Update: See below for quote from Taleb.
The Wall Street Journal’s Scott Patterson and Tom Lauricella have a delicious story tonight that is too good not to believe.
The nut is that a fund linked to Nassim Taleb — Mr. Black Swan — may have placed the initial trades that got the ball rolling for Thursday’s violent selling.
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 trade by Universa, a hedge fund advised by Nassim Taleb, author of “Black Swan: The Impact of the Highly Improbable,” led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank Barclays PLC—to do their own selling to offset some of the risk, according to traders in Chicago.
As their story goes this trade lead others to buy protection, prompting one thing to lead to another and then voila — black swan crash!
As the panic selling intensified, some HFT funds scrambled to turn off their trading systems to avoid the meltdown — among those doing so was Manoj Narang’s Tradeworx, who rushed to get out of the market.
Readers may remember Narong for his appearance on CNBC last week (the guy on the right), where he was seen defending HFT on the grounds that it provides much-needed liquidity (though obviously, as this story goes, he wasn’t that eager to keep providing liquidity when the market needed it most).Anyway… we’re starting to piece together the story of what happened a bit more, though we’re not all the way there.
But just the fact that the Taleb-linked fund might have had a role in setting off the dominoes is too perfect.
We’ve reached out to Taleb for comment. Our guess is that if/when we hear from him, his answer will have to do with the the stock exchange’s pronounced lack of robustness. See our interview here for why that is.
Update: Well we called it. Here’s Taleb’s response for comment on the story:
“Just landed all I can say is that the explanation is in “robustness and fragility” in the second ed. of The Black Swan ironically coming out tomorrow, particularly the discussion on ‘weakening of causality’.”