Daily Speculations

The Web Site of Victor Niederhoffer & Laurel Kenner

Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.



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Traffic Lights and Market People by Andrew Moe

My on ramp to the freeway has 2 lanes. During peak hours, each lane is governed by a traffic light which sits at about eye level on the outside of the lane. Directly below the light, a white sign reads "2 Cars Per Green". Despite this generous allowance, an alarmingly high number of cars fail to utilize the incentive. By my counts over the last several weeks, 1 in 20 cars wait an extra light. Keep in mind that at least half of the people getting on the freeway each day are making their daily commute and should be well familiar with the proceedings.

If people can blunder the simplest of tasks (driving), imagine the mistakes that can be made in the markets. We frequently hear of program trades gone awry, an extra 0 - or a few - being added to an order, a false rumor... The list is endless. On an immediate level, we observe a sharp spike in price. If the rumor is corrected or the order is reversed, the spike changes direction quickly, blowing out everything in its way.

What is interesting here is the speed at which information travels through the market.
On 9/1/2004, at 1:01 PM EST, the S&P sat at 1106.75, wallowing in a midsummer haze. 49 minis traded that minute. Volume picked up sharply in the next 5 minutes as rumors spread of a terror attack on US soil. By 1:06, volume had risen to 5,500 shares - well above average for this time of day. Word had clearly spread. Price closed down 2 full points at 1104.50. For the next 5 minutes price painted a red stripe downward, reaching at a low of 1098.50 at 1:12 as volume peaked out at 13,000 for the minute. $715,000,000 of a single contract changed hands in 1 minute. The crowd was in full panic mode. Price knifed through a well memed technical number (50 SMA) as well as the magic 1100 level without so much as a pause. Had the rumor been true, we could have dropped steadily into the close.

However, over the next minute volume ran at a hearty 10,808 as price popped back above 1100. It can be argued that word of the false rumor had spread by then or that technical and round number players had moved in - but by 1:13 we were plowing towards 1102 as definitive word of the false rumor spread through the market. Still, it took until 1:18 for price to top 1106, the same level we were at just minutes before. In fact, it took almost exactly the same amount of time for price to return to its prior equilibrium as it did for the fall.

Almost beyond belief, earlier in the day Morgan Stanley's computers went haywire, buying the Russell 2000 en masse. Everything spiked upward. At 10:01, we were at 1103. By 10:29, we had topped 1109. According to news reports, they "worked quickly" to alleviate the problem. It looks to me like they eased the line out a bit until the bottom fell out by other means. Then they sold it all - fast. So a panic can certainly be exacerbated by the hands various big players hold.
On a very short term basis, these events are alarmingly frequent. It's almost like watching 2 cars per green.