23/04/2013 Flash-Crash. How to lose (and re-gain) $136 billion in minutes and why we still need humans

So yesterdays market action was all about the Flash-Crash event that happened after (allegedly) the Syrian Electronic Army hacked into the Associated Press Twitter feed and posted a tweet regarding an attack on the White House and Barack Obama.

The S&P fell 1% on the news (allegedly wiping out $136 billion in gains) before regaining its previous level.

The yen actually strengthened against the dollar by about 0.7%

Soc Gens FX strategist Sebastien Galy’s takeaway from this episode is that “The market is very long equities and short yen”

What was interesting is that the market really crashed in those 1-2 minutes before AP put out a message saying they’d been hacked and that the tweet was erroneous  After that markets swiftly returned to previous levels very very quickly.  Who did that? I can’t believe it was program traders who did that? (If it was then please educate me, I’m happy to listen). No, it was humans who realised the error and then other humans who corrected the market. Very quickly as well.  In this modern age of HFT where algo’s abound we perhaps think that the end is nigh for human traders but I still believe (especially on longer time frames) that human interaction is required and that they also provide an edge.

On the downside for human traders I watched a video this morning of a somewhat dubious trader telling people how you could have made a killing by following his system that gave you an entry signal right at the bottom of the crash. Yeah – right, like a) any one in Europe was around when it happened and b) during such a crash very few humans (especially private retail traders) would have had the ability or inclination to buy something that’s just crashed so hard. As always these things look perfect in hindsight.

So I suppose a bit of swings and roundabouts for human roles in the markets there.

Until the next flash-crash (you know there’ll be one soon), trade well!

Paul