FAST FORWARD …….FLASH CRASH
On May 6th, 2010, 2:45 PM, the stock market had just gone into free fall. No one knew why this is happening, a long-time well known market commentator screamed, “market manipulation,†on CNBC. In a period of less than 15 minutes the market had fallen to an historic intra-day low of down 998 points. We all looked around to try and determine what had just happened. Many considered it a fat fingered trade…..please…..Others thought that large option trading had caused the problem. ……..again, please.
For days people shuffled around trying to figure out what had happened, Congressional hearings were held, the SEC Chairperson testified, Broker/Dealer firms put their two cents out there but then nothing. Can anyone definitively explain this event?
By the way….isn’t it interesting that this issue seems to have faded into the background and no one wants to re-visit it? Where do you think Sergey’s software ended up? Was May 6th the first foray into the US market? Why no further conversations? Is it fixed? Who fixed it? When was it fixed?
The stock market since May 6th certainly has been banging around trying to determine in which direction it is heading. Perhaps that is how the problem has morphed? Curiously the market has been very adept at moving back and forth without causing too much furor. I offer the following:
May 6th, 2010 Â Â Â -347.8
May 10th, 2010 Â +404.71
May 20th, 2010Â Â -376.36
May 27th, 2010Â Â +284.54
June 4th, 2010Â Â Â Â -323.31
June 10th, 2010Â +273.28
June 29th, 2010Â -268.22
July 7th, 2010Â Â Â Â Â Â +274.66
July 16th, 2010Â Â Â -261.41
It seems this random walk may not have been so random for someone.
In the 132 trading days of 2010 there were 10 trading days that showed more than 250 point swings positive or negative. Nine of those trading days happened after the flash crash, within 49 trading days of each other, and in swings that were greater than 250 points per day. …..Go figure! Where did that software end up, and what could it do?
Regardless of the conspiracy theory behind these moves, there is one more strange twist to this story. Goldman Sachs, while all this turmoil in the market was occurring, settled with the U.S. Government with regards to its conflict over “disclosure.†Goldman, was looking to put this event behind them and to move on. But in a move brought on by the need to comply with the new FINREG – Volker requirements, Goldman is contemplating spinning off its proprietary specialty trading unit.
According to an article by Mark DeCambre, the Goldman Sachs Principal Strategies unit invests, ….â€strictly on behalf of Goldman Sachsâ€â€¦â€¦ What does that mean? …..The article states that the Volker rule prohibits investment banks (GS) from maintaining pure proprietary trading platforms. If GS can’t maintain a proprietary trading unit in the future, wouldn’t it be best to sell it now? Or perhaps it is because GS does can’t afford any other negative publicity to haunt them over their past “proprietary trading systems, units, or programs.”
What if the sale is part of that strategy? Distance yourself from any other potential conflicts with regards to trading, software, platforms, etc., by showing how you sold that business and walked away from the conflict. ( a public relations win for a tarnished firm!) However, what have these trading platforms and software packages spawned? Certainly computer generated trading will not go away, certainly, from time to time, it will have an unwanted influence on the market, and most definitely someone, or some entity, will use it unscrupulously in the future. If individuals feel that they can take advantage of the largest free market, they will, and I am sure that Goldman and others will want to have distanced themselves from even a trace of conflict given their most recent tribulations.
Or perhaps the sale of the trading arm isn’t their main concern, perhaps it is the fallout from these potential Trojan horses that they fostered. The knowledge that this trading exists, that quants throughout the world can create it, and that the stock market may have already been manipulated by it, surely is reason enough to distance yourself from the source of the conflict.
 FINREG may have reintroduced the Volker rule, which will eliminate the idea of cross purpose trading in order to level the playing field for all investors, but it will not stop the attacks on the trading systems and platforms of the different markets.
After all…….where did that software end up, and what can it do?