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Strategies & Market Trends : ahhaha's ahs -- Ignore unavailable to you. Want to Upgrade?

To: ahhaha who wrote (17901)	2/20/2011 4:49:32 PM
From: ahhaha	Read Replies (1) \| Respond to of 24758

Flash Crash report part 7 LIQUIDITY CRISIS WITH RESPECT TO INDIVIDUAL STOCKS The second liquidity crisis occurred in the equities markets at about 2:45 p.m. Based on interviews with a variety of large market participants, automated trading systems used by many liquidity providers temporarily paused in reaction to the sudden price declines observed during the first liquidity crisis. These built-in pauses are designed to prevent automated systems from trading when prices move beyond pre-defined thresholds in order to allow traders and risk managers to fully assess market conditions before trading is resumed. After their trading systems were automatically paused, individual market participants had to assess the risks associated with continuing their trading. Participants reported that these assessments included the following factors: whether observed severe price moves could be an artifact of erroneous data; the impact of such moves on risk and position limits; impacts on intraday profit and loss (“P&L”); the potential for trades to be broken, leaving their firms inadvertently long or short on one side of the market; and the ability of their systems to handle the very high volume of trades and orders they were processing that day. In addition, a number of participants reported that because prices simultaneously fell across many types of securities, they feared the occurrence of a cataclysmic event of which they were not yet aware, and that their strategies were not designed to handle. Based on their respective individual risk assessments, some market makers and other liquidity providers widened their quote spreads, others reduced offered liquidity, and a significant number withdrew completely from the markets. Some fell back to manual trading but had to limit their focus to only a subset of securities as they were not able to keep up with the nearly ten-fold increase in volume that occurred as prices in many securities rapidly declined. HFTs in the equity markets, who normally both provide and take liquidity as part of their strategies, traded proportionally more as volume increased, and overall were net sellers in the rapidly declining broad market along with most other participants. Some of these firms continued to trade as the broad indices began to recover and individual securities started to experience severe price dislocations, whereas others reduced or halted trading completely. Many over-the-counter (“OTC”) market makers who would otherwise internally execute as principal a significant fraction of the buy and sell orders they receive from retail customers (i.e., “internalizers”) began routing most, if not all, of these orders directly to the public exchanges where they competed with other orders for immediately available, but dwindling, liquidity. Even though after 2:45 p.m. prices in the E-Mini and SPY were recovering from their severe declines, sell orders placed for some individual securities and ETFs (including many retail stoploss orders, triggered by declines in prices of those securities) found reduced buying interest, which led to further price declines in those securities. Between 2:40 p.m. and 3:00 p.m., approximately 2 billion shares traded with a total volume exceeding $56 billion. Over 98% of all shares were executed at prices within 10% of their 2:40 p.m. value. However, as liquidity completely evaporated in a number of individual securities and ETFs,11 participants instructed to sell (or buy) at the market found no immediately available buy interest (or sell interest) resulting in trades being executed at irrational prices as low as one penny or as high as $100,000. These trades occurred as a result of so-called stub quotes, which are quotes generated by market makers (or the exchanges on their behalf) at levels far away from the current market in order to fulfill continuous two-sided quoting obligations even when a market maker has withdrawn from active trading.