Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?

[deminks]

http://online.wsj.com/article/SB10001424052748704879704575236771699461084.html?mod=WSJ_hps_LEFTWhatsNews#articleTabs%3Darticle

Shortly after 2:15 p.m. Eastern time last Thursday, hedge fund Universa Investments LP placed a big bet in the Chicago options trading pits that stocks would continue their sharp declines.

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.

Then, as the market fell, those declines are likely to have forced even more "hedging" sales, creating a tsunami of pressure that spread to nearly all parts of the market.

(end snip)

So, not a fat fingered trader, and not totally a computer meltdown.

[WeDidIt]

1. So when will the Nasdaq do over the do over?

I mean, there apparently wa sno mistake, so all trades should stand.

One DUer bought a ton of Accenture at 0.01 during that time, IIRC.

[MadHound]

2. The more interesting question, that nobody is asking, is how did that Black Swan soar back up again?

Fighting stop loss orders, automatic triggers, computer algorithms, and generalized panic, the market turned on a dime and climbed back to within one hundred points of where it started, again, all in a matter of minutes.

Can you say Plunge Protection Team? That's my bet.

[Ruby the Liberal]

3. Don't forget buy triggers - the offset to sell stops.

[MadHound]

4. Buy triggers work fine when individual stocks start going south

But when we see a massive drop like last week, they're so much kindling wood trying to stop the flood.