Monday, August 24, 2015

Flash crash of Mon 24 August 2015


  • The U.S. markets took investors on a stomach-churning ride today. The Dow briefly plunged more than 1,000 points, sending a shiver of fear from Wall Street to Main Street.

On Monday, Aug. 24, 2015, global stock markets were in panic-mode. The selloff began in China, infected other Asian markets, then Europe.  The selling spilled over to Wall Street right from the opening bell, with the Dow Jones Industrial Average plunging over a thousand points lower in the first 10 minutes of trading. For retail investors, the pain of the panic selling was magnified by a near breakdown in trading for many Exchange Traded Funds (ETFs). Huge price swings of 30% or more in just a few minutes, and widespread trading halts for many ETFs, resulted in buy and sell orders getting filled at huge discounts to the actual market prices of the underlying stocks.

Charts 10 days later:


















China

European markets Aug 24

US markets - midday- 24 Aug 2015

US markets - EOD - 24 Aug 2015

In hindsight, the market was able to recover, and by October, the Dow had erased all signs of its previous decline. Yet what investors focused on the most was the magnitude and speed of the decline and the accompanying disruptions in trading. The use of futures contracts, exchange-traded funds, and more complex trading strategies led many to conclude that there was a near-vacuum of liquidity to open the trading day on Aug. 24, and that was what created the huge air pockets in which stock prices oscillated wildly. Many blamed high-frequency trading algorithms and other automated strategies for the extent of the swings.

Regardless of the cause, the hundreds of circuit breaker-created trading stoppages in individual stocks and ETFs wrought havoc on the way professional traders handle their portfolios. How to handle the interconnections across financial markets remains an open question, because what became clear on Aug. 24 is that shutting down one part of the market while leaving other closely related parts of the market open only creates confusion and the potential for disastrous consequences.

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