Courtesy of Pam Martens.
JPMorgan’s Plunge on August 24, 2015
On Monday, August 24 the Dow Jones Industrial Average plunged 1089 points within the first few minutes of trading. Close to half of that loss was recouped by the closing bell when the Dow clocked in with a loss of just 588 points. So if the small investor didn’t panic, he made out okay, right? Not necessarily.
Small investors frequently have in place standing stop-loss orders that are sitting on the stock exchange order books to sell a stock at a pre-determined exit price that is lower than the current market to “stop” further losses. Once the target price of the stop-loss order is reached, the order automatically becomes a market order and is executed at where the market happens to be. In properly functioning, orderly markets, this would typically mean the stop-loss order would be executed at, or close to, the designated target price. In flash-crash markets, on the other hand, it’s a recipe to be robbed in broad daylight.
Let’s take, for example, the trading in the stock of JPMorgan Chase on the morning of Monday, August 24. The stock had closed at $63.60 on the prior Friday, August 21. Its opening trade on Monday morning was at $59.29. Within a matter of minutes, however, the stock plunged to $50.07 – a stunning 21 percent from its Friday close. But by the day’s close, JPMorgan Chase was at $60.25, a mere 5 percent lower than Friday’s close.
Similar stop-loss carnage occurred on August 24 in other large cap stocks and household names like Home Depot, General Electric, Apple, Ford Motor, Colgate-Palmolive, Merck and Verizon. This suggests to many that market makers simply backed away from making a market until hedge funds stepped in to buy at prices 15 to 20 percent lower than the prior trading session and make a tidy profit on the day.
What was the final tally for stop-loss orders going off at obscenely low prices only to see the stocks recover most of the losses by the close of the day? We have yet to find reliable data on that score but we plan to keep asking.
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