Some liquidity notes from SEC review of the “Flash Crash” of 6/10/2010. Day started off with video of riots in Athens. Market was down a few percent and VIX was up. Liquidity started to thin out (from what was already low levels), then a massive futures order came in ($4bn notional). The order was one that typically took a day or two to trade but was entered as a “percentage of volume” order. This pounded the market causing liquidity to vanish, HFT arbitragers spread the fire to SPY and other stocks/markets. JPM says liquidity in present day is ~$250 million (1500 Emini SPY futures) vs $2 billion that day (which the SEC said was low). A bit surprising nothing of this scale has happened recently.
May 6 started as an unusually turbulent day for the markets…the U.S opened to unsettling political and economic news from overseas concerning the European debt crisis. As a result, premiums rose for buying protection against default by the Greek government on their sovereign debt. At about 1 p.m., the Euro began a sharp decline against both the U.S Dollar and Japanese Yen – SEC Report
Liquidity in EMINIs went from $6 billion to $2.65 billion.. then:
a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position…. This large fundamental trader chose to execute this sell program via an automated execution algorithm…that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time…. However, on May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes. By 2:45:28 there were less than 1,050 contracts of buy-side resting orders int h e E-Mini, representing less than1% of buy-side market depth observed at the beginning of the day. At the same time, buy-side resting orders in SPY fell to about600,000 shares (equivalent to 1,200 E-Mini contracts)representing approximately 25% of its depth at the beginning of the day. – SEC Report