Following today’s stunning not one but countless flash crashes, many have asked: just how was the flash crash of August 24, 2015 different from that of May 6, 2010. The answer is shown in the Nanex chart below, and the simple summary is that 2015’s was orders of magnitude worse than 2010’s as a result of E-Mini liquidity that was orders of magnitude worse throughout the entire day.
In fact, the trough liquidity on May 6 is where ES liquidity was throughout the entire day on August 24, 2015.
The outcome of this total liquidity devastation was what we summarized just after the open:
Curious why few if any traders can actually execute any trades, whether buys or sells? The reason is that despite the relative calmness of the index prints, what is going on beneath the surface is an unprecedented wave of constant halt and unhalts as all stop levels were taken out, many in circuit breaker territory, making it virtually impossible for any matching enginge to, well, match buyers and sellers. The resulting halts made it impossible for regular traders to step in, requiring central banks to buy via the CME’s Central Bank Incentive Program, to restore some market stability.
So to be technically accurate, what happened in May 2010 was one marketwide flash crash, while today we had a market paralysis which was the direct result of countless distributed, isolated mini flash events, all of which precipitated the market’s failure for the first 30 minutes of trading.
Nanex provides some other truly amazing charts showing the first minutes of trading and how there was practically no market for a period of about 30 minutes due to every single HFT algo going haywire almost as the same time…
At the open in $AAPL today, the price varied between $92 and $97. Many, many times. Each dot a trade pic.twitter.com/zOQ5eYYzgJ
— Eric Scott Hunsader (@nanexllc) August 24, 2015
$GE liquidity during the open. Wow. pic.twitter.com/Tb8KOf6l56
— Eric Scott Hunsader (@nanexllc) August 24, 2015
Opening liquidity in $JPM was crazy: pic.twitter.com/5xpad4L9Qk
— Eric Scott Hunsader (@nanexllc) August 24, 2015
… in the process leading to what may have been the most dramatic collapse in ETF logic to date.
The market farce was so profound, and the outcry from the handful of people who still care about “markets” large enough that even CNN had no choice but to opine:
Normally there are a few dozen trading halts a day. But Monday wasn’t a normal day with 1,200 halts. “That’s huge. I’ve never seen that many halts,” said Dennis Dick, a market structure consultant at Bright Trading. Dick said he believes the stock market may have suffered even worse losses if it weren’t for the trading pauses. “The circuit breakers are designed to prevent a full-on flash crash. Those circuit breakers kind of saved the day,” he said.
Maybe, then again, the circuit breakers gave us a glimpse into the ETF endgame:
The circuit breakers were implemented more than 600 times on ETFs, the increasingly-popular securities that trade like stocks. ETFs hold a basket of stocks, removing the risk of betting on a single company. ETF.com examined the pricing action and discovered at least eight ETFs that showed “flash-crash” style drops at the opening of trading.
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ETFs that experienced panic selling are far larger and wouldn’t be expected to have that kind of turbulence. For example, the iShares Select Dividend ETF (DVY) plummeted as much as 35% at its lows.
That’s a stunning move considering this BlackRock (BLK)-backed ETF is worth over $13 billion and is focused on stable American stocks that have a long history of paying dividends.
None of this ETF’s top holdings — like Lockheed Martin (LMT), Philip Morris Internationa (PM)l and McDonald’s (MCD) — suffered losses north of 11%. It was even worse for the Guggenheim S&P 500 equal weight ETF (RSP). The $10 billion fund, which holds some well-known stocks like Chipotle (CMG) and ConAgra (CAG), plummeted nearly 43% at one point on Monday.
Another popular ETF that seeks to capitalize on the booming cybersecurity business plummeted as much as 32%. The ETF, PureFunds ISE Cyber Security ETF (HACK), has a market value of more than $1.2 billion.
Said otherwise, for minutes at a time, there was an unprecedented disconnect in ETF fair value as hedge funds sold off ETFs however correlation arbitrageurs were unable to capitalize on the discrepancy with the underlying leading to historic, and extremely lucrative divergences.
At this point, experts are still scratching their heads over what may have caused these ETFs to nosedive. One possible explanation is that liquidity providers — think high-speed traders and other Wall Street firms — charged with stabilizing the market weren’t there when needed. That’s what happened during the flash crash of 2010.
“When markets get hairy, sometimes those liquidity providers step out of the way to avoid getting run over,” said Matt Hougan, CEO of ETF.com. Despite the steep selloffs, Hougan said ETFs generally “functioned well” during the market difficulty.
The bottom line, as Themis Trading’s Joe Saluzzi summarized, “Something went wrong here. Somewhere along the way, the ETF pricing model was broken today.” Noting that there are more than $3 trillion in ETF assets, Saluzzi said: “They better hope they don’t have a confidence problem there.”
The good news is that with liquidity inevitably collapsing ever further to a state of near singularity with ongoing central bank interventions, and with markets broken beyond repaid, we will very soon have a repeat flash crash like today, one which will provide enough satisfactory answers to the question of just happened that lead to a market that was completely broken for nearly an hour, and where the VIX was so very off the charts, the CBOE was afraid to show it for at least thirty minutes.
One thing is certain though: while the market dies a slow, painful, miserable death, the biggest HFTs will continue pocketing millions. Such as Virtu: “Virtu Financial Inc., one of the world’s largest high-frequency trading firms, was on track to have one of its biggest and most profitable days in history Monday amid a tumultuous 24 hours for world markets, according to its chief executive.”
“Our firm is made for this kind of market,” said the CEO, Douglas Cifu.
Correction: your firm made this kind of market.
