4 ms·

Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?

46 points by grellas 16y ago

joubert 16y ago
What do people think of the Black Swan theory?
- retube 16y ago
  I think it's a good concept. Taleb has built a career off of this one idea, and although I find him generally conceited and quite smug, he is definitely on to something with this. Just look at recent events: BP oil spill, the meteoric rise of twitter from nowhere, Iceland volcano etc. The trouble is, of course, that you never know when/where the spike event will occur. He made a lot of money by holding far out-of-the-money options. You bleed a small amount of cash in time-decay, but when the event happens, you make a lot back. You could do a lot worse than putting 5 - 10% of your portfolio into such a strategy. Edit: I believe taleb lost money several years running doing this. He made it all back and more when the market crashed in 87.
lrm242 16y ago
Finally, a decent, well research piece of what might of happened.
borism 16y ago
QOTD: '"Black Swan"-linked fund may have contributed to "Black Swan" moment' talk about self-fulfilling prophecy...
ivenkys 16y ago
Another theory of why the Yo-Yo effect happened on the Stock Market , the reality though is no-one really seems to know. These are all conjectures, there is no proof.
rfreytag 16y ago
"Instead, the picture is one of a highly rare confluence of events, some linked, some unrelated, that exposed weaknesses in the stock market large and small." Please can we stop calling these "highly rare"? When market crises happen every few years - they aren't rare. Here is a list off the top of my head: - Nixon Wage and Price Controls of 1971 (coupled to floating the dollar see: http://en.wikipedia.org/wiki/Price_freeze http://en.wikipedia.org/wiki/Price_freeze) - Oil Crisis of 1973 (http://en.wikipedia.org/wiki/1973_oil_crisis http://en.wikipedia.org/wiki/1973_oil_crisis) - Third World Default (hit major US banking hard in the mid 70's. I remember Walter Wriston then head of Citibank [then First National City Bank], lobbying a great deal in the press on this subject at the time, see: ). - The Sterling Crisis of 1976 (http://en.wikipedia.org/wiki/Pound_sterling#The_1976_sterling_crisis http://en.wikipedia.org/wiki/Pound_sterling#The_1976_sterlin...) - Stagflation Crisis last 70's(http://en.wikipedia.org/wiki/Stagflation http://en.wikipedia.org/wiki/Stagflation) - Farm Debt Crisis of late 70's (tied to Carter Grain Embargo in 1980: http://www.socialistaction.org/news/199910/farmcrisis.html http://www.socialistaction.org/news/199910/farmcrisis.html) - Reagan/Volker Recession of 1981-1982 (http://www.economist.com/blogs/freeexchange/2010/03/volcker_recession http://www.economist.com/blogs/freeexchange/2010/03/volcker_...) - Latin American Debt Crisis of 1982: (triggered by too much lending by major 1st-world banks to 3rd-world nations see: http://en.wikipedia.org/wiki/Latin_American_debt_crisis http://en.wikipedia.org/wiki/Latin_American_debt_crisis) - Japanese Asset Price Bubble of 1986-1991 (mostly property producing the lost generation: http://en.wikipedia.org/wiki/Japanese_asset_price_bubble http://en.wikipedia.org/wiki/Japanese_asset_price_bubble) - Black Monday in 1987 (http://en.wikipedia.org/wiki/Black_Monday_(1987) http://en.wikipedia.org/wiki/Black_Monday_(1987)) - US Savings and Loan Crisis of late 80's (http://en.wikipedia.org/wiki/Savings_and_Loan_Crisis http://en.wikipedia.org/wiki/Savings_and_Loan_Crisis) - Black Wednesday (Sterling leaving the ERM with Soro's help in 1992, see http://en.wikipedia.org/wiki/Pound_sterling#Following_the_European_Currency_Unit http://en.wikipedia.org/wiki/Pound_sterling#Following_the_Eu...) - Swedish Banking Crisis and Run on Swedish Currency of 1992(http://en.wikipedia.org/wiki/Economy_of_Sweden#Crisis_of_the_1990s http://en.wikipedia.org/wiki/Economy_of_Sweden#Crisis_of_the...) - Mexican Peso Collapse of 1994 (http://en.wikipedia.org/wiki/1994_economic_crisis_in_Mexico http://en.wikipedia.org/wiki/1994_economic_crisis_in_Mexico) - Euro collapse (late 90's) - Asian Financial Crisis of 1997(http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisis http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisis) - Russian Financial Crisis of 1998 (http://en.wikipedia.org/wiki/1998_Russian_financial_crisis http://en.wikipedia.org/wiki/1998_Russian_financial_crisis) - LTCM in 1998 (http://en.wikipedia.org/wiki/Long-Term_Capital_Management http://en.wikipedia.org/wiki/Long-Term_Capital_Management) - Peregrine Fund Collapse in 1998 (http://en.wikipedia.org/wiki/Peregrine_Investments_Holdings) http://en.wikipedia.org/wiki/Peregrine_Investments_Holdings)) - Argentine Economic Crisis of 1999-2002(there are so many Wikipedia finds it necessary to put a date on this one see: http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999%E2%80%932002) http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999...) - Dot Com Crash starting in 2001 (http://en.wikipedia.org/wiki/Dot_com_crash http://en.wikipedia.org/wiki/Dot_com_crash) - South Korean Crash of mid-2000's (reading the Buffett bio _Snowball_ he enjoys learning about and finding good buys in the Korean market, see: http://en.wikipedia.org/wiki/The_Snowball http://en.wikipedia.org/wiki/The_Snowball I cannot find a more specific reference to the South Korean Crash at this time) - Argentina devaluation of 2002 (http://www.wsws.org/articles/2002/jan2002/arg-j08.shtml http://www.wsws.org/articles/2002/jan2002/arg-j08.shtml) - US Real Estate Collapse of 2006 (http://en.wikipedia.org/wiki/United_States_housing_bubble http://en.wikipedia.org/wiki/United_States_housing_bubble) - Flash-Crash in 2010 (tied to potential Greek Debt Default and possibly some financial hacking: see: http://theweek.com/article/index/202769/The_Dow_Jones_flash_crash_5_theories http://theweek.com/article/index/202769/The_Dow_Jones_flash_... and http://online.wsj.com/article/SB10001424052748704879704575236771699461084.html?mod=WSJ_hps_LEFTWhatsNews http://online.wsj.com/article/SB1000142405274870487970457523...) Order is likely off and I am missing a few. I am finding a lot more but welcome your suggestions and reorderings (email me, see profile, of you don't want to post). This Flash-Crash sounds just like a 0 day exploit to me. The solutions and vulerability just like trying to keep an OS stable while running untrusted code. As long as it is more profitable to destabilize our economic "OS" rather than support it we'll see even more such snatch-and-grabs. One solution: put all profits in interest-earning escrow for a week or so. That will slow down the rate of an attack allowing it to be identified and for an exploit to be closed. P.S. Black Tuesday and Black Thursday commonly refer to events leading to the Wall Street Crash of 1929 (http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929 http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929). And Black Friday is the biggest shopping day of the year i the U.S. falling after Thanksgiving Day on Thursday and the Weekend - so another important financial day.
