This is a companion piece to our look at the regulators’ report on the causes of the May 6 Flash Crash.
Here’s a short list of some acronyms and shorthand expressions that recur in the report — and reporting — on the report. And at bottom are appendix entries with the regulators’ timeline for the crash and their trader classifications.
There are a few choice circumlocutions for “trading halt,” along with a definition for “noise traders.” Noise traders? Maybe the culprit who dumped the 75,000 E-mini contracts should be called a “smell trader.”
E-Mini Futures: The SEC’s reference to E-Mini’s refers to the original E-mini introduced in 1997 to provide a cheaper version of the standard S&P 500 futures contract. Now there are over a dozen other E-minis for trading in various equities, currencies, and commodities. A lot of the reporting make it sound like there is only one E-mini, although you could also invest in the likes of heating oil or Dollar/Yen futures.
LRP: NYSE’s Liquidity Replenishment Points are the moments when the NYSE “pauses” trading in an issue in order to restore order and bring in more liquidity. Theoretically.
SLF: The Stop Logic Functionality is the CME’s version of an LRP, though it seems to be automated. Note that no one wants to call it a trading halt.
SPY: While people talk of a “stock market” crash, it’s important to distinguish among individual stocks, futures, baskets, E-minis, and the good old SPY– the S&P 500 Index Exchange Traded Fund (ETF).
Crash: As the report details, the “crash” had at least five chronological components, and this SEC summary does not go into all the details about marketplaces involved. Moreover, volatility and unusual price movements were evident well before the first crash phase began at 2:32 EST. Price fluctuation was evident in assets other than equities, including currencies, gold and U.S. Treasury securities.
- During the first phase, from the open through about 2:32 p.m., prices were broadly declining across markets, with stock market index products sustaining losses of about 3%.
- In the second phase, from about 2:32 p.m. through about 2:41 p.m., the broad markets began to lose more ground, declining another 1-2%.
- Between 2:41 p.m. and 2:45:28 p.m. in the third phase lasting only about four minutes or so, volume spiked upwards and the broad markets plummeted a further 5-6% to reach intra-day lows of 9-10%.
- In the fourth phase, from 2:45 p.m. to about 3:00 p.m. broad market indices recovered while at the same time many individual securities and ETFs experienced extreme price fluctuations and traded in a disorderly fashion at prices as low as one penny or as high as $100,000.14
- Finally, in the fifth phase starting at about 3:00 p.m., prices of most individual securities significantly recovered and trading resumed in a more orderly fashion.
A useful appendix is the section showing how regulators classify traders. See report page 29 for statistics on the May 6 activities of these trader classifications:
- Intermediaries are defined as “market makers” who follow a strategy of buying and selling a large number of contracts, but hold a relatively low level of inventory. This trading strategy manifests itself in both a low standard deviation of position holdings and a low ratio of overall net holdings to trading volume.
- HFTs, or high-frequency traders, are defined as “market makers” with very large daily trading frequency. For classification purposes, the top 3% of the Intermediaries sorted by the number of trades were designated as HFTs.
- Fundamental Traders are defined as those who were either buying or selling in one direction during the trading day and held a significant net position at the end of the day. Fundamental Traders are further separated into Fundamental Buyers and Sellers depending on both the direction of their trade and the trading volume associated with the accumulation of their net positions.
- Noise Traders are defined as those traders who traded fewer than 10 contracts on May 6.
- Opportunistic Traders are defined as those traders who do not fall in the other five categories. Traders in this category sometimes behave like the intermediaries (both buying and selling around a target position) and at other times behave like fundamental traders (accumulating a directional long or short position). This trading behavior is consistent with a number of trading strategies, including momentum trading, cross-market arbitrage, and other arbitrage strategies.
Disclosure: "no positions"