domenica 3 ottobre 2010

Il gigante dai piedi di argilla, ovvero: cos'è veramente successo il 6 maggio? Il rapporto della commissione di inchiesta sul flash crash

Il rapporto della commissione di inchiesta sul flash crash del 6 maggio scorso è stato reso noto ieri (e potete scaricarlo qui). La commissione promossa congiuntamente dalla Securities and Exchange Commission e dalla Commodity Futures Trading Commission è giunta alla conclusione che l'incredibile mini-crash è stato provocato da una serie di brevi ma intense crisi di liquidità dovute all'immissione di un forte ordine di vendita sul mercato dei futures in una giornata di mercato già molto nervosa. Secondo il Wall Street Journal:

The report placed relatively little blame on the broad structure of U.S. financial markets, created and overseen by the SEC and CFTC. It didn't answer a key question: If one trade could cause so much turmoil, why hadn't that happened before?
"There was no one culprit," said CFTC commissioner Bart Chilton, noting that the markets were already skittish that May day, partly due to worsening economic news out of Europe. Then, he said, when one firm used a trading program to sell 75,000 futures contracts valued at more than $4 billion, "the markets went into shock." (...)
The 104-page report painted a mixed picture of high-frequency traders, who have taken heat for leaving the market that day. High-speed traders magnified the impact of the selling by the mutual-fund firm by quickly dumping futures contracts that they had bought back on the market, the report said. And broadly, these trading firms were aggressive sellers during the downdraft. But it noted that some high-speed firms remained active traders.
The report was perhaps most forgiving of stock exchanges, which the SEC regulates. It said steps made by exchanges contributed to the chaos, but didn't play a "dominant role" in the flash crash.
Some traders criticized the report for not coming out with thorough proposals for avoiding a repeat of the crash.

Le reazioni al rapporto sono state molto critiche: sempre il Wall Street Journal fa notare come  While the report hadn't been expected to make policy recommendations, it only lightly touched on how rules from the SEC and other regulators set the stage for a market implosion. Since May 6, the SEC is testing rules designed to briefly halt trading in individual stocks during sharp moves or to prevent them moving beyond a certain percentage limit.
Joe Saluzzi, co-head of equity trading at Themis Trading, an agency brokerage, said he was disappointed by the narrow focus on the large trade, rather than a set of proposals for how to prevent a similar crash. "All you got here is five months after the fact, you have an analysis of 15 minutes of trading," said Mr. Saluzzi. "If this were to occur again, it would take another five months to figure it out."

Ecco come si svolsero le cose il 6 maggio scorso nella ricostruzione della commissione di inchiesta (vi segnalo anche una interessante ricostruzione grafica degli avvenimenti di quel giorno sul sito del WSJ, precisamente qui).

May 6 started as an unusually turbulent day for the markets. As discussed in more detail in the Preliminary Report, trading in the U.S opened to unsettling political and economic news from overseas concerning the European debt crisis. As a result, premiums rose for buying protection  against default by the Greek government on their sovereign debt. At about 1 p.m., the Euro began a sharp decline against both the U.S Dollar and Japanese Yen. (...)

By 2:30 p.m., the S&P 500 volatility index (“VIX”) was up 22.5 percent from the opening level, yields of ten-year Treasuries fell as investors engaged in a “flight to quality,” and selling pressure had pushed the Dow Jones Industrial Average (“DJIA”) down about 2.5%.

Furthermore, buy-side liquidity in the E-Mini S&P 500 futures contracts (the “E-Mini”), as well as the S&P 500 SPDR exchange traded fund (“SPY”), the two most active stock index  instruments traded in electronic futures and equity markets, had fallen from the early-morning level of nearly $6 billion dollars to $2.65 billion (representing a 55% decline) for the E-Mini and from the early-morning level of about $275 million to $220 million (a 20% decline) for
SPY. Some individual stocks also suffered from a decline their liquidity.
At 2:32 p.m., against this backdrop of unusually high volatility and thinning liquidity, a large  fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position.
Questo cospicuo ordine di vendita viene immesso sul mercato mediante un programma di esecuzione automatica degli ordini di vendita che mira ad eseguire volumi pari al 9% dei volumi complessivi scambiati durante il minuto di contrattazioni precedenti, senza tenere conto del prezzo al quale avvengono gli scambi! Normalmente questo tipo di ordini richiede molte ore per essere evaso completamente, ma il 6 maggio furono necessari solo 20 minuti per l'escuzione, creando una straordinaria pressione sul mercato. Secondo il rapporto

This sell pressure was initially absorbed by:
   •    high frequency traders (“HFTs”) and other intermediaries8 in the futures
   •    fundamental buyers in the futures market; and
   •    cross-market arbitrageurs9 who transferred this sell pressure to theequities
        markets by opportunistically buying E-Mini contracts and simultaneously
        selling products like SPY, or selling individual equities in the S&P 500 Index.