johnnyg 16y ago
When I first heard of this I thought "well, bugs in software are like asymptotes, you can always close the distance by half but never get there". I read that a few of the gray haired market geniuses were blasting the exchanges for failure to correct "basic electronic errors" and had to chuckle. No one can understand even the basic functions of everything! Now its been days and no specific mechanical/process culprit has been identified. As trades are interconnected, it seems impossible to cover something like this up. Everyone wants to point a finger and be done. Perhaps the answer isn't a "Black Swan" but that confidence is really that low and things are really looking that bad. Buy Gold?
lutorm 16y ago
I don't know much about trading but would there really be any real harm in artifically slowing down trade, like only executing trades once per day? These events all seem like mass psychosis to me, it's not like anyone can objectively evaluate the condition of the economy in the two minutes that is "a lifetime of trading". I thought for a market economy to work well, the actors need to rationally evaluate the consequences of their actions given all possible information. That's going to take some time for everyone, if trades happen faster then it's just basal instincts like fear that will govern the action. The market is supposed to reflect the state of the economy, but somehow it's all backwards and more like the economy reflects the state of the market.
- chasingsparks 16y ago
  People experiment with things like that often. Search JStor for market structure or market mircostructure (especially O'Hare). Even in conventional markets there are periods of auctioning and alternative pricing structures. I studied it a while back, but the gist is that single day trading does not nullify panic or mania. At best, it is identical to continuous trading but it is most likely worse. Continuous trading works very well. The problem that is increasingly causing damage is the strong interdependence. Isolated manias and panics may actually be a good thing; when it represents a global tide however...
- yummyfajitas 16y ago
  Slowing down trading seemed to exacerbate this situation. NYSE slowed trading, held onto buys while routing sells to other exchanges in an effort to boost prices. The net result is that prices tanked at other exchanges, while NYSE was frozen. I'm not strictly opposed to trading halts/slowdowns under circumstances like last thursday, but they are a very tricky thing to do properly.
brown9-2 16y ago
I have an issue with the description of such a fast and swift decline in stock prices as pointing out "that there is a structural flaw" or that this was something that was devestating. The article closes with: Around 3 p.m., the selling pressure abated. Just as swiftly as the market fell, it recovered ground. One factor behind the swift recovery, traders say, were funds that use computers and formulas to sniff out bargains in the market. These funds swooped in on hundreds of cheap stocks, helping push the market higher. So at the end of the day, the market (investors, algorithms, traders, etc.) saw bargains in under-priced assets and took advantage, making prices rise back to something near the original level (but a few percentage points off). In the end, the market still worked.
- deleted 16y ago
  [deleted]
- deleted 16y ago
  [deleted]
- steveplace 16y ago
  Sort of. If you were cognizant enough to "sniff out bargains," and you placed an order to buy, odds are you didn't get filled. In fact, I call BS on anyone that said they "bought on the dip" because it happened so quickly even if you put a market order in on your Etrade platform (nearly all retail brokerages locked up BTW) you wouldn't get the price you wanted. The structural flaw existed on both sides of the market. Everyone's focusing on the lack of bids on the way down, but there were lack of offers on the way up as well. I would've expected more volume on a capitulative move like that.
  - brown9-2 16y ago
    Well I think if the rise was too fast too take advantage of, the opposite must be true of the way down, no? I remain very doubtful that very many people were hurt by this action in the market.
    - yummyfajitas 16y ago
URSpider94 16y ago
I'm disappointed that the exchanges have decided to nullify the trades conducted during this period. If hedge funds and quants are going to put semi-autonomous trading programs into the market, they need to have accountability for their actions. Eliminating the consequences for this kind of out-of-control trading creates moral hazard, in the same way as bailing out housing speculators who now can't pay their mortgage. If we declare a re-do every time the computer trading systems create an automated melt-down, then there's no real incentive to put buffers in place to prevent recurrence.
- yummyfajitas 16y ago
  People engaging in program trading generally want the exchange not to nullify trades. Trade nullification is unpredictable, and program traders want the markets to obey a set of predictable rules. The main beneficiaries of the broken trades are retail investors who placed stop loss orders. Many high frequency firms are actually hurt by this, namely the ones who bought at the bottom and sold near the top. Their buys were broken, but their sells were not.
VBprogrammer 16y ago
This feels a little like trying to figure out which butterfly caused the hurricane.

