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BlueHorseshoe

Where Were You when . . . ?

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Where were you during the flash crash of May 6th 2010? Did you have a position open, or did you have orders in place that were triggered during the price decline?

 

The flash crash occured in the same week that I had first discovered trading. Amusingly, being completely new to trading, I watched the crash in real time and thought it was a perfectly normal day (I had absolutely no frame of reference for volatility at that stage)! Also, because it occured on the same day as a general election here in the UK, it got no real coverage in the news.

 

Has the flash crash (or any of the subsequent similar incidents in the oil markets etc) affected how you trade or manage risk at all?

 

BlueHorseshoe

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Where were you during the flash crash of May 6th 2010? Did you have a position open, or did you have orders in place that were triggered during the price decline?

 

The flash crash occured in the same week that I had first discovered trading. Amusingly, being completely new to trading, I watched the crash in real time and thought it was a perfectly normal day (I had absolutely no frame of reference for volatility at that stage)! Also, because it occured on the same day as a general election here in the UK, it got no real coverage in the news.

 

Has the flash crash (or any of the subsequent similar incidents in the oil markets etc) affected how you trade or manage risk at all?

 

BlueHorseshoe

 

 

I was at my desk working. Watched in real time. I thought WW3 had started.

 

I was short euro/usd and down about 30 pips, My TP had been set for 100 pips and it blew right thru without triggering. I was up 500+ pips at one time, but knew from past experience that if I tried to close the position the platform would probably lock up.

 

That is very funny, thinking it was normal volatility. :haha::):haha:

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That is very funny, thinking it was normal volatility. :haha::):haha:

 

I guess it just shows the extent to which we interpret market behaviour relative to perceived norms.

 

Have you changed anything about the way you trade since the crash, or do you just regard it as a completely unpredictable and unavoidable rare event?

 

Bluehorseshoe

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I had a position on in my C2 account and watched as it happened. I was completely shocked how fast the market moved and how quickly my losses mounted. I was long just for a small scalp. These weren't real losses but it was on my track record (which I've hidden to keep firms/traders from trying to copy me).

 

It really took me by surprise. But, let me back up... I had actually predicted that this would happen the night before. Yes, I predicted the flash crash but I didn't expect it to happen as quickly as it did. I was looking for that move within about 3-5 days to take place.

 

I actually made a large profit from this trade on the long side because I added a bit which I rarely/almost never do when I'm down. But, I recognized it was an exceptional opportunity.This event was I believe the largest DD I experienced over my track record.

 

Yes, it did change my beliefs. C2 didn't allow me to enter a stop with my entry (efficiently) but it made me swear to ALWAYS enter a stop at the time of entry and not after entry. I realized that when these things happen there isn't time to react! I always use bracket orders. This came in handy recently when my internet went down and I was in a large trade. My phone is an internet phone, as well so I had no way to call the trade desk.

 

But it also made me really question the value of stops for longer term traders...As a day trader it reinforced that notion but for swing traders.. I think it shows how risky using stop losses can be because a lot of people lost a lot of money who had stop losses.

 

Events like these are unfortunately hard to come up with an answer for. Also, I learned that its risky to get involved during these periods in equities where trades can be busted and losses can mount. Fortunately, futures don't have that rule. I read that a lot of traders lost money in equities due to busted trades. I think that made it worse as traders were afraid to try to take advantage of the situation.

 

I think for sure though this was a bad event for all traders and investors, and something I never want to see happen again.. though surely it may.

---

Blog - The Market Predictor

Edited by Predictor

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I guess it just shows the extent to which we interpret market behaviour relative to perceived norms.

 

Have you changed anything about the way you trade since the crash, or do you just regard it as a completely unpredictable and unavoidable rare event?

 

Bluehorseshoe

 

I changed nothing. The next day trading as usual. Something about Lightening striking twice.

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Also, I learned that its risky to get involved during these periods in equities where trades can be busted and losses can mount. Fortunately, futures don't have that rule. I read that a lot of traders lost money in equities due to busted trades.

 

Hi Predictor,

 

Thanks for an interesting response!

 

The more I read about it, the more it seems that the futures exchanges operate with much 'fairer' and more transparent rules than equities exchanges (if anyone knows otherwise then please post!). One of the main differences seems to be the relative simplicity of order types available for futures. Busted trades are another example.

 

BlueHorseshoe

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Hi Predictor,

 

Thanks for an interesting response!

 

The more I read about it, the more it seems that the futures exchanges operate with much 'fairer' and more transparent rules than equities exchanges (if anyone knows otherwise then please post!). One of the main differences seems to be the relative simplicity of order types available for futures. Busted trades are another example.

 

BlueHorseshoe

 

I was on a trading holiday May 10, so did not notice it.

Re busted trades - different rules for different countries I guess, however as I understand it busted trades are done whereby they are re-booked at a fair price - this way the auto traders who automatically re-hedge some where else are not penalised for doing what they do, and at the same time it does not take other players out of the game if they go broke,

The other reason why they were done was as it forces people to ensure that it is in a fair and orderly market.

Too many fat fingers could occur - selling 1million shares at 1 cent etc......no matter how many checks you have errors will occur and hence I think there is validity in re-booking trades on those rare occurances.

Back on the floor there were always occurances whereby negotiations to cancel errors occured and it depended on who you dealt with and if they liked you. (I still have my black list of people that owe me money :)) At the worst case you could go to the exchange and they would bust the trade as it never should have occured as it was outside market parameters. Otherwise imagine how easy it would be to rip clients faces off - not good for market trust.

