Because regulators are still trying to find some glitch from Thursday’s action, and refused to believe that sometimes there are simply no bids, we wanted to bring you this anecdote from The Pragmatic Capitalist of what a no-bids market can look like. It’s really great for a few reasons:
The context is trading long a particular, unspecified futures contract in anticipation of a specific piece of overnight economic news.
The news hits. It is bad. Sh*t! The bids fall off the board. There are no buyers. No one for me to sell to. Bear in mind this is 3AM EST and no one in their right mind is trading or even paying attention aside from a few market junkies like myself. So what do I do? I put in a bid WAY below the last price. I’m testing the waters to see if there is a bull out there who will match my price and maybe test the higher prices for me. And who knows, maybe I become a buyer at a very low price. I’m sort of playing both sides of a very inefficient market – not unlike a market maker. What happens next? My workstation buzzes and my buy order goes off. Someone was panicked by the news and hit my bid! I relaxed for a bit to make sure that what had just happened had really happened. Yes, someone had hit my bid and effectively lowered my overall basis to a point where I would certainly break-even on what should have been a losing trade. I went to bed thinking I had just saved myself a handful of cash in a few minutes. It was an inefficient, illiquid and fear-filled market at its most raw.
So a clever trading tactic saved him? Nope. The exchange did the same thing the exchanges did on Thursday
What happened next was unbelievable to me. I wake up in the morning and my order is busted out. I literally don’t own the shares I had owned when I went to sleep just a few hours before. The guy/gal placed an order error with the exchange and they actually busted the trade out. I couldn’t believe it. I called the exchange and no reasonable response was provided. I wound up taking a decent haircut on the trade, but it isn’t the only time I’ve seen weird things happen in an illiquid market and it won’t be the last. It’s not a perfect example, but this is a real-life example of what can happen when a market is illiquid and the buyers just dry up. People make mistakes, make rash decisions and sometimes markets crumble to prices they should never be at in the first place. Fear is a boring excuse for a market crash, but it’s always the cause and it always will be. After all, psychology will always drive markets regardless of how many computers we have up and running. At some point, raw human emotion always plays into the equation and that is the primary reason why markets are inefficient and will always be so.