46 points by grellas 16y ago

joubert 16y ago

What do people think of the Black Swan theory?

retube 16y ago
I think it's a good concept. Taleb has built a career off of this one idea, and although I find him generally conceited and quite smug, he is definitely on to something with this. Just look at recent events: BP oil spill, the meteoric rise of twitter from nowhere, Iceland volcano etc. The trouble is, of course, that you never know when/where the spike event will occur. He made a lot of money by holding far out-of-the-money options. You bleed a small amount of cash in time-decay, but when the event happens, you make a lot back. You could do a lot worse than putting 5 - 10% of your portfolio into such a strategy. Edit: I believe taleb lost money several years running doing this. He made it all back and more when the market crashed in 87.

lrm242 16y ago

Finally, a decent, well research piece of what might of happened.

borism 16y ago

QOTD: '"Black Swan"-linked fund may have contributed to "Black Swan" moment' talk about self-fulfilling prophecy...

ivenkys 16y ago

Another theory of why the Yo-Yo effect happened on the Stock Market , the reality though is no-one really seems to know. These are all conjectures, there is no proof.

rfreytag 16y ago

"Instead, the picture is one of a highly rare confluence of events, some linked, some unrelated, that exposed weaknesses in the stock market large and small." Please can we stop calling these "highly rare"? When market crises happen every few years - they aren't rare. Here is a list off the top of my head: - Nixon Wage and Price Controls of 1971 (coupled to floating the dollar see: http://en.wikipedia.org/wiki/Price_freeze http://en.wikipedia.org/wiki/Price_freeze) - Oil Crisis of 1973 (http://en.wikipedia.org/wiki/1973_oil_crisis http://en.wikipedia.org/wiki/1973_oil_crisis) - Third World Default (hit major US banking hard in the mid 70's. I remember Walter Wriston then head of Citibank [then First National City Bank], lobbying a great deal in the press on this subject at the time, see: ). - The Sterling Crisis of 1976 (http://en.wikipedia.org/wiki/Pound_sterling#The_1976_sterling_crisis http://en.wikipedia.org/wiki/Pound_sterling#The_1976_sterlin...) - Stagflation Crisis last 70's(http://en.wikipedia.org/wiki/Stagflation http://en.wikipedia.org/wiki/Stagflation) - Farm Debt Crisis of late 70's (tied to Carter Grain Embargo in 1980: http://www.socialistaction.org/news/199910/farmcrisis.html http://www.socialistaction.org/news/199910/farmcrisis.html) - Reagan/Volker Recession of 1981-1982 (http://www.economist.com/blogs/freeexchange/2010/03/volcker_recession http://www.economist.com/blogs/freeexchange/2010/03/volcker_...) - Latin American Debt Crisis of 1982: (triggered by too much lending by major 1st-world banks to 3rd-world nations see: http://en.wikipedia.org/wiki/Latin_American_debt_crisis http://en.wikipedia.org/wiki/Latin_American_debt_crisis) - Japanese Asset Price Bubble of 1986-1991 (mostly property producing the lost generation: http://en.wikipedia.org/wiki/Japanese_asset_price_bubble http://en.wikipedia.org/wiki/Japanese_asset_price_bubble) - Black Monday in 1987 (http://en.wikipedia.org/wiki/Black_Monday_(1987) http://en.wikipedia.org/wiki/Black_Monday_(1987)) - US Savings and Loan Crisis of late 80's (http://en.wikipedia.org/wiki/Savings_and_Loan_Crisis http://en.wikipedia.org/wiki/Savings_and_Loan_Crisis) - Black Wednesday (Sterling leaving the ERM with Soro's help in 1992, see