The Wall Street Journal debunks the “fat-fingered trader” theory of last week’s precipitous 1,000-point market crash and recovery that occurred in the span of some 15 minutes. Darn. Because we really liked the schadenfreude associated with a mysterious ham-fisted Citigroup trader punching “b” instead of “m” while thinking about porn and a steak dinner. Ah well. You win some, you lose some.
Why the crash, then?
Shortly after 2:15 p.m. Eastern time last 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 Journal posits that this led traders on the other side of the transaction to sell to offset risk, which forced even more hedging as the market fell, “creating a tsunami of pressure that spread to nearly all parts of the market.”
The market, of course, was already on edge, and “as the selling spread, a blast of orders appears to have jarred the flow of data going into brokerage firms,” meaning exchanges were clogged.
“Universa alone couldn’t have caused the meltdown,” said Mark Spitznagel, Universa’s founder. “We had reached a critical point in the market, and it was poised to collapse.”
There is less evidence, says the Journal, to suggest a data-entry error, but we’ll hold out hope. Surely some trader must have fucked up that day.