Wednesday, January 26, 2011

Remember the flash crash?

Well, we apparently don't care when it's on the other side - a flash explosion to the upside caused by a computer error is apparently a good thing.

"IBM, which makes up 10 percent of the share-price weighted Dow average, jumped to $164.35 on an order for 200 shares on the New York Stock Exchange at 3:18:15 p.m. New York time, according to data compiled by Bloomberg. The stock traded at $160.89 during the same second, followed by five trades for a combined volume of 19,600 shares at between $163.22 and $164.35."

A trade happened at roughly $3.50 over the current price for 200 shares. Clearly it's a mistake but before anyone can bust the trade the computers come charging in. Before long the rest of the computers that trade based on market direction (again remember IBM is 10% of the Dow) start racing into the market and suddenly we had a melt up back to unchanged on the day.

One or two flawed "upside" trades in monster stocks like IBM, Apple or Exxon can effectively move the market in a matter of minutes. Again, when this happens on the downside there are Congressional inquiries but when it's causing prices to rise - it's all good.

Until the merry-go-round stops one day.

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