Quant deleveraging/forced liquidation?

I’m hearing rumors of computer/exchange problems being blamed for intensifying today’s selling. Suggests to me the possibility of quant funds forced deleveraging, as momo unwinds + program trading = forced quant unwinds, and even further illiquidity, intensifying the positive feedback loop. More as it comes, if it comes…

EDIT (4:30 PM): Lots of talk about a Citi fat finger. Not sure how believable I find this. But more importantly, the carry trade/risk on-risk off nature of this market was exposed today, especially in regards to the USD vs JPY. With perpetual ZIRP, the JPY has been the carry currency of choice for years. But going forward, especially post-crisis (when JPY surged as carries unwound), JPY/JGBs are terrible safe havens considering Japan’s ballooned debt/GDP, and USD is a more favorable candidate at least in relative terms. Today’s absolute plunge in USD/JPY shows how much of the rally since March 2009 was due to traders carrying low yielding currencies to chase yield. Absolutely a function of excess liquidity. And as far as market liquidity, today also exposes how little exists in this market.

EDIT (8:08 PM): A little credence to the algo-driven JPY carry unwind thesis to explain the mechanics of today’s plunge, courtesy of Bruce Krasting:

As of this writing none of the big trading houses has fessed up to adding a zero on an e-mini electronic order. We shall see. I think it was connected to a move in the Dollar/Yen. When that break occurred it triggered some algo machine to sell. And that happened when the NYSE had a halt.

It was computers that are behind it. Mary Shapiro at the SEC has been very reluctant to tackle this issue. Not any more. Look for her to make a statement shortly. The axe is going to fall on an important part of how the markets function.

JPY

FXY

Either way some damage was done. This is a picture of one stock that traded 3450 shares at .01 cent or $34.50. It was worth more than$140,000 at the close. The trade above for 7,254 shares at 41 cents resulted in a paper gain to someone of $300,000. These will be reversed. What a system…..

Bloomie

And check out some anecdotal comparisons drawn to September 30, 2008 (right at the onset of the 08 market crash), as pointed out by multiple readers:

Sept. 30 2008

NEW YORK (CNNMoney.com) — An accidental trade drove shares of Google Inc. to unbelievable lows Tuesday, causing the Nasdaq to correct the stock’s closing price and adjust the index’s final value.

The Internet search engine’s stock appeared to have plummeted to a low of $25.80 at one point during the session. Shares opened at $396 and traded in a relatively tight range before dropping sharply near the close of trade.

“A market participant sent in a large number of orders and drove the price down at approximately [3:57 p.m. ET] which caused the bid-offer to be artificially low due to their mistake,” according to a Nasdaq spokesman.

Google’s (GOOG, Fortune 500) official closing price will be adjusted to $400.52 from the original, inaccurate settle price of $341.43. And the closing value of the Nasdaq 100 Index will be changed to 1594.63.

Nasdaq said that it will cancel trades made at or above $425.29 and at or below $400.52 that were executed on the Nasdaq between 3:57 pm ET and 4:02 pm ET.

The closing value of the Nasdaq Composite Index and several other related products will also be adjusted.

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One Response to Quant deleveraging/forced liquidation?

  1. Pingback: I-L-L-I-Q-U-I-D-I-T-Y… | Stocks!

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