The May 6, 2010 market error

The statement “market error” is possible, but largely impossible. At times errors occur, they are rare but obvious, like in many individual stocks on May 6, 2010. But the “market error” speculated to have been made by reaching the indices low levels was largely exactly as it appeared and it was real. It did happen and if you don’t think that it did because of technical or speculative mindset, then you’ll just have to wait until you see it happen again I guess. If not 1,000 in a day, than three days of 333.333 would do right? There is cause to be concerned with the long term direction of the markets and things should be watched closely. The news teams, traders and exchanges searching and speculating for a scapegoat for what happened, will do nothing to reverse it.

Many want to blame computers. Though first it started off as a fat finger error, but whoever sold the e mini futures on the S&P didn’t think his fingers were fat. There was no error there, they wanted out. It’s easy to hate a computer. It has no feelings. Which is exactly why they are used in trading. But, if ever a day comes when algorithmic trading is removed from any sector of market participants, that could easily create a vacuum just as did removing specific human market participants on May 6, 2010. Computer trading keeps price spreads close and fluid. When the NYSE held up or went into slow mode, the programs prices circumvented that stop sign and found price spreads abnormally wide. The mistakes of this instance are not only those of computers but of humans as well.

Computers are run by humans. I don’t know why anyone forgets that. If you think otherwise, go buy a black box trading device that you have no idea how to run and see how well it does running itself. You must know how the program runs to know if it is running properly, otherwise you are just lucky or unlucky. And when the later, it is not the computers fault. The only fault I saw in yesterdays sell off was that a set of practices for slowing markets was not in place that was standard between both humans and computers in severe instances. Thats collectively a human error.

You can’t try to find error or blame, only when things go wrong or against you. It is hard to regulate proactively when nothing is “wrong”, and there has been many years when this has seemed to be the case. But, if you are a trader or investor in the market on this day and you are looking for some error in the market because of your position, your looking in the wrong place for your resolution. You’re playing the victim, and not playing the market. The market is “never” wrong. Meaning, it is always wrong but perhaps your trade is equally wrong or incorrect. You’re not seeing something right in your trading or investing strategy if on a day like this your looking for blame elsewhere. The loss, if you took one and it wasn’t a rescinded trade abnormality, was due to misjudgment in what you thought possible.

Your trading strategy can not be based solely on what you think is possible. It also has to be based on what is happening right now. Because what is happening right now, is happening. The market did trade down 1,000. They might pull trades from individual stocks, but I’m understanding that that tic on the S&P and Dow will stick. Regardless, just look at how the S&P tested all but 30 pts of that larger move the day after while dropping 27 pts. In the markets things are relative to an emotional perception, but you would think everyone counts to 1,000 the same way.

Aside from the nonsensical trades that have been removed from the tape, look at what happened to those stocks that just plain traded badly. Many stocks legitimately traded down 20 and 30%, but when people looked for blame or “error”, there was none. As traders there’s nothing worse than having to wait to get your bargain price. Whether it is a bargain or not is up to you. I think there will be new lows coming for sure, but many stocks are much more than half way to potential short or long term buy points thanks to yesterday. If you want things to happen slowly, if you think that electronic trading is bad, take a look at the S&P from 1965 to 1985. All things being equal, which they’re not to this point, that is still a good representation of what slow could look like without computers.

When something like this happens, respect your positions relative to your time frame. Respect that what is happening is happening, but also realize that price is being sped up by the markets during these moments relative to time. Time can not be altered. As much as you may think time is being sped up, it is not. But the relationship of price to time which the markets are built on can be exacerbated. Prices during these moments often exceed a “normal” moment of time, but price does not loose track of what has happened in time. Price will not forget May 6, 2010 and will not forget if your stock was down 20%.

Your chart is telling the truth. Study it. If you remain calm, possibly stop arguing with yourself about what to do, stop looking at the news that doesn’t know more than you in this instance, you may find yourself seeing something real that you hadn’t seen before. This could be very good, or very bad. But either way, hopefully, you will be seeing what really is happening and not only what you thought would happen. This at the very least will give you a better sense of how to trade out of your position with less loss or perhaps stay with your position, as price has sped through time but left you a much clearer present point of view.