I have this dream...

Discussion in 'Trading' started by Hofferino, Dec 5, 2005.

  1. (I am fleshing out the details.)

    It is late in the afternoon, maybe 3:00pm EST (1:15 from close). ES has been drifting down. Longs are looking to for a chance to get out; maybe a bounce to break even. Some are looking for a good place to get short, as this looks like a long-term move.

    Suddenly, a surge of buying sets in. In 2 minutes, ES is up 10 points. Those who were long cover as quickly as they can, "before the spike disappears" and price returns to where it was. Many get short, in anticipation of a rebound.

    The market does come down back 3 points or so in the next five minutes. No major news has been announced, and now everyone's just kind of waiting to see what happens next. Those who shorted the top of the "spike" aren't ready to take their profits yet, and those who got caught short from the bottom, although sweating, can't bear to take a 7 point loss! They wait.

    The next surge of buying comes in.

    2 minutes--20 points.

    People who had sell limits just above the high of the previous surge "just in case price comes back up and gives me one more chance" are in (yay!) -- and 20 points down. They are stunned. Those who didn't get out with a 7 point loss, and are now down 27 ($1650/contract) wish they had.

    Brokers who allow traders to trade on margins of $500/contract "because they have their own risk department" are sweating nails. Some of their traders were already teetering on default after the previous surge. Now they are heavily in default ($5,000 account, short 8, down $12,000) "We should have taken them out when the market came down 3 points..." Emergency phone calls to VPs... "Wait for the market to come down a little; if you take them out now, we'll never see that money."

    Over the next 5 minutes, the market backtracks 6 points. Most shorts are still holding. Under their breath, they try and talk the market down further. "Come on sellers... keep on coming!" They're down 15-25 points per contracts, and they can't bring themselves to get out yet. "Just a few more points; not break even, but at least something reasonable. It can't stay up here!"

    The next surge is electrifying. 3 minutes--60 points. IB's automatic liquidation is firing left right and centre, driving the market up even more. The brokers with traders on $500 margins are so far past their risk parameters they are simply frozen; like deer in the headlights. Without automated liquidation, they weren't even able to react to the market's last surge.

    No one has the guts to go long here, and those who need to liquidate just can't bring themselves to do so.Everyone who was long at the beginning of the move (except those who took an opportune break and had no 'profit targets') has taken their profits--they thought they were smart when they got out with +20 points.

    Over the past 20 or so minutes, the market is up over 80 points.

    On the DOME, buy orders number in the 10 and 20 thousands at each of the 5 levels. Who's going to sell into that?

    Suddenly, the big numbers disappear. It seems as if the market is going to drop like wild. Prices start jumping 5 and 10 points per tick. At one point, price ticks down almost 40 points from its highs.

    Just as suddenly, the volume returns. Sell orders are devoured, and the buyers whoosh up the market another 120 points from their previous highs. We're now up 200 points. It's about 3:45. Huge volume on the buy side of the dome.

    200 points = $10,000/ contract. The most cautious traders (except those who use hard stops) are hurting. Almost all the smaller firms are looking at bankrupcy. People are saying that the buying came from "the far east."

    The rest of the day is, to the extent one can say so, unevenful. The big fall never happens. Nor does the market surge up anymore.

    The few traders who fell asleep at their screens and woke up to find themselves up 200 points per contract are sure they're dreaming. By the time they realize they aren't, they start to wonder whether clearing firms are going to be able to clear their trades and pay them their profits.

    Traders who weren't even in on the move are also nervous. While all the stock traders are jubilant, the futures traders realize this has been a slaughterhouse. They worry their firms will bankrupt. They call their firms to try and withdraw their funds. "The wire department is closed for the day..." they are told, "and the back office has frozen all funds."

    As I say, I have fleshed in the details somewhat, and I have done a poor job of describing it... I'm not a novelist. But is their any possibility of such a thing ever happening? If so, what can traders, who depend on their trading to earn a living, do to protect themselves?
  2. cool story.

  3. landboy


    Definitely was on the edge of my seat, thanks for the pick-me-up, i'm sooo bored at work right now... Obviously this couldn't happen in this day in age, post-1987, limit-up would have come into affect

    Did you dream who was responsible for the buying?
  4. nkhoi

    nkhoi Moderator

    it's just another day in market,

    If you can keep your head when all about you
    Are losing theirs - kipling
  5. According to the CME Price Limit FAQ, there is no price limit on the upside during regular trading hours.

  6. While I agree with you somewhat, a move like this is somewhat unprecedented. Would it bankrupt firms? Is anything in place to deal with something like this?
  7. When checking the intraday charts of the S&P for this year i saw that it was impossible to lose 12.50 points within 1 hour. The difference between the high and the low never reached 12.50 points, even not if you would take the worst possible entry and exit.

    Since january 1987 we never had a difference of 80 points within 1 day.
  8. True (perhaps -- I didn't actually check this). But attitudes such as this can also contribute to such a move. As the market continues to skyrocket, everybody just keeps saying "this can't be happening."
  9. It was a good story, but you made it seem like EVERYONE in the market was short. Who was doing the buying? A 200 point move in the spoos would be big, but it would be much more likely to move down that much, not up. (thats just how markets behave) What you described basically happened in 1987 just the other direction. If something like what you desribed happened most people would be elated, not bankrupt. The general public is long stocks, and a large move like this would be seen as having a huge wealth creation effect, no one would be worried about the traders that happened to be short.

    Also keep in mind that for this to happen it would have to move the cash index as well, your talking about a 15% move up in a matter of minutes. This is just a guess but I think that would take about $500 billion of buying power, I don't believe someone would have to get in stocks that quickly. Stock markets take long periods to climb higher, bur can fall quickly. Look at a graph of the dow in the 20s-30s, and reverse it so that the crash looks like a huge run-up and the bull market looks like a long decline. It just doesn't look right.
  10. You have it backwards, when the stock market is going up the only people getting hurt are professional and retail traders who happen to be short, there is no such thing as massive panic BUYING in the stock market, this only happens on the sell side. Markets go down a lot faster than they go up.

    #10     Dec 5, 2005