Cashin’s Comments – May 7, 2010: On Yesterday’s Market Action

What Happened Yesterday? How It Looked From Ground Zero – The stock market opened wary and a bit nervous yesterday. They were still shaky about the scenes presented in the streets of Athens in the prior two days.Shortly after the opening, Mr. Trichet ended his ECB press conference. The sense was that he had punted the Greek problem back to the nation states of the EU. If the ECB was adopting a “not my problem” attitude, the euro didn’t like it at all. As the euro weakened, further pressure built on U.S. stocks.

Around 10:00, the bulls tried to circle the wagons. The attempt was brief and ineffective. Stocks quickly rolled over.

Prices moved lower and the Dow slipped to minus 150.

In early afternoon, the Greek protestors, who had surrounded Parliament, hoping to prevent the vote on the austerity package, began to disband. As they did so, they began to confront the police.

Around 2:00, the scene in Athens began to turn more fractions. TV screens across the floor (and across America) were filled with scenes of police wading into pockets of riotous protestors. Each foray was marked by audible reactions on the floor.

Bids began to cancel all around. The level of selling picked up and prices moved steadily and sharply lower – down 250, then 275; 325; 375; 400 then down 450.

Around 2:40, the selling grew very intense. Prices began to cascade lower in waterfall fashion. The Dow seemed to fall in 50 point increments.

At this point, we should talk about structure.The NYSE market model has some built-in safety checks. They are somewhat like the speed bumps you might find around a school zone. They are not intended to stop the car, just to slow it down enough to prevent a serious accident. Trading is slowed very slightly by those protective speed bumps allowing better reaction time and attempting to inhibit a rush over the cliff.

Some of the players, however, tried to get around the NYSE speed bumps. To do that they sent their sell orders to other, thinner markets.

One of the examples cited in the press was Proctor & Gamble (PG). The stock was trading on the NYSE at 56. The boys who circumvented the safety speed bumps were selling PG at 39 in other thinner markets. Some sold into bigger air-pockets with 40 dollar stocks trading at a penny or less.

When the sellers saw they had rushed to sell at inferior prices (How could I sell PG 17 points below the NYSE last sale??), two things happened. First, you stop selling – immediately. Second, you try to buy back some of that stock you just sold at “give away” prices.

That kind of action is what caused the Dow to drop 600 points in a matter of minutes and completely reverse in a similarly brief period. A 17 point price gap between ticks in PG would result in a 136 point move in the Dow. That’s just from one stock.

Another assumed factor in the zany trading was thought to be a possible trader error. One, two, or even three different firms were rumored to have hit a bad button and sold more shares than intended. The media suggests it was a typo error – instead of entering “M” for million, they typed “B” for billion.

That’s highly unlikely. A more plausible explanation is that many trading desks have computers pre-programmed to limit key strokes. Instead of hitting three key strokes to sell 100, you teach the computer to “assume” the “00”. That allows you to hit a single key “1” which is then translated into 100 shares. Not much of an error if you’re selling 100, but if you try to sell 1 million, those two invisible zeroes changes your order into 100 million. That’s a market mover, especially if you’re selling a basket rather than one stock.

The rumors of “trader error” could not be confirmed but they were, and are, pervasive.

One other oddity occurred after the close of business. Several venues decided to cancel a variety of those “outlier trades”. Under their rules, they can announce a trade void and participants often have no right to appeal.

So, if you bought XZY at “bargain” prices at 2:43 and then sold it much higher at 3:30, then at 4:30 your buy order had been canceled. Your sale is still good, however, so you are now, accidentally, net short, at what looked like a good price but now looks like a bad one.

That could bring some buy interest this morning as folks seek to cover these accidental shorts. It all depends on how pervasive the cancellations were.

Another factor could be the rumored trader error. If it occurred, did they cover by the close? Did they hedge overnight? We may know on the opening.


One Response to Cashin’s Comments – May 7, 2010: On Yesterday’s Market Action

  1. I wonder why it tooks so long to find out it was a human error. They should overlook the whole process more carefully.

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