Flash Crash – Nanex report

Wed. 03NOV2010 0117GMT

Well, today is the long-awaited FOMC meeting. In a little while we get a clearer indication of the extent and method of implementation of QE2. While we wait, some good reading; here is a link to the Nanex report on the May 6 Flash Crash:

May 6’th 2010 Flash Crash Analysis Final Conclusion

http://www.nanex.net/FlashCrashFinal/FlashCrashAnalysis_Theory.html

May 6’th 2010 Flash Crash Analysis Continuing Developments

http://www.nanex.net/FlashCrash/FlashCrashAnalysis.html

h/t to the Econbrowser blog, Links for 2010-10-31
http://www.econbrowser.com/archives/2010/10/links_for_20101.html

In a nutshell, this is what Nanex has to say:

First of all, the Waddell & Reed trades were not the cause, nor the trigger. The algorithm was very well behaved; it was careful not to impact the market by selling at the bid, for example. And when prices moved down sharply, it would stop completely.

The buyer of those contracts, however, was not so careful when it came to selling what they had accumulated. Rather than making sure the sale would not impact the market, they did quite the opposite: they slammed the market with 2,000 or more contracts as fast as they could. The sale was so furious, it would often clear out the entire 10 levels of depth before the offer price could adjust downward. As time passed, the aggressiveness only increased, with these violent selling events occurring more often, until finally the e-Mini circuit breaker kicked in and paused trading for 5 seconds, ending the market slide.

BUT – please read the whole of the Nanex article, it is fantastically informative. Not just as to what caused the Flash Crash, but also for those students of Wyckoff and Market Profile, here is what Wyckoff &MP talks about, the CO/OTF in action. Great stuff.

To read the charts on the Nanex page, use some sort of ‘cross hair’ to line up the times with the events. This is the CrossHair I use, if it is any help:
mlin.net
http://www.mlin.net/CrossHair.shtml

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