Malgrado il grande volume scambiato in pochi minuti (si veda il grafico qui accanto tratto dal rapporto della commissione di inchiesta, e dall'ottima ricostruzione dei fatti su econotwist) come giustamente osserva il rapporto especially in times of significant volatility, high trading volume is
not necessarily a reliable indicator of market liquidity.

E infatti si innescano due crisi di liquidità che affossano gli indici in pochi minuti. La prima si manifesta a livello aggregato sui futures e sugli ETF, e in particolare sull'E-Mini, la seconda sugli scambi delle singole azioni. Scrive la commissione:

Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other – generating a “hot-potato” volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net.
At this time, buy-side market depth in the E-Mini fell to about $58 million, less than 1% of its depth from that morning’s level. As liquidity vanished, the price of the E-Mini dropped by an additional 1.7% in just these 15 seconds, to reach its intraday low of 1056. This sudden decline in both price and liquidity may be symptomatic of the notion that prices were moving so fast, fundamental buyers and cross-market arbitrageurs were either unable or unwilling to supply enough buy-side liquidity. (...)
The second liquidity crisis occurred in the equities markets at about 2:45 p.m. Based on interviews with a variety of large market participants, automated trading systems used by many liquidity providers temporarily paused in reaction to the sudden price declines observed during the first liquidity crisis. These built-in pauses are designed to prevent automated systems from trading when prices move beyond pre-defined thresholds in order to allow traders and risk managers to fully assess market conditions before trading is resumed.
Il rapporto della commissione di inchiesta sottolinea alcune lezioni da trarre dal flash crash (ho evidenziato in rosso alcuni passaggi a mio modo di vedere particolarmente significativi):

One key lesson is that under stressed market conditions, the automated execution of a large sell order can trigger extreme price movements, especially if the automated execution algorithm does not take prices into account. Moreover, the interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets. As the events of May 6 demonstrate, especially in times of significant volatility, high trading volume is not necessarily a reliable indicator of market liquidity.
May 6 was also an important reminder of the inter-connectedness of our derivatives and securities markets, particularly with respect to index products. (...) 

Another key lesson from May 6 is that many market participants employ their own versions of a trading pause – either generally or in particular products – based on different combinations of market signals. While the withdrawal of a single participant may not significantly impact the entire market, a liquidity crisis can develop if many market participants withdraw at the same time.
Il gigante ha dunque i piedi di argilla, e se si mette a correre troppo l'unica soluzione è quella di farlo andare un po' più piano, lasciandogli il tempo di riposare e riflettere: ecco tornare le raccomandazioni sui circuit breakers 

As demonstrated by the CME’s Stop Logic Functionality that triggered a halt in E-Mini trading, pausing a market can be an effective way of providing time for market participants to reassess their strategies, for algorithms to reset their parameters, and for an orderly market to be re-established. (...) 

The circuit breakers pause trading across the U.S. markets in a security
for five minutes if that security has experienced a 10% price change over the preceding five minutes. On June 10, the SEC approved the application of the circuit breakers to securities included in the S&P 500 Index, and on September 10, the SEC approved an expansion of the program to securities included in the Russell 1000 Index and certain ETFs. The circuit breaker program is in effect on a pilot basis through December 10, 2010.
A further observation from May 6 is that market participants’ uncertainty about when trades will be broken can affect their trading strategies and willingness to provide liquidity. In fact, in our interviews many participants expressed concern that, on May 6, the exchanges and FINRA only broke trades that were more than 60% away from the applicable reference price, and did so using a process that was not transparent.
To provide market participants more certainty as to which trades will be broken and allow them to better manage their risks, the SEC staff worked with the exchanges and FINRA to clarify the process for breaking erroneous trades using more objective standards.13 On September 10, the SEC approved the new trade break procedures, which like the circuit breaker program, is in effect on a pilot basis through December 10, 2010.

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