http://en.wikipedia.org/wiki/Pound_sterling#Following_the_European_Currency_Unit http://en.wikipedia.org/wiki/Pound_sterling#Following_the_Eu...) - Swedish Banking Crisis and Run on Swedish Currency of 1992(http://en.wikipedia.org/wiki/Economy_of_Sweden#Crisis_of_the_1990s http://en.wikipedia.org/wiki/Economy_of_Sweden#Crisis_of_the...) - Mexican Peso Collapse of 1994 (http://en.wikipedia.org/wiki/1994_economic_crisis_in_Mexico http://en.wikipedia.org/wiki/1994_economic_crisis_in_Mexico) - Euro collapse (late 90's) - Asian Financial Crisis of 1997(http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisis http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisis) - Russian Financial Crisis of 1998 (http://en.wikipedia.org/wiki/1998_Russian_financial_crisis http://en.wikipedia.org/wiki/1998_Russian_financial_crisis) - LTCM in 1998 (http://en.wikipedia.org/wiki/Long-Term_Capital_Management http://en.wikipedia.org/wiki/Long-Term_Capital_Management) - Peregrine Fund Collapse in 1998 (http://en.wikipedia.org/wiki/Peregrine_Investments_Holdings) http://en.wikipedia.org/wiki/Peregrine_Investments_Holdings)) - Argentine Economic Crisis of 1999-2002(there are so many Wikipedia finds it necessary to put a date on this one see: http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999%E2%80%932002) http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999...) - Dot Com Crash starting in 2001 (http://en.wikipedia.org/wiki/Dot_com_crash http://en.wikipedia.org/wiki/Dot_com_crash) - South Korean Crash of mid-2000's (reading the Buffett bio _Snowball_ he enjoys learning about and finding good buys in the Korean market, see: http://en.wikipedia.org/wiki/The_Snowball http://en.wikipedia.org/wiki/The_Snowball I cannot find a more specific reference to the South Korean Crash at this time) - Argentina devaluation of 2002 (http://www.wsws.org/articles/2002/jan2002/arg-j08.shtml http://www.wsws.org/articles/2002/jan2002/arg-j08.shtml) - US Real Estate Collapse of 2006 (http://en.wikipedia.org/wiki/United_States_housing_bubble http://en.wikipedia.org/wiki/United_States_housing_bubble) - Flash-Crash in 2010 (tied to potential Greek Debt Default and possibly some financial hacking: see: http://theweek.com/article/index/202769/The_Dow_Jones_flash_crash_5_theories http://theweek.com/article/index/202769/The_Dow_Jones_flash_... and http://online.wsj.com/article/SB10001424052748704879704575236771699461084.html?mod=WSJ_hps_LEFTWhatsNews http://online.wsj.com/article/SB1000142405274870487970457523...) Order is likely off and I am missing a few. I am finding a lot more but welcome your suggestions and reorderings (email me, see profile, of you don't want to post). This Flash-Crash sounds just like a 0 day exploit to me. The solutions and vulerability just like trying to keep an OS stable while running untrusted code. As long as it is more profitable to destabilize our economic "OS" rather than support it we'll see even more such snatch-and-grabs. One solution: put all profits in interest-earning escrow for a week or so. That will slow down the rate of an attack allowing it to be identified and for an exploit to be closed. P.S. Black Tuesday and Black Thursday commonly refer to events leading to the Wall Street Crash of 1929 (http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929 http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929). And Black Friday is the biggest shopping day of the year i the U.S. falling after Thanksgiving Day on Thursday and the Weekend - so another important financial day.

