04/22/15   Remembering the Flash Crash

Editor’s Corner

Ron Rowland

The Flash Crash of May 6, 2010 was a fading memory, but recent news has brought it to the forefront again.  I remember sitting in front of my trading screen that day, watching in disbelief as prices plunged to near zero on some of the ETFs I was watching.  “Disbelief” is the key word in the preceding sentence, as I did not believe all of the value had been sucked out of these funds in a matter of minutes.

I’d seen temporary trading glitches before on illiquid securities.  It can happen if someone comes in with a large “market” order and there are only a few hundred shares available to buy or sell at current prices.  However, this time was different.  I could see it happening on many securities all at once, and even the highly traded and liquid securities were affected.  Therefore, I believed what I was seeing—stocks and funds trading for pennies on the dollar.  What I did not believe was that these trades were taking place at a fair value.

I could not believe that US companies and funds would lose 90% or more of their value in a few minutes.  Sure enough, prices soon started rising, and a few minutes later they had nearly completely recovered.  Opinions varied as to the reason for the crash.  Many of the early theories included large directional bets by hedge funds, high frequency computer controlled trading, the usual “fat finger” theory of a trader accidentally putting in an order for millions of shares instead of hundreds, and good old technical glitches.  The answer was never clear, and actions to prevent a recurrence were never fully comforting.

This week we learn that an arrest has been made.  A London-based high frequency trader has been accused of driving the market lower with thousands of automated sell orders that would be pulled before they could be executed.  This “spoofing” was accomplished with a new order type he requested—a cancel-if-close order.  Then, buy orders were entered and filled at these artificially low prices.  If true, the plan probably worked far better than he anticipated, and drew more attention than he desired.  If it turns out the Flash Crash was the work of one man, then we can expect more regulation in our future.

Investor Heat Map: 4/22/15


Health Care is at the top again today, aided last week by additional merger and acquisition activity in the sector.  Energy continued its ascent, climbing from fourth to second after being on the bottom just three weeks ago.  Consumer Discretionary slipped a spot and Telecom gained one.  Technology climbed two places and is back in the top 5 again.  Consumer Staples was the big disappointment, slipping three places to sixth.  Industrials, Materials, and Financials continue to lag.  Utilities and Real Estate are the only two sectors in the red, but this week Real Estate is on the bottom after being in third just two weeks ago.


We are beginning to sound like a broken record when discussing the style rankings, but the simple fact is that the relative strength trends have been persistent.  The best performing market segment is small company stocks with growth characteristics.  This has been the case so far for all of 2015.  Both factors seem to be equally strong, and this can be seen in the rankings with Small-Cap Growth at the top and Large-Cap Value at the bottom.  The symmetry continues with Micro Cap in second place and Mega Cap being second-to-last.  There wasn’t much change in the relative rankings this week.  Mid-Cap Blend and Large-Cap Growth both moved a spot higher as Small-Cap Value fell two places lower.


China is on top for a third week.  It is not surprising to see a large partial retracement after such a huge short-term upward move.  However, China seems to be the exception to that rule, and this week China A-Shares were surging again.  Japan had a good week, allowing it to move ahead of Emerging Markets.  Canada has a high correlation to the Energy sector, and the strength of Energy has translated into a five-spot jump for Canada this week.  Although Europe managed to increase its momentum versus a week ago, it slipped below World Equity and Pacific ex-Japan.  The UK climbed a spot higher and pushed the US down another level in the process.  Latin America is the only thing preventing the US from sitting on the bottom.

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“Need to get in touch with a technician that will be able to programme for me extra features on [the software],
“namely, “a cancel if close function, so that an order is canceled if the market gets close.”

email from Navinder Singh Sarao (London trader accused of causing Flash Crash) sent to his broker in July 2009.


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