May 6th stock market plunge

Discussion in 'Forex Trading' 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.



    Best
    LJ
     
  2. cigarno

    cigarno

    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.

    two problems:
    (1) where is that off exchange thing you talk about?!
    (2 what if the market goes below 1.2370 then DB would lose on the deal