Hence I think busting trades in those rare events is valid - not a crash, not a plane into the building event, but a flash crash yes - subjective of course.

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Hence I think busting trades in those rare events is valid - not a crash, not a plane into the building event, but a flash crash yes - subjective of course.

 

 

Hi SIUYA,

 

Thanks for replying.

 

I can't honestly decide whether or not I agree with you.

 

On the one hand it's surely the case that everybody trading must be aware of the risks involved, crashes and order entry errors included, and have chosen to take on those risks. While I appreciate that errors and misunderstandings would be unavoidable in the turmoil of a busy pit, isn't any modern day trader who enters too many noughts basically just pretty damn careless? Is providing a safety net for careless or irresponsible market participants really promoting fairness?

 

And although greatly accelerated in pace, it could also be said that the loss of liquidity in the flash crash is no different from the loss of liquidity in any other kind of crash.

 

On the other hand, I suspect my feelings might be rather different if I were to find myself on the wrong end of this kind of event :)

 

By the way, which exchange did you trade on, the LIFFE?

 

BlueHorseshoe

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BTW...

 

Here's a link to a brief description of the event. It has links to references if one wants to know more.

 

2010 Flash Crash - Wikipedia, the free encyclopedia

 

Thanks!

 

One of the reasons I posted this thread was because there is repeated suggestion that many funds made material changes to the design of their systems following the flash crash; I'm wondering how many retail traders did the same?

 

BlueHorseshoe

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Hi SIUYA,

 

Thanks for replying.

 

I can't honestly decide whether or not I agree with you.

 

On the one hand it's surely the case that everybody trading must be aware of the risks involved, crashes and order entry errors included, and have chosen to take on those risks. While I appreciate that errors and misunderstandings would be unavoidable in the turmoil of a busy pit, isn't any modern day trader who enters too many noughts basically just pretty damn careless? Is providing a safety net for careless or irresponsible market participants really promoting fairness?

 

One of the key requirements for ensuring trust in the equity (or any market) is an assurance that it will be fair, orderly and can be seen to satisfactorily deal with areas or market manipulation. Dont forget that the key participants are not necessarily (however are bec0ming increasingly so) the short term speculators.

If you scare others away either by - sending them broke, or loosing their trust - then the market dies.

Fairness is about ensuring not that irresponsible people are protected -it is about treating people equally, and also understanding mistakes occur. (mistakes - not deilberately manipulated theft or investments over time). continued mistakes usually results in dismissal or removal of a licence - hence they are not really protected.

Lets ask Knight securities today? :)

Knight Market-Making Unit Says It Had

 

And although greatly accelerated in pace, it could also be said that the loss of liquidity in the flash crash is no different from the loss of liquidity in any other kind of crash.

 

On the other hand, I suspect my feelings might be rather different if I were to find myself on the wrong end of this kind of event :)

 

I would say the major difference is one is a loss of liquidity due to normal external market forces and not manipulation by internal market liquidity providers, whilst one is a result of the actions of market participants as a whole - it is a very open subject. One could be seen as due to manipulation, the other not.:2c:

Would you want a terrorist organisation to not have their trades cancelled should they profit out of their actions? What about an insider trader?

 

again a lot goes back to fair and orderly - I can tell you there was a day Oct 1997 -whereby (I can laugh and say theoretically/practically - I was the only person in the world at that time willing to make a market in a few instruments - everyone else on the floor skedaddled. Was if fair or orderly - did these other people fail to meet their obligations to make markets.??)

 

By the way, which exchange did you trade on, the LIFFE?

 

Oussssstraaaalia mate - Sydney Futures floor then equity options floor at the ASX.

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Do you remember when… the way we were ?

 

The spikey action and range this morning in the currencies struck me as being very similar to the way it used to be 3 or 4 days a week in ‘85 – ’88 :)

Those were “fun” / stressful / exciting times to be alive and trading!

…placing stops really was stupid

...and a whole bunch of other cowboy guidelines smoothed the ‘thinking’ (or lack of it ;) )

… if only I was as good at it then as I am now :wrygrin:

... honestly - I was a fkn mess back then :rofl:

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The following quote is from an article interviewing Stephan Kraus, Vice President of Institutional Equity at Deutsche Börse. It would seem to suggest an interesting alternative to the "circuit breaker" approach employed in the US.

 

What measures does the exchange have in place to prevent a "flash crash" like the one witnessed on May 6 in the US? Specifically, are there presently "circuit breakers" in place that would bring a halt to trading under a similar scenario? Are market makers obliged to actively quote bid and offer prices under these extreme circumstances? Are there any additional measures that can be put in place to prevent a similar market disruption on the Deutsche Börse?

 

Deutsche Börse’s electronic trading system Xetra features volatility interruptions as safeguards against potential flash crashes. Volatility interruptions are automatically initiated if the potential execution price of an order lies outside a pre-defined price range around a given reference price. Once a volatility interruption has been initiated, continuous trading is interrupted and a change in trading form to auction is triggered. Market participants are informed of this market situation and may react to it by either adding, modifying or deleting orders and quotes. Continuous trading resumes after a certain minimum duration of the auction. In case of larger price deviations, the auction is extended until the volatility interruption is terminated manually. Given the described circuit breaker mechanism, a scenario similar to May 6 in the US is impossible to happen on Xetra. This is particularly true since the calculation of the DAX is based on Xetra data only, thereby effectively taking into account trading interruptions on Xetra while other platforms may continue to trade.

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