Here are two accounts dissecting in detail the events from yesterday. One is from Dan Hinckley at Wild Analytics, the second from Dan O'Brien.

Anatomy Of A Capitulation

Having seen the capitulation unfold second by second and then listen to CNBC come up with every excuse under the sun just got under my skin. I've decided to chart some of our one second analytics charts of the capitulation unfolding on our screens. The chart below (more to follow) captures the moment of the final capitulation, before the reversal today. The idea that it was a 'fat finger' error is ludicrous; unless the fat finger hit every market in the world virtually simultaneously. Liquidity simply left the world financial markets for about four minutes this afternoon. The bids just vanished. And what else vanished? Remember the vaunted supplemental liquidity providers, led by Goldman Sachs. Remember that they are paid to "provide liquidity" through their predatory high-frequency algos, they are not required to do so. So when the S@#$T hit the fan they just disappeared. In one second more or less someone (and yes, under these circumstances, human beings take control of the machines) made the decision to pull the bids on every equity in the S&P, every financial futures contract, every FX contract in every market in the world. This kind of thing just doesn't happen in a pure auction environment; there just isn't a tight enough communication link between the parties to allow the decisions to propagate within the same second -- even with HFT algorithms. No. Some human made the decision to pull the bids; all of them, all at once. If that is not a condemnation of the concentration of financial power and the systematic risk it engenders I don't know what is.



As you look from the top to the bottom of this chart (1 second histograms) you will see first the TICK of all US securities falling rapidly; then as it hit -3700 (that's a record 3700 stocks ticking down vs up), look down the chart and see what happens. The markets freeze; there are no bids anywhere. There is virtually no trading, no shares changing hands (e-mini time and sales will show 8 or 10 contracts at each level for some moments here, but that is virtually nothing).

The next graph is the ESM10 e-mini contract. At 1444 and change it just drops like a stone. The EURJPY below it goes into free fall at exactly the same second. The USDJPY below it drops but then holds steady for nearly a minute (carry unwinders are at this point looking for dollars ANYwhere, even against the YEN).

At about the same moment the 10yr US treasury futures contract catches air; the money has to go somewhere. Gold ironically does is behind the 10yr futures in getting rocketed. This is the kind of thing we take a couple of hours to deconstruct; more on this in a follow-up post. But notice that we have the same phenomena here: there are suddenly no offers for either the treasuries or gold. (note I am comparing apples and oranges here; GLD vs 10yr FUT; this bears further analysis; if the lag bears out, but then switches out at some other point in the (near) future we would find this extremely significant)



Now, next you see Procter & Gamble. I included this because it was the focus of the idiotic (and I mean this with all the love in my heart for the CNBC 'analysts'; it must be tough when you don't have a teleprompter). Supposedly there was a 'glitch' that caused PG to trade hugely down. In reality it simply behaved in unison with every other instrument in the entire global market at that moment. The bids were gone. Nevermind that the NYSE didn't trade that low; they only control a quarter of the action anyway; ask someone what their supplemental 'liquidity providers' were doing at that moment.



You can see by looking at the $TICK above that not all stocks traded quite the same. There are courageous (read foolish) retail traders out there that actually put a bid in when they disappeared everywhere else and got hit.



Otherwise, in every other market, NOTHING got hit until nearly SIMULTANEOUSLY the bids were back in the market, albeit at a hugely lower price (vice versa for GLD and treasuries). At this point, in most (non retail markets) there was such a huge spread that it took nearly 3 minutes (minutes!) for the bids to find someone to buy from -- at this point the sellers, algos watched by humans, are anticipating a snap-back and are not going to sell cheap. The drop into the abyss is over and 'normal' trading resumes, on about 14:48. Volumes, and the order book flow were a sight to behold. Hopefully it was a once in a lifetime event; but don't hold your breath.



Finally notice that the EURUSD and AUDUSD are slightly late to the game to recover. Although the auction resumes about the same time, they continue to print precipitously longer. This is all the confirmation of Cluesix' AUD analysis I need. No one is talking about it today, but after Asia tonight they will; Asia (and even China) are next.



That's all I have for tonight; things are busy here; I will try to follow up with some more second-by-second charts and a more detailed forensic with volume, moneyflow/agression and an order book analysis.

"Mega-Drop - Just What the Computer Ordered "



"What goes up must come down." You have heard this phrase - right? Well, it doesn't only apply to gravity - it also applies to computerized trading.



If you didn't know how the recent 1-year rally has occurred, you either haven't been reading my notes or I haven't been clear enough. I will try to be blunt: the massive 12-month rally, in my seasoned opinion, has occurred almost entirely due to program/algorithmic trading in New York. Despite the chronically low volume, prices continued to increase. This is quite similar to stating that GDP will increase forever based on the new drug - hopeium - alone. Neither will last.



When the housing market was going gangbusters, nobody in Washington DC gave a damn. Representative Ron Paul often brought up the sickening calamity-to-be of FNM and FRE, but was often rebuked by Barney Frank who told Representative Paul that FNM and FRE were just fine and nothing bad would happen. Yeah --- not so much!



