Ok - first, disclaimer: I'm up here in the woods of New Hampshire. I don't have Bloomberg, I can't see how much stock printed at each of the crazy prices, and I was out buying plants at the time the crash happened, notified by a text from the Big Show that read simply: "HOLY FUCK." BUT, I do have a lot of experience with market structure, index arb, electronic execution and the like, and I am still in close contact with several senior people in these roles at major firms - I'll get to what they have told me in a minute.
Now, here's what I do know:
1) people are talking about a fat finger error in the e-mini futures. That makes no sense to me. If there's an error, I think it HAS to be in the "cash" basket - in other words, stocks, not futures. That's the only way you can get stocks like ACN to trade down to pennies. YES - pennies. Futures errors wouldn't do that. Complicating issues, though, SIZE traded in the e-mini SPX futures as this was happening - $15B or so in notional... So that makes it look like futures were involved also! Or perhaps that was everyone else in the market panicking to sell the most liquid asset as they saw the stock prints.
2) another initial thought I had was related to a discussion I had with a friend a mere two days ago about "peer factors." Peer factors are, dumbed down, the way to describe how a quant model will model the fact that everyone has the same inputs in their model. If all the models are correlated, then, when they are triggered, things can go bad in a hurry. HOWEVER, a buddy of mine who runs quant trading at a major firm told me that he has several of these models running currently and that they were fine today - it wasn't a Terminator-esque case of the machines becoming self aware - at least not in the peer factor quant models.
3) The rumor was that Citi had a major execution error, yet another buddy of mine told me he had a lengthy call with them, where they denied it.
So, how can this happen? Well - some execution systems will allow you to type in the size of the basket. The rumor is that some Joey Baggadonuts meant to type in 15M (for million) but typed 15B (as in... BILLION) instead. Now, I can't believe that guys can still do this. It boggles my mind that there aren't risk controls in place. When I was trading, we took great lengths to make sure that you couldn't do this - even if you had fat fingers, if you dropped a can of soda on your keyboard, if a ferret ran across your computer, or if you suffered from some sort of dementia and just went crazy - you couldn't send an order like that without being 100% sure that you were doing it, if you could even do it at all. When we moved to a new execution system from a third party, we mandated that they install confirmation screens on every order entry window. "The devil is in the details," my boss always used to say...
Each trader had execution limits - that meant that I couldn't send a $1B basket no matter how badly I wanted to. Pure and simple - my systems login wouldn't send it. Now, on certain days, I'd need to execute billion dollar baskets, so we'd have to change the risk parameters - but in general, there were caps on the size of each basket, the total volume for the day, and extra warnings if you tried to send an order that was even 25% of your max quantity - you'd have to click through confirmation boxes of the type "ARE YOU SURE YOU WANT TO DO THIS?"
Anyway, what will happen in the aftermath of today's frenzy? One contact told me that they did some quick math and figured that in S&P500 stocks, $31Billion of notional traded below the 1100 level in the SPX. That is a lot of stock. A different former colleague told me "I think people figured it out and bought it back ahead of the offender. I also think the person with the mistake had time to cover." I'm also told that all trades more than 30% off of stable last sales after 2:30pm will be busted. THIS IS WHAT I'M TOLD - THIS IS NOT A GUARANTEE. In other words, if you scooped ACN at 10c, you're probably getting that trade busted.
we'll await further developments...