by ilene - May 11th, 2010 3:39 pm
I wouldn’t call this a "black swan" event any more than Jon Stewart would call it a "perfect storm." Felix Salmon - it’s a silly theory – Nassim Taleb Didn’t Cause the Crash makes a better argument below. – Ilene
By SCOTT PATTERSON And TOM LAURICELLA, WSJ
Shortly after 2:15 p.m. Eastern time on Thursday, hedge fund Universa Investments LP placed a big bet in the Chicago options trading pits that stocks would continue their sharp declines.
On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later.
The trade by Universa, a hedge fund advised by Nassim Taleb, author of "Black Swan: The Impact of the Highly Improbable," led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank Barclays PLC—to do their own selling to offset some of the risk, according to traders in Chicago.
Then, as the market fell, those declines are likely to have forced even more "hedging" sales, creating a tsunami of pressure that spread to nearly all parts of the market.
The tidal wave of selling fed into a market already on edge about the economy in Europe. As the selling spread, a blast of orders appears to have jarred the flow of data going into brokerage firms, such as Barclays Capital, according to people familiar with the matter…
Continue here.>>
By Felix Salmon
Of all the silly theories about the cause of Thursday’s stock-market plunge, I’m not entirely sure why the WSJ has decided to give particular credence to the idea that it can all be traced back to a single $7.5 million trade for 50,000 options contracts. Lots of options trades of that size take place every day, and just because this one happened just before the market fell doesn’t mean it was the cause of the crash.
It’s becoming increasingly clear that the crash was fundamentally the fault of weak market structures, especially in the smaller electronic exchanges. It wasn’t a fat finger, it wasn’t cyberterrorism, it wasn’t the sale of 16 billion
…
Tags: Barclays, black swan, Felix Salmon, high frequency trading, market plunge, market sell off, Nassim Taleb, Options, perfect storm, Universa, weak market structure, WSJ
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by ilene - May 11th, 2010 2:02 pm
Courtesy of Josh M. Brown, The Reformed Broker
The market plunged because of a "Perfect Storm"…one that happens about every two weeks.
Tags: Daily Show, flash crash, Jon Stewart, market crash, perfect storm, Video
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by ilene - July 24th, 2009 5:56 pm
Courtesy of Mark Thoma, referencing Tim Duy’s Fed Watch at Economist’s View
Tim Duy looks at the shape of things to come:
The debate over the shape of the recovery continues unabated. Equities, at least this week, are voting in favor of the V-shaped recovery, with the Dow pushing past the 9,000 mark for the first time since January. Never one to accept good news at face value, Nouriel Roubini predictably took the opposite position:
A “perfect storm” of fiscal deficits, rising bond yields, “soaring” oil prices, weak profits and a stagnant labor market could “blow the recovering world economy back into a double-dip recession,” he wrote in a research note today. “It is getting more likely unless a clear exit strategy from the massive monetary and fiscal stimulus is outlined even before it is implemented.”
Roubini, chairman of Roubini Global Economics and a professor at NYU’s Stern School of Business, predicted that the global economy will begin recovering near the end of 2009. The U.S. economy is likely to grow about 1 percent in the next two years, less than the 3 percent “trend,” he said.
Roubini based his short-term outlook on the worsening condition of the U.S. housing and labor markets, which he called “inextricably linked.” He said a “weak” job market will contribute to another 13 percent to 18 percent drop in house prices, bringing total declines nationally to as much as 45 percent from their peak.
I would add to Roubini’s pessimism that bond market investors as of yet do not share the optimism of their brethren in the equity side of the industry. The run up in yields that brought a 4-handle to the 10 year Treasury appears to have been stopped dead in its tracks, and that maturity has pulled back to the mid threes. If the run-up in yields foreshadowed a burst of optimism in equities, the pull back would suggest that this rally has nearly run its
…
Tags: Dow 9000, global economy, Nouriel Roubini, perfect storm, Recovery, V-shaped
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.