Trading software sparked flash crash...report link included

[undgrd]

Linky to Article (http://finance.yahoo.com/news/Trading-software-sparked-cnnm-2450893340.html;_ylt=Ahco7dmCHLAeyTlYaVRXzX.7YWsA; _ylu=X3oDMTE1cDVuMWIwBHBvcwMyBHNlYwN0b3BTdG9yaWVzB HNsawN0cmFkaW5nc29mdHc-?x=0&sec=topStories&pos=main&asset=&ccode=)
Linky to Report (http://www.sec.gov/news/studies/2010/marketevents-report.pdf)

Ben Rooney, staff reporter, On Friday October 1, 2010, 1:43 pm

A large investor using an automated trading software to sell futures contracts sparked the brief-but-historic stock market "flash crash" on May 6, according to a report by federal regulators released Friday.

In the 104-page report (http://www.sec.gov/news/studies/2010/marketevents-report.pdf), staff members at Securities and Exchange Commission and the Commodity Futures Trading Commission said an unnamed investor used a trading algorithm to sell orders for futures contracts called E-Minis, which traders use to bet on the future performance of stocks in the S&P 500 index.

The contracts were sold quickly and in large numbers, according to the report, on a day when the market was already under stress due to concerns about the European debt crisis.

The selling was initially absorbed by "high frequency traders" and other buyers, the report said. But the algorithm responded to an rise in trading volume by increasing the number of E-mini sell orders it was feeding into the market.

"What happened next is best described in terms of two liquidity crises -- one at the broad index level in the E-Mini, the other with respect to individual stocks," the report said.

In other words, the lack of buyers and the rapid selling of E-Mini futures contracts began to affect the underlying stocks and the broader stock indexes.

As a result, the Dow Jones industrial average plunged nearly 1,000 points, briefly erasing $1 trillion in market value, before regaining much of the lost ground to close lower. It was the largest one-day drop on record.

Waddell & Reed, an asset management and financial planning company based in Overland Park, Kan., has been widely reported as the investor behind the sell order. But the report identified only a "large fundamental investor."

Waddell said in May that it was one of possibly 250 other investors trading the E-mini futures contract on the day in question, and that it did not intend to disrupt the market.

[Serpo]

Just like that....

[silversurfer]

it'll happen again

[undgrd]

I think I said this in another post. It wouldn't surprise me one bit if penetration testing is being done to see which buy or sell signals need to be sent to crash the system.

[silversurfer]

here is a snip from Nick Guarino's email of August 3rd........



On Thursday May 6, the markets caught a glimpse of the future. They felt the cold chill of what lies ahead


Sooner than anyone thought possible, investors started throwing in the towel. They realized the rally in stocks is just about over. There's no recovery. The sovereign debt wipeout is next.

Before Flash Crash Thursday, the market had dropped 100-to-200 points every day that week. Thursday started as more of the same. Then Goldman Sachs' high-frequency trading system from hell -- The Beast -- kicked in.

High-frequency trading is just a polite term for front-running. It lets Wall Street insiders trade before their customers do. Almost no one understands this. Anyone who did would never set foot in the Wall Street casino again, except in very smart, sophisticated ways.

Here's how it works.

As I told you, Wall Street computers are directly connected to the exchanges' computers. So firms like Goldman learn all orders that come in, to the NYSE and NASDAQ -- all the exchanges -- before they get executed. All buy orders. All sell orders.

That lets them place their own orders, for the same stocks, (or options or commodities) ahead of their customers. They get there micro-seconds before everyone else. Which makes all the difference.

Say Goldman's computer sees an order come in to the exchange, to sell a large block of IBM shares. Goldman rushes in a few micro-seconds ahead of time. Again, it can do this because it is connected to the exchange computers...and its computer is MUCH faster than anyone else's.

Goldman sells that same stock first. Its selling takes the market lower. So the original seller gets a lower price. Goldman pockets the difference.

Same thing when Goldman sees buy orders come in. It buys ahead. That forces the market higher. Buyers must pay a higher price.

Each day, Goldman front-runs billions of shares. That is how they made nearly $30 billion in profits the past few years -– even though the U.S. economy is in a deep recession, and normal investment banking activities (IPOs, mergers & acquisitions) have fallen into the crapper.

It's like playing poker, when you know the cards of all your opponents -– but they don't know yours. Goldman knows the cards of every retirement fund...mutual fund...institution and individual who trades stocks.

Remember, everyone else is not connected to the exchange computers, with their own personal multi-billion dollar super computer. Their trading systems work more slowly. That puts them at a fatal disadvantage.

Goldman learns the trades they are going to make. It jumps ahead of them, and “scalps” them. That is Wall Street's own term.

