Hedgefundlive — Earthquakes come without warning. Everything could look normal, a picture perfect day and not a cloud in the sky.
Flash crashes are like earthquakes they come without warning. They are the outgrowth of poor diversification in those providing short term liquidity to the market place. We all trade based on our assumptions of liquidity. When we see millions and 10 of millions of shares being traded in a symbol we are confident in our ability to quickly exit from a 20,000 share position. What if 75 pct of those shares were a bunch of computers ping ponging against each other all day. What if those computers just found it inefficient to trade that day. The depth of the order book is gone.
No big institutional orders resting for our protection. No specialists, no market makers, not even the old fashion day trader to give you some liquidity. Poof its gone in a flash and the crash begins. One thing is for certain after every earthquake there are going to be tremors. So if the trend holds, after every flash crash there will be mini (tremor) crashes. We all recently witnessed the flash crash and with that fresh in mind we will try to get out in front of something that looks potentially ugly and the Tremor Crash will begin.
Tremor crashes like the tremors that come after earthquakes have the warning signs. Some people get out along the way and that’s why they end up more contained.
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