track the major indices. If something causes the index to spike or fall, large volumes of whatever the index is composed of will traded.