The Flash Crash and Market Dynamics

Scrolling through the blogs today I found much to think about and quite a bit I wanted to refer to and write about. Yep, quite a bit. So much that I ended up not writing about anything.

But then I found one that stood out and that deserves repeating and referencing (well, IMHO, anyway).

From the Points and Figures blog, here:
http://pointsandfigures.com/2010/12/28/top-chart-of-2010/

I would like to nominate the critical chart, and critical moment of 2010. Here it is:

The writer (Jeffrey Carter) then puts a chart of the Flash Crash back in May. Check out the blog post for the chart and Carter’s comments. I found myself nodding in agreement, with comments like:

The market may be up, but lurking in the back of every trader, fund manager, CFO’s mind is the probability of it happening again.

The cash equity market is structured improperly. It’s broken, and there is little incentive to fix it.

I have written before about the Flash Crash, and what I think needs to be done to help reduce the likelihood of something similar happening again, and I’m not going to repeat myself. And, besides, plenty of people are saying the same thing as me, and saying it more clearly and with better arguments.

But … BUT … Well, you know, I wonder… how much does the strong rally in the US stock markets owe to the fear that still overhangs from the Flash Crash? What do I mean? Well, if there is a fear of something similar happening again (and there is a real, and – IMHO – quite justified, fear of this) and, at the margin, this has perhaps reduced the numbers of traders/investors willing to buy stocks and, at the margin, perhaps increased the number of traders/investors willing to try their hand at shorting the market … from a purely price dynamics point of view there may well have been, and may well continue to be, a reduced number of sellers as the price rises (traders/investors that have been unwilling to buy don’t have any, or as much, to sell) and buyers from an increased number of short-coverers.

I wonder. My thoughts don’t seem to be supported by the very, very strong bullish sentiment figures that are around at present, and also the very low percentage of short-selling around (I can a find a reference to this if needed). So, maybe I am barking up the wrong tree. On the other hand, though, perhaps these fears were much more important back in late August when bearish sentiment was overwhelming, and now are more-or-less irrelevant.

—————————–

While I am discussing the post from the Points and Figures blog I should refer to another one of his recent posts:
http://pointsandfigures.com/2011/01/03/speed-hft-markets-and-the-money/

Nice comments on market structure, well worth reading. (EDIT: Actually, if you want to start to understand the US equity market structure, and if you’re trading it or its derivatives, this is a … um … very good idea … then this post is essential reading).

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This entry was posted in Flash Crash 06MAY2010, Market Dynamics. Bookmark the permalink.

2 Responses to The Flash Crash and Market Dynamics

  1. Pingback: Speed, HFT, Markets and the Money Points and Figures

  2. Pingback: Top Chart of 2010 Points and Figures

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