The "Flash Crash" Continues to Reveal the Hidden Structure of our Equity Markets
August 09, 2010
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I am absolutely fascinated by this topic ... I can think of few things more important for investors than to comprehend fully what the flash crash was all about and what the implications are of the hidden dynamics of our equity markets that few investors ever gave a moment's thought to prior to that "warning shot" event.
The Atlantic has come out with this quality write-up based upon the research of data services firm Nanex. I think it is well worth a look... that knife pattern, or another like it, could become the knife that stabs our portfolios during moments of heightened market volaility.
Here is the article.
http://www.theatlantic.com/science/archive/2010/08/market-data-firm-spots-the-tracks-of-bizarre-robot-traders/60829/
"The trading bots visualized in the stock charts in this story aren't doing anything that could be construed to help the market. Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there's no way they'd ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants."
It's thanks to Nanex, the data services firm, that we know what their handiwork looks like at all. In the aftermath of the May 6 "flash crash," which saw the Dow plunge nearly 1,000 points in just a few minutes, the company spent weeks digging into their market recordings, replaying the day's trades and trying to understand what happened. Most stock charts show, at best, detail down to the one-minute scale, but Nanex's data shows much finer slices of time. The company's software engineer Jeffrey Donovan stared and stared at the data. He began to think that he could see odd patterns emerge from the numbers. He had a hunch that if he plotted the action around a stock sequentially at the millisecond range, he'd find something. When he tried it, he was blown away by the pattern. He called it "The Knife." This is what he saw: [Please click to the article here to see the chart.]
Here are some more of the flash crash intraday millisecond charts that data services firm Nanex has uncovered:
http://www.nanex.net/FlashCrash/CCircleDay.html
And here is the company's ongoing analysis of the flash crash event.
http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html
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