Nanex ~ 03-May-2012 ~ Liquidity Dropout Event in BRK.A
On May 3, 2012 at 9:32:21, the stock price of Berkshire Hathaway crashed, losing 90%
of its value in the blink
of an eye. Literally. In about 180 milliseconds, 29 trades took BRK.A from $121,862.00 to $12,011.10. Nasdaq's bid dropped all the
way to $1.00 -- which is an improvement from 2 years ago when many stocks went to a
penny after the flash crash.
Maybe someone needed to get out of the stock right away. Maybe the owners of Berkshire aren't market
savvy. Maybe Warren Buffett was splitting the stock. Maybe these High Frequency Traders
(HFT) know a lot more about pricing stocks than the rest of us. Maybe this was their
new volatility inducing algo (that we stumbled
on yesterday) gone awry.
What may be even more damaging to the credibility of HFT, is how the bid price returns from $1.00 to back above $120,000 about 16 milliseconds later. How can this possibly be justified as acceptable? Liquidity
in one of the most recognized stock symbols in America suddenly vanishes and reappears 0.2 seconds (200ms) later? This is a prime example of market dysfunction caused by
giving priority to speed above everything
else. Common sense included.
It is important to understand that this is not a glitch. This is the way HFT operates.
These Liquidity Dropout Events (LDE) happen thousands of times every day and occasionally
a few will have equally spectacular price changes. But more disturbing are the thousands
of LDEs with price changes small enough that they go unnoticed by people who trade infrequently.
1 millisecond chart showing trades (circles), bids and asks (triangles) color coded
At 10:37:48, the NYSE sent out the following notice which busted the trades. Note
that BRK.A traded all the way down to $12,011.10 on Nasdaq.
The Sell Short Restriction in BERKSHIRE HATHAWAY (NYSE: BRK A) was triggered by trades
at or below $118,340.96 that were executed at 9:32:21 a.m. ET. The exchange
trades have been busted pursuant to exchange clearly erroneous rules. (No trade at
or below that price occurred on the NYSE.) According to the ruling market(s),
this decision is not subject to appeal.
Accordingly, the Sell Short Restriction that was triggered by these trades will be
lifted at 10:47 a.m. ET today. Once the Sell Short Restriction is lifted, Sell
Short orders on the NYSE will be refiled at their limit prices.