May 6 was a pretty good day to be trading stocks–even with a 12-minute market freefall that, at one point, cost investors $1 trillion. For starters, traders saw opportunities to make money under conditions that had been fairly rare of late. Volume soared to 19 billion shares, fattening commission revenues, and fundamentals-driven bargain hunters picked up quick gains. Even losers could be, if not winners, not losers, either, after many losses were reversed by the exchanges.
Good news even appeared on the expense line of the day’s income statement. Traders generally felt a surge in confidence seeing all their IT spending justified under extreme volatility without crashing.
That’s not to say that it was easy keeping their hearts in their chests or that traders saw the drop coming any better than cartoon character Wile E. Coyote ever does. "I was shocked," said Bryan Lonsinger, head of equity positions trading at Janney Montgomery Scott. "I thought my Bloomberg went down. It had been incredibly calm. When I realized what was happening, I took a deep breath and went to work. It was very nerve-racking."
Nor do traders think that the fall and the Grand Canyon-wide bid-ask spreads that developed exemplify how the market should work. Indeed, the evolution of the market structure and current trading practices were thrown on the defensive.
Nasdaq criticized the NYSE for contributing to the collapse by slowing down the flow of orders. The other markets continued trading during the freefall.
Patrick Armstrong, co-president of the Alliance of Floor Brokers, said traders at the New York did what they are supposed to and the system worked. He noted that none of the trades on the NYSE needed to be reversed. He and Daniel Tandy, the other co-president, blamed regulation for the problem-notably Regulation NMS, which overhauled the U.S. equities markets.
Craig Rothfeld, executive director of WJB Capital Group, finds fault with dark pools and high-frequency trading. "There’s no liquidity anymore," he said. "We’re also kept in the dark on what’s being traded. It’s not a safe and secure market." Rothfeld is calling for more regulation of the pools and high-frequency trading. (Many suspect that the "flash crash" was accelerated by the dearth of bids, combined with the loss of high-frequency traders, many of whom shut down during the drop.)
Still, whatever threats traders may be operating under they got through May 6 without much, if any, damage. "It proved the performance of our trading platform," said Joe Sokolowski, managing director of U.S. principal program trading at Nomura Securities. "You don’t like to see the price dislocations, but there were no disruptions."
Sokolowski confirmed it when the 12 minutes were up. He looked up and down the trading floor to see that his staff had no problems and received the same news when he called the desk in Europe. Reviewing the collapse later, he and the staff reinforced the need to keep up with the huge and ever-increasing volume and complexity of market data.
If traders’ systems were working–and most appeared to have been–the incredible volatility was largely welcomed. More than 19 billion shares traded hands for the day. It was nearly double the average and a high for the year–in good measure thanks to the dive and bungee-cord rebound.
Nor were commissions from trading the only way to make money. Tony Kiniry, managing director of sales trading at Caris & Co., saw in the collapse an opportunity to put his clients into stocks his firm was watching for them. He had winners in Sybase, Seagate, Apple, Intel, Gap and Broadcom.
"We go by the fundamentals," he said. "Whatever the market is doing, if the price falls below the value of the stock, we’re going to get in. Do the clients appreciate that it worked? We’re just doing our job, right?"
Kiniry can’t wait for another market plunge, but his view was a decidedly minority opinion.
Patrick Fay, head of equity trading at D.A. Davidson & Co., doesn’t think Wall Street is equipped for debacles like this one–and he got a look into the abyss. He was one of the traders who had one of the biggest losses reversed. "It’s a crapshoot, and we lucked out," he said with obvious feeling. Next time–and no one doubts there could be one–he and the rest of Wall Street might not be so lucky.
Editors’ note: As Traders Magazine was going to press, the nation’s stock exchanges and the Financial Industry Regulatory Authority (FINRA) were filing rule proposals to introduce circuit breakers on individual stocks. Under the proposals, if a security fell or rose by 10 percent during a five minute period, the exchanges would halt trading for 5 minutes in that security. The rules are expected to go into effect in mid-June.
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