johnnyg 16y ago

When I first heard of this I thought "well, bugs in software are like asymptotes, you can always close the distance by half but never get there". I read that a few of the gray haired market geniuses were blasting the exchanges for failure to correct "basic electronic errors" and had to chuckle. No one can understand even the basic functions of everything! Now its been days and no specific mechanical/process culprit has been identified. As trades are interconnected, it seems impossible to cover something like this up. Everyone wants to point a finger and be done. Perhaps the answer isn't a "Black Swan" but that confidence is really that low and things are really looking that bad. Buy Gold?

lutorm 16y ago

I don't know much about trading but would there really be any real harm in artifically slowing down trade, like only executing trades once per day? These events all seem like mass psychosis to me, it's not like anyone can objectively evaluate the condition of the economy in the two minutes that is "a lifetime of trading". I thought for a market economy to work well, the actors need to rationally evaluate the consequences of their actions given all possible information. That's going to take some time for everyone, if trades happen faster then it's just basal instincts like fear that will govern the action. The market is supposed to reflect the state of the economy, but somehow it's all backwards and more like the economy reflects the state of the market.

chasingsparks 16y ago
People experiment with things like that often. Search JStor for market structure or market mircostructure (especially O'Hare). Even in conventional markets there are periods of auctioning and alternative pricing structures. I studied it a while back, but the gist is that single day trading does not nullify panic or mania. At best, it is identical to continuous trading but it is most likely worse. Continuous trading works very well. The problem that is increasingly causing damage is the strong interdependence. Isolated manias and panics may actually be a good thing; when it represents a global tide however...
yummyfajitas 16y ago
Slowing down trading seemed to exacerbate this situation. NYSE slowed trading, held onto buys while routing sells to other exchanges in an effort to boost prices. The net result is that prices tanked at other exchanges, while NYSE was frozen. I'm not strictly opposed to trading halts/slowdowns under circumstances like last thursday, but they are a very tricky thing to do properly.

brown9-2 16y ago

I have an issue with the description of such a fast and swift decline in stock prices as pointing out "that there is a structural flaw" or that this was something that was devestating. The article closes with: Around 3 p.m., the selling pressure abated. Just as swiftly as the market fell, it recovered ground. One factor behind the swift recovery, traders say, were funds that use computers and formulas to sniff out bargains in the market. These funds swooped in on hundreds of cheap stocks, helping push the market higher. So at the end of the day, the market (investors, algorithms, traders, etc.) saw bargains in under-priced assets and took advantage, making prices rise back to something near the original level (but a few percentage points off). In the end, the market still worked.

deleted 16y ago
[deleted]
deleted 16y ago
[deleted]
steveplace 16y ago
Sort of. If you were cognizant enough to "sniff out bargains," and you placed an order to buy, odds are you didn't get filled. In fact, I call BS on anyone that said they "bought on the dip" because it happened so quickly even if you put a market order in on your Etrade platform (nearly all retail brokerages locked up BTW) you wouldn't get the price you wanted. The structural flaw existed on both sides of the market. Everyone's focusing on the lack of bids on the way down, but there were lack of offers on the way up as well. I would've expected more volume on a capitulative move like that.
- brown9-2 16y ago
  Well I think if the rise was too fast too take advantage of, the opposite must be true of the way down, no? I remain very doubtful that very many people were hurt by this action in the market.
  - yummyfajitas 16y ago

URSpider94 16y ago

I'm disappointed that the exchanges have decided to nullify the trades conducted during this period. If hedge funds and quants are going to put semi-autonomous trading programs into the market, they need to have accountability for their actions. Eliminating the consequences for this kind of out-of-control trading creates moral hazard, in the same way as bailing out housing speculators who now can't pay their mortgage. If we declare a re-do every time the computer trading systems create an automated melt-down, then there's no real incentive to put buffers in place to prevent recurrence.

yummyfajitas 16y ago
People engaging in program trading generally want the exchange not to nullify trades. Trade nullification is unpredictable, and program traders want the markets to obey a set of predictable rules. The main beneficiaries of the broken trades are retail investors who placed stop loss orders. Many high frequency firms are actually hurt by this, namely the ones who bought at the bottom and sold near the top. Their buys were broken, but their sells were not.

VBprogrammer 16y ago

This feels a little like trying to figure out which butterfly caused the hurricane.