May 6th Hypothesis

Discussion in 'Stocks' started by huckabilly, May 21, 2010.

  1. Working Hypothesis for May 6th stock market plunge.

    To many people reading this post, my hypothesis for the May 6th stock market plunge might seem far fetched or even impossible, but please hear me out.

    My theory for the plunge is based on my observations from my experience trading spot currency. Since spot currency trades over-the-counter (not through an exchange) certain scams are possible for big banks to pull off. For this hypothesis I am going to name one bank in particular since they are the bank that I believe it is behind both the stock market plunge and the spot currency scam. The bank is Deutsche Bank.

    Often times, when trading spot currency, the market will suddenly spike or “flash crash”. These “flash crashes” in spot currency happen daily, though usually on a much small scale than what we saw in the May 6th stock market crash. Here is how the spot currency scam works.

    Using their level III or higher vantage point on orders, Deutsche Bank or other banks will look for a particular type of order – stop orders. So, let us say for example that Trader X has 100 contracts Eur/Usd with 100 contract stop that is thirty pips away from the market at 1.2370, spot 1.2400. Seeing this, Deutsche Bank will then do two things. First, they will place an order to buy 101 contracts at 1.2370. Here is where it gets interesting. Using an “off exchange” sale, Deutsche Bank will then fill its own order for 1 contract at 1.2370. When the price hits the market, the other 100 contracts are cleared at 1.2370. The next order Deutsche Bank will fill is back at 1.2400. This is where it will sell the 100 contracts it just bought at 1.2370.

    It is a clear manipulation of the market and is only allowed because off exchange trading. It is also a classic bucket-shop maneuver.

    Normally, this type of manipulation would not be allowed through an exchange. In fact, exchanges were designed to prevent exactly this type of manipulation. On May 6th, the market exchanges failed and the old bucket shop tactics where able play on Wall Street. Why? Dark pools, a.k.a. over the counter, off exchange trading.

    In order to prevent May 6th from happening again, two things have to happen. First, shut down all off exchange trading. Second, end level III and higher order viewing or prevent those who have it from entering trades. If the banks can’t see the stop orders, they will not be able to hunt them effectively.

  2. The scams keep stealing hard working money of millions people around the globe. Can these people sleep at nigh or swallow stolen food??????????

    When they look at their kids in expensive clothes and big yatch can they see tears in kids that they stole money from????

    At the end of the day they will be punished.....

    .Success is accomplishment of good goals by living God's commenmands.

    Stealing, MANIPULATING is not acceptable for humans.
  3. olias


    I'm trying to follow your logic, so I have to ask: why exactly was May 6th special? Couldn't they do that any time they wanted, according to your theory? Dark Pools didn't exist until May 6th?

    My own theory is less conspiracy-esque. The stock market had made a steady gains for months. I don't know that the markets had ever risen so much over that given time frame. You can look at Elite Trader itself over that time and find any number of posts that 'market keeps moving reason to be shorting until things change'. If everyone thinks that way then you have a shortage of Shorts in the market. No shorts looking to cover...and a build-up of Sell Stops in the market. It's like watching the dominoes get lined up to come tumbling down when significant selling starts.

    I'm sure I'm being overly simplistic, and it's a crude theory but it seems logical to me, and more satisfying than accusing anyone of manipulating the markets. Just me
  4. NoDoji


    I agree with olias here. It was pretty standard price action. Market was in a "buy every dip" mode for many months. Dips were reliable support areas that brought in buyers on high volume. The market had been drifting down and the dip buyers were likely waiting for a mini-capitulation selloff. When the market cracked the 1140's everyone looked to the 1125 zone. When the rally off 1125 was extremely weak and the retest (that point at which the volume buyers come in when support holds) broke down. The sell programs kicked in, taking out the latecomers to the party first and then the earlier bulls as the even figure broke.
  5. Why not read whats already been explained in the press, instead of making up fairy stories.
  6. Can you really trust what you read in the news nowadays?
  7. yes ive seen spot EUR/USD "crash" 100pips in 5 min...

    5% in ES in 5min is a different story
  8. In order for a stock price to change, a transaction must take place, buyer meets seller. On an open cry exchange, such as NYSE, it is the specialist’s job to match orders. In over the counter markets such as the NASDAQ, the computer matches orders.

    Here is the problem with the computerized system. If there are no orders at the market price because of low liquidity, the computer will match the next available order even if the next price is 33% lower, as was the case with Proctor and Gamble.

    The second problem is that many large institutions can see very deep into the market and trade with anonymity in these so call “dark pools” of money. They can trade with themselves, for example. So, if liquidity dries up, the big guys can easily blow out stop orders. They know the exact location of stop order prices already, right? All it would take is one share to exchange hands to move a stock price from $60 to $43.

    The result is some chump’s stop gets triggered, and then the big institution can sell the $43 shares back to the specialist on the NYSE for $60 – sweet deal.

    Here are the lessons we’ve learned from May 6th. Over the counter exchanges and dark pools, stop orders, plus level III transparency, and the malicious intentions of large institutions can wreck havoc on markets. Thankfully the heads of the NASDAQ had the clarity to cancel the bogus orders.

    Heaven help anyone trading other OTC markets.
  9. It can't be stopped, as long as humans are involved
  10. pookie


    I agree with you, huckabilly. This whole thing has made me very leery of entering the market. I'm surprised there is not more discussion about this here at ET.
    #10     May 23, 2010