II. Effects ~
Delayed price data leads to uncertainty, fear, and panic.
The main chart shows when significant stub quote trades occurred (light
blue dots) and the relative intensity of stub quote trades in the Stub Trades
Other reports point to Stub Quotes as a factor in the Flash Crash. This is
not supported the data. Nearly all Stub Quote Trades, which are
trades executed at stub quotes, occur after the market
bottomed and therefore stub quotes could not have been a cause
of the crash.
Stub quote trades may have been the result of a combination of a lack of
liquidity and panic induced market orders based on delayed quote data.
People watching television news sources showing the plunging Dow Index (which
we now know was delayed 2+ minutes) may have been one source of stub quote
trades. Also, the triggering of stop loss orders, which become market orders
when hit, may have resulted in stub quote trades.
However, it is interesting to note that a significant number of stub quote
trades appear immediately after the perceived bottom of the market -- when the
very much delayed Dow Index makes it's low. In fact, for those with timely
quote data, the market was actually rocketing higher when nearly all stub
quote trades executed.
NYSE Slow Mode or Liquidity Replenishment Points (LRPs)
The NYSE employs a circuit breaker known as the
Liquidity Replenishment Point or LRP. Each NYSE stock
has a LRP which is essentially a predetermined price above and below the trade
price of that stock. If the price of a trade in that stock exceeds the upper or
lower LRP price, software at the NYSE automatically turns off NYSE's
auto-execution system and places the stock in Slow Quote Mode, which means it's
handled differently by that stock's Designated Market Maker.
When an LRP is triggered, the NYSE will send out a quote with a special tag
indicating that stock is now in Slow Quote Mode. That quote is sent out the
same way that other quotes are disseminated, which means if the quotation
system is overloaded and delayed (recall the NYSE-CQS Delay), the quote with
the special tag will be delayed too. This means a lot of orders can get sent
between the time the switchover to LRP mode occurs on the NYSE floor and the
reception of the quote indicating the switchover occurred.
We have noticed that trade executions in a stock immediately after it hits
an LRP are often at substantially lower prices than bid prices on other
markets. It was this reason why we began our flash crash by first investigating
LRP's role in the flash crash. However we found that the
number of stocks switching to
Slow Mode did not become significant until well after the market had already
Anemic Recovery Volume
The Trade Rate color ribbon shows trading activity first surged at 14:42:44
(bright red), again at 14:43:20, 14:43:45, 14:44:05, and then at 14:44:30 and
remained high until about 14:46:20, where it began slowing considerably
(changing to green and cyan) and except for a brief surge ar 14:49:25, remained
low. The Quote Rate ribbon (directly above the Trade Rate ribbon) shows a strong correlation and
also begins to slow around 14:46:20 (note this is also about the same time the
NYSE-CQS Delay peaked).
This drop in quote and trading volume also occurs shortly after the market
bottomed (though the perceived bottom for those using the DJI as a proxy, would
not come for another 40 seconds at 14:47). Yet prices of stocks rocketed
higher. By 14:48, the SPY, and many other stocks, had regained all they had
lost from the drop at 14:42:44 and on significantly lower volume.
Applying simple supply and demand logic to these events might suggest the
recovery was not driven by stong demand, but rather a lack of supply; perhaps there
were few sellers left.
Large eMini Futures Discount (ES.M10 - SPY)
Beginning at 14:46:35 the difference between the price of the
SPY equity and the eMini futures contract grew to about 3% at 14:48:50, and
returned to normal at 14:50:40. A considerable arbitrage opportunity, selling
SPY and buying the future contract, existed for nearly 4 minutes. Some of this
difference could have been due to the Waddell 75,000 contract eMini sell
program that reportedly took place between 14:32 and 14:52.