Redirecting

Thursday, May 20, 2010

Emergency Powers!!??!


"Federal market regulators are still unsure about the cause of the sharp stock market drop two weeks ago, and that worries Senator Jim Bunning."

Let me interrupt here - I'll tell you the cause of the sharp drop:  more sellers than buyers! If we're talking about the aberrant prints, like 1c in ACN, you don't need Sherlock Holmes for that one either:  sellers came in to sell stock regardless of price, and there were no buyers. 

"Mr. Bunning, Republican of Kentucky, told Mary L. Schapiro, the chairwoman of the Securities and Exchange Commission, that she should request emergency powers from the Senate to do whatever is necessary to prevent another market plunge until the cause of the May 6 flash crash can be determined. 

“If we get bad news out of the I.M.F. or Greece or Portugal or something that could have an adverse affect on our markets, we could see the exact same recurrence and we haven’t done anything,” Mr. Bunning said at a Senate hearing on Thursday."

Senator Bunning - there's an easy fix for this:  make sure that retail traders know that "market order" means "regardless of price."  Make sure that retail traders know that "stop orders" become "market orders" when their stops are triggered.  Once you protect the retail traders, no one care if the professionals shoot themselves in the foot with bad order types.  Yet, Bunning wants the SEC to have "EMERGENCY POWERS!"  Bunning:

“I think there comes a time you take emergency actions and if we are in that situation that we need emergency powers, all you have to do is come here and ask,” Mr. Bunning added.” We don’t want a recurrence, and we surely don’t want to arbitrarily break up trades that were legitimately done under a set of rules, and I would urge you to come and ask this committee for emergency powers.”

I can only hope that the literal translation of what Bunning means is NOT "If it looks like stock prices are going to go a lot lower, and there's nothing that can be done to prolong the Ponzi scheme, please let us know and we'll put regulations in place to prop up stock prices."
Cause that's what it sounds like to me, but maybe I'm just being cynical...

My favorite part of the article sounded like a little cynicism from the author:

"It is unclear as to what emergency powers the Senate could grant the S.E.C. to hold off another flash crash, given that the origins of the first disruption has yet to be determined."

-KD

18 comments:

J Johnson said...

Kid,

I was surprised to see this (see link) from a finance prof I respect in the field...do you know if there is merit to it? Mostly, it seemed like fat finger had been ruled out as the drop..is if fair to say this started things and the HFT algo's took over afterward?

http://pages.stern.nyu.edu/~adamodar/

Kid Dynamite said...

J Johnson - there's been a lot of anecdotal evidence that HFT guys turned their machines off - if they are getting any sort of delay in their data feeds, their models don't work as well, so they pull out.

thus, i don't think that it was HFT algo's slamming bids, although anything is possible. i think it may be just "regular" algos - VWAP algos, and "% of volume" algos that made a few stupid trades...

that and some retail stop orders.

Anonymous said...

KD,

You'd enjoy listening to Senator Bunning at roughly 22 minutes into the hearing. Trust me!

http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.LiveStream&Hearing_id=1b8af4cd-f9c2-47d8-8e87-3748a4ad43ca

-PeterPeter

Kid Dynamite said...

peter - the part about canceling trades? nice.

Anonymous said...

> peter - the part about canceling trades? nice.

And a few seconds later when he blasts market orders.

getyourselfconnected said...

It was not a fat finger but some smart guy trying to frontrun the herd down in a hollow market. Who could that be?

Kid Dynamite said...

GYC - you're becoming more and more of a conspiracy theorist, i noticed... acting like a ZH disciple, and using terms like "frontrun," when they almost certainly do not apply.

Kid Dynamite said...

by the way, GYC, what i mean is that the entire point of "Trading" is to try to do what the "herd" does before the herd does it... it's the object of the entire game/business/market/whatever you want to call it. it's not "frontrunning"

regardless, i don't think that has anything to do with what drove the market lower on May 6th. i'm willing to bet that the guy selling ACN at $12 wasn't doing so because he thought he'd be able to buy it back from "the herd" selling it to him at a penny.

scharfy said...

Mr Kid D,

On the topic of Flash Crash/Market Orders..(and if you aren't too busy)

Paragraph 1, top of Page 4 on notes from an interview with Seth Klarman.. (which is a good read for what its worth)

Seth Klarman Quotes Kid Dynamite(kinda)


Bears growling loudly today...

Kid Dynamite said...

i'm tellin' ya scharfy - it's not rocket science when it comes to addressing market orders

getyourselfconnected said...

Geez, it's just a term.

I do love ZH though!

Let me re-phrase as not to rankle;
A overextended stock market was very vulnerable to a downside move because there was not much underneath the move up to support prices. Fund flows have been large into bonds and out of equities (until very recently) and thus low volume moves up rumored to involve some trading programs did not have a backfill of resistance to stop a move down. The major correction in stock prices on May 6th could have been an errant trade to start, but was enough of a flashing exit sign to cause a change in sentiment. The poor news out of Europe and worse than expected economic data were enough to cause a rush out the door by traders of all kinds.

Or, those who ran it up were trying to run in front (frontrun) out the door.

Either way, thats my take. Sorry to lead off with the short version.

Daniel said...

KD,

I hope you don't mind but I have to post this from Richard Kovacevich former CEO of WFC:

"People are high-fiving each other and bragging about TARP restoring health to the banks. Baloney." Quite the reverse, he argues. TARP pointlessly put the fear of God about WFC and other upright banks in the minds of investors and shareholders, causing WFC to plunge 80% for no good reason. Do you know how many innocent shareholders of ours sold at these bottoms? These are people who are retired, owned WFC for 40 years and depended on it for dividends," said Kovacevich, who retired this year after 12 years running the bank. "And who made money? The shorts on the way down, who then went long because they knew it was oversold. Who lost? The retail investor who doesn't understand how this worked. That's the calamity of this thing."

You're welcome for this gift that I have given you....

Kid Dynamite said...

wow daniel - what a nutjob. he's absolutely crazy. WFC was dead in the f'n water without TARP, although I'm reading the End of Wall Street right now, and they tried to make it sound like WFC was more prudent with its mortgages that others...

interestingly, I thought I heard the WFC CEO make comments several months ago about how his bank was AVOIDING the carry trade trap that everyone else was falling into, since he saw higher US gov't rates in the future, and didn't want to blow up when the trade had to be unwound - I respected him for that. I don't respect the comments he made that you just quoted.

Daniel said...

Thats because its a different guy. John Stumpf is the new CEO that made the comments a couple of months ago that you referred to. Kovacevich has been out for a year.

Kid Dynamite said...

ah hah. thanks. exactly. i respect Stumpf a lot for that view he stated about avoiding the easy carry trade

Matt_NY said...

GYC: frontrunning is not simply trying to do something before someone else. It's when you know of a specific large order which has not been fully filled yet and insert your own, smaller, orders to execute before the completion of the large order. Since it's done with privileged information, it's generally illegal.
KD: Were there really enough market or stop-market orders from retail investors to explain ACN?

Kid Dynamite said...

matt - i don't know who sent the market orders in ACN, but someone did.

Clay said...

The SEC's idea of taking on financial crime is busting Martha Stewart. It's not like they're that into using the powers they already have except as kabuki theater. Giving them "Emergency Powers" just makes it two powers they won't use while surfing for porn.