It’s 2:40 p.m.. Do you know where your stock trades are?
Ok, so that is a take-off from the Chicago curfew – “It is 10:30 p.m. … Do you know where your children are?” I remember that message scrolling across the TV screen. I never did find out what would happen if the police caught you outside after curfew.
I only knew what would happen if my parents caught me after their curfew. I made it home on time. Take a look at this chart from May 6th – it’s what a 10-minute market crash and recovery looks like on the S&P 500 Index, now know as the “Flash Crash.” 
For reasons yet unknown, a huge sell order hit the E-Mini S&P 500 futures contact on the Chicago Mercantile Exchange around 2:40 p.m., causing hundreds of automatic sell programs to kick in that caused more sell programs to kick in, that caused more, well, you get the picture. Sell orders hit all the exchanges. It was fast and furious.
Right around 2:45, buying started to come back into the markets. The Dow traded down over 1000 points form the previous day’s close and recovered to close down (only) 348 points at 10,520. The S&P 500 lost 37 points on the day to close at 1128. If you weren’t glued to a monitor, you missed most of it. It was over in a “flash.”
We used to call this type of trading “program trading.” Many blame the October ’87 “Black Monday” crash on programmers. Or, remember the now defunct Long Term Capital firm who theoretically had a “fail-safe can’t lose” computer model? Flash forward to May 6, 2010.
Perhaps algorithmic trading will be blamed this time. “Algo” trading is automatic – programmed trading done at hyper speed, across all markets and perhaps more importantly, without any human intervention. No market makers, no specialist to step in and take the other side of the trade, just the computers trading away. The days or orders being executed only on the New York, American or Nasdaq exchanges are long gone. Trades can and will be done anywhere, all trying to get the best execution.
Watch for more to be discovered and discussed on this crash. Days like May 6th are why I am a long term believer, a long term investor. While we should expect more volatility in the markets, you can be sure that I will not be trading nor writing algorithmic programs any time soon.