The same is happening with stock trading right now: as the indices go higher - nobody gives a damn how or why...it's all good as long as share prices increase. I have written repeatedly on the preposterous LACK of volume on rally days, yet nobody but myself and a few other blogs bothered to discuss this. Why? The lame steam media didn't care, so neither did many others, thus the lack of attention.



There were accusations on the floor today of a bogus 150k to a 500k "fat finger" mini S&P trade that caused the drop. There were others on television who blamed it on a bad trade in Proctor & Gamble. However it may have started it's irrelevant; what happened after that is important. I believe it was very similar to the 1987 crash where "portfolio insurance" brought down the market. Once the market dropped enough, this "insurance" triggered wave after wave of sell-stops that drove the market lower.



I believe this happened today via our friends in the "too big to fail" community...their tradng desk algorithms to be exact.



According to Bloomberg...Computerized trades sent to electronic networks turned an orderly stock market decline into a rout today, according to Larry Leibowitz, the chief operating officer of NYSE Euronext. While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the sell-off snowballed because of orders sent to venues with no investors willing to match them, Leibowitz said in an interview on Bloomberg Television.



Reuters says the following...A spine-chilling slide of nearly 1,000 points in the Dow Jones Industrial Average, its biggest intraday points drop ever, led to heightened calls for a crackdown on computer-driven high-frequency trading.



The slide, which in one 10-minute stretch knocked the index down nearly 700 points, may have been triggered by a trading error. Major stock indexes eventually recovered from their 9 percent drops to close down a little more than 3 percent.



But the follow-through selling that pushed stocks of some highly regarded companies into tailspins exacerbated concerns that regulators can quickly lose control of the markets in a world of algorithmic trading.



"The potential for giant high-speed computers to generate false trades and create market chaos reared its head again today," Senator Edward Kaufman said in a statement.



"The battle of the algorithms -- not understood by nor even remotely transparent to the Securities and Exchange Commission -- simply must be carefully reviewed and placed within a meaningful regulatory framework soon."



How does Shitigroup shares trade nearly one BILLION times per day when the total for the entire market may be six billion? Of course, the answer is computerized trading - where one bank buys the hell out of Shitibank and the other trading desk sells it back to the former...then they switch sides and do it again. This happens so often that it can reach far more than 1/6 of the total volume...with NO CHANGE in the indices that day.



Not odd to the lame stream media....very odd to me!



Those of you who know me well know that I am a fan of computerized trading; however, I am a fan of Joe Six-Pack employing these methods - not the banking cartel.



When the US Congress allows the banking industry to LIE about their balance sheets (FRE needs another bailout -- really???) it's bad. But when these same @$$-hats in Congress allow JPM, Goldman, UBS, BAC and the others to use these illusory profits to gun the markets higher via program trading it's really bad...unless you are like me.



If you are like me, and you can foresee the BLACK SWAN crash like we had today. You are ready for anything. In fact, you will profit from it like we did today. But please, under NO CIRCUMSTANCES should you believe that a RIGGED market (like this CLEARLY IS) can and/or will last forever because it is going in you favored direction: up. Moreover, you should also not complain when the heretofore magical no-volume rallies turn on you like a rabid dog -- rough!



Said another way, if you are happy with Goldman and JP Morgan's trading desks gunning the market higher by simply trading back and forth to each other - then you better damn well be happy with the Black Swan event: a CRASH caused by the same computers.



I am under no illusions. I know the market is rigged. I trade it as I see it. I, however, am a professional and I feel bad for all the rubes who believe in the nonsensical drivel like - Goldman Sachs is doing God's work. (I still can't believe the CEO of GS said that.)



How does all of this happen? Well, you can thank the Federal Reserve...

1) The Fed prints fake money out of thin air...

2) Large banks and hedge funds borrow money from the Fed at near-ZERO interest rates...

3) These institutions buy Treasuries with a guaranteed 4% return, thus guaranteeing the banks massive and risk-free profits on the backs of the middle class (remember, you're not allowed to earn an interest rate on your savings accounts!)...

4) These institutions then swap Treasuries with the Fed for cash...

5) These same institutions (banks) then take the cash and gun the stock market higher with its FREE MONEY from the government...I meant free money from you. By the way, were you asked to vote on this? Frankly, it's better than free money - they're being PAID to do this...

6) Banks pay the very clown-posse that cause the 2008 crash (and today's) the largest bonuses...EVER...with your tax dollars.



Oh, but don't you worry folks, surely this is a one-day event. The high frequency trading desks and algorithmic desks/programs will be plugged in before Friday's open. You can go back to Dancing With the (B-list) Stars and American Idol. Benron Bernanke and Tax-Cheatin-Timmy will have it all fixed up by morning.



Nothing to see here. Move along.



Trade well and follow the trend, not the so-called “experts.”



Behold the age of infinite moral hazard! Today is the 399th day of legalized accounting fraud on a grand scale. April 2nd, 2009 was the day CONgress forced FASB to suspend rule 157 in favor of deceitful accounting.