I received a couple of twitter messages about whether I was trading AAPL on the Open today. JoeP had mentioned in his morning thoughts blog that we were watching the 291 level closely for a possible break of the recent uptrend. As it turned out I was short RIMM on the Open and watching CRM as well for a break below 117 so I was unable to initiate a short in AAPL as it quickly traded below 291.
Apparently “flash crash” has now become part of the trading vernacular as I have seen many tweets describing what happened in the first few minutes in AAPL as such. If the working definition of flash crash is a hard down move in a momentum stock that has recently run up a ton then apparently flash crashes are more common than most people realise and certainly were occurring a lot earlier than May 6th 2010.
The implication when people start talking about flash crashes is that structural changes in the market are the source of these quick, vicious down moves we are seeing in today’s market. From my point of view these moves are no different than the sharp down moves I have seen in NASDAQ stocks for the past 15 years. If a rumour starts in a high flyer quite a few people are going to head for the exits at the same time. Especially if those circulating the rumour get the ball rolling right on the Open when the market is thinnest.
I’ve attached the tick chart below from the Open in AAPL. The 30 second down move from 286 to 276 is indicative of price action being controlled by a sell order encountering market making programs. What I mean to say is that as AAPL moved down each leg 2-3 points a market making program would then step up the bid for 1 point. When no real buy orders materialised the market making program began to sell again causing the next down leg.
I am not particularly interested in trading a stock when the bid is dropping 1 point every few seconds or so. That is a younger man’s futile game. But once the free fall is over and the reflexive bounce loses momentum I will carefully pick my spots to make a trade. In the case of AAPL I was interested in establishing a short after it retraced the 10 point down move. It began moving more sideways and was easier to define my risk. The tape itself actually provided a very nice entry point at the retracement high of 286.80.
AAPL failed at 286.80 twice after which I placed an offer at 286.78. I started watching my CRM position hoping that AAPL would pop up one more time to my offer so I could get short. I heard Gman say that it was starting to consolidate fairly close to the 286.80 level so I cancelled my offer to get short as the pattern he was describing generally leads to a breach of resistance. The 286.80 level did hold one more time causing a 4 point down move before AAPL finally reversed and traded up to around 290.
There are definitely structural changes that I would like to see in the US equity markets. If spreads were to move to nickels instead of pennies it would encourage more participants to make markets and take on risk because of the greater rewards earned on spreads. I know that I would certainly put on more risk each day.
However, I don’t endorse the conventional wisdom that I have heard recently that HFT market makers are somehow worse than the NASDAQ market makers who bilked the public for billions in the 1980s and 1990s and were required to pay billions in a settlement garnered by the SEC.
This post was written by Steve Spencer, Partner, SMB Training.
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