article coherently argues they were caused by "broken HFT models that were unloading positions without regard to price or fair value." http://www.etf.com/sections/blog/understanding-etf-flash-crashes?nopaging=1
%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%Like Art Cashin said''panic sellers NEVER win'' Cant blame anybody but the un- informed panic sellers. Wisdom is profitable to direct
True, but the article also argues that most of the trades were sub-100 share prints, suggesting these were "mom and pop" investors who either had bids to buy or stops in place to sell at market. What's interesting is Rule 48, explained in the article... "Because of the chaos of Friday’s trading, the NYSE opted to invoke the rarely used “Rule 48.” Rule 48 effectively lets the designated market makers not tell anyone where things are going to open until they start trading, removing a level of information from the market."
I buy some of what he's saying...but not all of it. Everyone knows we have a high volume of HFT. The SP was limit down about 20 mins before the open...which means the price stopped at 1870 - however everything in the SP continued to trade. So when the open occurs and limit down is lifted, all these computers (that know precisely where the SP should be, based on the underlyings) go nuts and start arb'ing back and forth trying to get parity. Meanwhile, certain ETFs and some underlyings get halted for circuit breakers - further confusing the situation. If you have an underlying that's halted...that's fine...no problem, the index can reflect that just fine. But when you have baskets/indexes/ETFs that are halted when SOME underlyings continue to trade, then you will have confused algorithms that are always trying to square the imbalance. That squaring is going to bring the ISO orders in very odd numbers because the imbalance is slight, since only a few issues are halted and out of balance. The computer is trying to figure out precisely how many of the basket/index to buy/sell to square where the price SHOULD BE. It is a mess, to be sure.
HFT just skimms from the middle, can't see how it would make moves like this, everyone blames HFT for everything, can't see as it makes much difference, except for money flow going it's way making the game over all harder.
"RSP got hit hard Monday, before it recovered, trading below $50 when “fair value” for the underlying stocks never dropped below $71:" The interesting question here is why wasn't this arbitraged out sooner? One would think that there are several HFT shops set up to capture this type of opportunity.
They may not have had reliable constituent data for their modeling, to be sure they were buying mispricings rather than falling knives.
This smells like stop running. If you mix a little bit of shit in with a lot of chili, most people can't tell the difference which is what the author is doing.