And this computerized front-running, this “scalping,” led to the chaos on Flash Crash Thursday...



How to turn a Greek riot into a global stock crash



The Greek riots were broadcast around the world. Investors were scared shitless. This is not what Wall Street told them would happen. Huge amounts of sell orders hit the exchanges, all at once.

Goldman Sachs' brilliant computer models saw those sell orders. Its black box computers did their job, without human knowledge or intervention. In microseconds they jumped in ahead of the market, and put in more sell orders. Goldman was making a killing.

But two problems came up. First, sell orders kept coming in. From all around the world. They greatly outweighed the buys.

The NYSE's slow-moving computer saw this huge imbalance of sell orders. It delayed the processing of all trades. By 90 seconds. That is, every order was held up for 90 seconds.

This was supposed to give the market makers time to check for errors. (In reality, to cover their asses.) But it only made things worse...

The Beast and the other HFT computers could not make trades on the NYSE. Remember, they make decisions every micro-second. For them, a minute and a half is an eternity.

But even more selling pressure was building up. The sell orders kept pouring in. Goldman's computer knew about these orders before the NYSE did: it is both connected to the exchange computers and far faster than they are.

So the computer did what it is programed to do. It started selling on other stock exchanges. It sold on the futures markets as well.

These markets did not delay sales. They were deluged with sell orders. Prices fell even faster than on the NYSE. Creating a huge backlog of sell orders, that accelerated by the micro-second.

You literally saw stock market traders stampede for the burning exchange doors. The whole thing quickly got out of control. Because there were no buyers!

And the computer systems from hell did more of the unthinkable. Seeing prices falling, they kept selling more, bidding the market down. Down, down, down she goes. Where she stops, nobody knows.

Computers led the market meltdown. A meltdown like nothing seen before. It is only the first. Next time the collapses will be too big to stop. Even temporary, partial reversals will not last.

Please understand. Wall Street has bet all your money -– our entire financial system -– on their computer models. On the bizarre belief that they can correctly predict the future, day in and day out, without error. Do you see how crazy this is?

Stop-loss orders screwed the little guy even more

On Flash-Crash Thursday, things kept getting worse. Many people trade (foolishly) with stop-loss orders. Stops are supposed to limit losses. But in the new world of The Beast, they only make your losses bigger.

Stop-loss orders do not hold your broker to a set price. All he has to do is get the “best possible” price.

In the market chaos, the usual Wall Street victims could not get out at their stop-loss prices. The stocks crashed right through the stops. That meant the little guy got screwed. Even more than usual.

Many people were forced out at the lows. Yet the market closed WELL above the original stop price. This is why trading with stops is a suckers' game. When you need them the most, they will screw you to the wall.

One stock was selling for $42 a share early Thursday. It plunged straight down to $.04. That's what the average guy, with stops, got. Four cents a share. He lost 99% of his money.

Later that same day, this stock bounced back. It closed over $41. Who do you think bought these shares at the ridiculously cheap price of a few pennies a share? And then watched it shoot back up to over $41? None other than Goldman Sachs' HFT computer trader, The BEAST.

In essence, Goldman & Co stole these people's stock. No humans involved in any way.

Not surprisingly, the regulators are still scratching their ass, looking for someone to blame. Of course, they are careful not to piss off their future bosses...the people they will work for when they leave government service. Do you know that most key financial/economic positions in government are held by “former” Goldman partners?

By day's end of the Flash Crash, the market manipulators were able to regroup. They brought the market back up some. The Dow still lost nearly 350 points on Thursday.

But here's what you must understand. You just got a tiny, graphic, demonstration of what's to come. In two ways.

First, tiny Greece broke the back of the insane stock market rally. That led to the biggest stock market meltdown ever. And it is just the start. The first run at what will be the biggest stock market crash ever.

As I told you, giants Spain and Italy owe hundreds of times more than Greece does. So do England and Portugal. They will be the next to wipe out. And they are too big to bail out. We are talking massive default here.

They are tied to every economy the world over. Our major banks hold their bad paper. And they are as broke as GM, Chrysler, AIG, Lehman Brothers and Merrill Lynch were -– all put together. Their collapses will start a financial chain reaction, that cannot be stopped.

They have already started to collapse. Haven't you heard the rumblings from Spain? From Portugal? How England just had emergency elections, that left no one clearly in charge?

And then there's the biggest debtor of all. The U.S. We will need more money than anyone, by huge amounts. For years to come.

Printing our way out of this crisis is not an option. Not for us or for any major nation on the planet. We are talking a depression, worse than any of modern times.

People will lose their savings. Their retirements. Their homes, work, and bank deposits. Those who manage to hang onto their jobs will see their pay severely cut.

These are all deflationary phenomena. You are witnessing the start of it as we speak. God help the world.