Tuesday, May 11, 2010

"WSJ Stretches with Black-Swan Theory of the Crash" and "SEC Chair on the flash crash: no evidence of a fat finger"

I hate the "?" thang. It should be verboten. Especially for those in the prognostication biz.
First up, the Colubia Journalism Review's The Audit blog:

A tried and true way to draw readers to your blog is to say something provocative in your headline and add a question mark. It’s a red flag that what follows is typically speculation, but, hey, you’ve already got all that traffic.

The Wall Street Journal does the newspaper version of that today on the front of Money & Investing with a story headlined “Did a Big Bet Help Trigger ‘Black Swan’ Stock Swoon?”

Well, it “may” have, although it “mightn’t” have, either. The Journal doesn’t know, and neither do you after reading this story. I criticized The New York Times last week for overdosing on weasel words in its lede story last Friday on the crash. The Journal trots them out here, too:

On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later.

The trade by Universa, a hedge fund advised by Nassim Taleb, author of “Black Swan: The Impact of the Highly Improbable,” led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank Barclays PLC—to do their own selling to offset some of the risk, according to traders in Chicago.

Then, as the market fell, those declines are likely to have forced even more “hedging” sales, creating a tsunami of pressure that spread to nearly all parts of the market. The tidal wave of selling fed into a market already on edge about the economy in Europe. As the selling spread, a blast of orders appears to have jarred the flow of data going into brokerage firms, such as Barclays Capital, according to people familiar with the matter.

Well, all righty then....MORE

As far as drawing traffic, we lean toward the thinking of the Washington Post's Joel Achenbach:

...When in doubt, go with the most hysterical headline.
(Rule one of blogging is that the End Of The World will be good for page views.)

From FT Alphaville:

According to the testimony of SEC chair Mary Schapiro before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises on the flash crash of May 6 (emphasis in the original):

we are unable to point to a single event which could be the sole cause. We can, however, address some common reports that have circulated about the events of May 6.

“Fat Finger”: There have been reports in the press about a “fat-finger” error where, it is hypothesized, an order of billions of shares was entered, rather than an intended order of millions of shares. While we cannot yet definitely rule that possibility out, neither our review nor reviews by the relevant exchanges and market participants have uncovered such an error.

Proctor & Gamble: In addition, there have been reports that one or more exceptionally large orders in the stock of Proctor & Gamble may have preceded and helped to trigger the broader market decline. There does not appear to have been any prior unusual trading in Proctor & Gamble that would have triggered the broader market decline.

E-Mini S&P 500 Future: Another focus has been the role of the E-mini S&P 500 future in leading the market decline and recovery. To a great extent, this concern merely reflects a basic fact of market dynamics — much of the price discovery for the broader stock market occurs in the futures markets. Those who believe that the broader market is overpriced (or underpriced) often will first sell (buy) futures for a broad market index rather than sell (buy) the individual stocks that make up that index. Moreover, many arbitrage traders study the relationship between futures prices and stocks prices. If they see a decline (rise) in the price of the futures compared to the price of the stocks, they will sell (buy) the underlying stocks in expectation that the stock prices quickly will follow the futures price. Indeed, this type of activity helps assure that stock prices will closely follow futures prices up or down.

Accordingly, given that the E-mini S&P 500 futures price fell by more than 5 percent in a few minutes and then quickly recovered all of the 5 percent decline, it should be no surprise that the broader stock market indexes showed similarly fast and similarly large declines and recoveries. It must be recognized, however, that the fact that stocks prices follow futures prices chronologically does not demonstrate what may have triggered the price movements. The triggering factor may have been an event in the futures market (such as an exceptionally large order), but it could have as readily been events or anomalous activities in individual stocks that caused someone to trade first in the futures markets.

Hacker or Terrorist Activity: At this time, we have not identified any information consistent with computer hacker or terrorist activity. I would also note that staff from our Enforcement Division are fully integrated in our review of the events of May 6 and will recommend appropriate action if they identify any activity that violates the securities laws.

Ultimately, we may learn that the extraordinary disruption in trading, however it may have been triggered, was the result of a confluence of events which, taken together, exacerbated what already had been a down day and led to an extraordinarily steep price drop and recovery. However, we are not prepared at this time to draw that conclusion....