Thursday, May 6, 2010 4 comments

US markets temporarily fall off a cliff...apparently due to quotation problems

Weird market behaviour today, with the DJIA down almost 10% (approximately 1000 points) at one point. As MarketWatch reports, it appears that some of the decline was due to trading errors:

The U.S. stock market's rapid freefall Thursday afternoon was accelerated by program trading, which was triggered after a sharp drop in shares of Procter & Gamble and at least one other Dow stock, 3M Co., market watchers said.

Shares of Procter & Gamble plunged to $39.37 from around $60. The New York Stock Exchange said each stock has its own circuit breaker level. When these stocks fall below their levels, then they can be traded on any other exchange or platform at any price. When P&G fell below its circuit breaker, a bid came in for the stock at $39.37 from the Nasdaq, the NYSE said.

Several market watchers said they heard a major firm may have accidentally released an errant program, where a trader accidentaly placed an order to sell $16 billion, instead of $16 million, worth of e-minis, the futures contracts tied to equity indexes.

Traders also also noticed errant trades among exchange-traded funds, including the iShares Russell 1000 Value Index Fund (IWD), which dropped from close to $60.00 to 7.5 cents.

In a seperate story, NYSE said there weren't any erroneous trades. It looks like those ridiculously low prices seen for shares of P&G, MMM, and IWD, were quotation errors.
If you are a newbie like me, you always learn something new every day: I never knew that individual stocks have circuit breakers on them. It's not clear if it's just for Dow components or any NYSE-listed security (anyone know?)


4 Response to US markets temporarily fall off a cliff...apparently due to quotation problems

May 6, 2010 at 6:32 PM

The market doesn´t go "no bid" just because of a trading error. A trading error may have triggered it but what followed was a panic sale with no bidders to take the other side. And have you seen eur/usd?  I suppose that's a trading error too. For the first time in months I'm glad to be net short... This could get funny.

Sivaram Velauthapillai
May 7, 2010 at 11:04 AM

Depends on when you were net short...  Sell in may and go away I guess?

Looks like my post earlier this week, suggesting that the Greek problems were a side show while the big one is China, turned out to be completely wrong =-O

I don't think we were seeing a "no bid" issue. There was clearly panic selling, not to mention momentum trades (towards bearish side) and stop-loss exits, but I think the big declines were quotation errors.

There is no way you would get panic selling in P&G or 3M. These are mega-caps, at least P&G is, with huge volumes and millions of willing buyers sitting on the sidelines, and it is unlikely that the market marked them down by more than 30%. In fact, P&G is the type of company that should hold up better during a panic sell-off (consumer staple and not that vulnerable to economic slowdowns.)

May 9, 2010 at 9:36 AM

Here is my solution to this kind of problem:

A new type of order that is a cross between a market and limit order should be made standard.  I will call it a 'sensible market order'.

This would perform just like a market order, but would not execute except within a certain range (perhaps 5%) of the last trade (as of the time the order was received).  So if there is a liquid market, then this order behaves exactly like a market order.  However, if liquidity falls out of the market, and there is no available bid/ask within 5% of the last order, then it acts like a limit order, and waits for a bid/ask within that range.

My feeling is that this is what most people actually want when they enter a market order.  They do not expect or desire an execution way off of the last price.  And if someone wanted to use the current 'unrestricted' market order, that could still be an option.

PS ---  I've gotten in the habit of using limit orders from investing in small cap stocks, and I now use limit orders exclusively, even on large caps, and even if I am buying/selling at the market price.

May 9, 2010 at 6:27 PM

The exchanges apparently have circuit breakers that prevent a price from falling off the cliff, so to speak. I'm not sure if that's limited to specific stocks but apparently stocks cannot trade far from their prior trading range. Similarly, the broad indexes themselves have circuit breakers. They tripped several times during the meltdown over the last few years and trading was curbed during those periods. But it appears that system is flawed. My impression is that NYSE (and maybe NASDAQ) has circuit breakers but a lot of trading is done on other obscure exchanges without those rules. It seems that trading was done at any price on those exchanges.

There is also a rumour that says that the collapse was due to some quant funds withdrawing from the market (this lends credence to ContrarianDutch's view of the "no bid" being the cause of the collapse.) That seems unlikely because (i) those funds are htought to have withdrawn after the collapse, after they saw the huge decline, and (ii) the market didn't see similar scenarios when such funds didn't exist in the prior hundread years or so.

The most surprsing thing to me is how several markets, including ones in foreign countries, saw similar low-price trades. Yes, capital and knowledge flows across countries more easily than ever, but the characteristic of the market (such as the amount of volume due to quant funds) is very different in foreign countries.

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