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"In fact, I would guess that the majority of people hurt by this volatility spike were market making or algorithmic traders." I think it's the other way around

by minimax 14y ago

"In fact, I would guess that the majority of people hurt by this volatility spike were market making or algorithmic traders." I think it's the other way around. I guess it depends on the volume on either leg of the spike, but the market makers who were buying on the way down would have been accumulating inventory at reduced prices and could have made a tidy profit when things bounced back. On the other hand, any trader with a stop loss order within the range of the spike probably got hurt by being forced into selling at a reduced price.

washedup 14y ago
Yea, good point, it all depends on where the volume was. I would break it up this way: The initial sell off: These orders would be executed from traders that use a live twitter feed to make buying or selling decisions. The underlying algorithm would have been able to execute these orders faster than any human. The serious news would have driven them to sell quickly, causing the market to start diving. Most of these probably made money, depending on how they were able to react to the news that it was fake. It is possible that there were algorithms selling all the way down the entire spike with the expectation that it was going to go down even further, losing money on most of the positions during the bounce. After-all, the bounce was faster than the drop. Secondary sell off: While the algorithms are executing sell orders, market makers would begin to realize that a huge volatility spike was entering the market place, whether they heard the bad news or not. Because market makers train their models on relatively low volatile intra-day data, this spike would have been enough to reach either max positions or max downdraw, forcing the traders (or the market making algos they created) to cover positions for a loss on the way down.
yummyfajitas 14y ago
...but the market makers who were buying on the way down would have been accumulating inventory at reduced prices and could have made a tidy profit when things bounced back. On the other hand, any trader with a stop loss order... So your claim is that market makers who were promoting an orderly market (by pushing the price back up) made money, while speculators who contributed to the problem (by pushing the price down) lost money? Sounds like the market is at least getting the incentives right.

by minimax 14y ago

washedup 14y ago

Yea, good point, it all depends on where the volume was. I would break it up this way: The initial sell off: These orders would be executed from traders that use a live twitter feed to make buying or selling decisions. The underlying algorithm would have been able to execute these orders faster than any human. The serious news would have driven them to sell quickly, causing the market to start diving. Most of these probably made money, depending on how they were able to react to the news that it was fake. It is possible that there were algorithms selling all the way down the entire spike with the expectation that it was going to go down even further, losing money on most of the positions during the bounce. After-all, the bounce was faster than the drop. Secondary sell off: While the algorithms are executing sell orders, market makers would begin to realize that a huge volatility spike was entering the market place, whether they heard the bad news or not. Because market makers train their models on relatively low volatile intra-day data, this spike would have been enough to reach either max positions or max downdraw, forcing the traders (or the market making algos they created) to cover positions for a loss on the way down.

yummyfajitas 14y ago

...but the market makers who were buying on the way down would have been accumulating inventory at reduced prices and could have made a tidy profit when things bounced back. On the other hand, any trader with a stop loss order... So your claim is that market makers who were promoting an orderly market (by pushing the price back up) made money, while speculators who contributed to the problem (by pushing the price down) lost money? Sounds like the market is at least getting the incentives right.