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business newsFive Things You Need to Know: Market Crash Inquiry Focuses on One Trader
Was a single trader responsible for the May 6 market crash?
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Regulators reviewing the brief stock market free fall last Thursday are examining heavy selling in the market by a single trader, beginning 10 minutes before stock prices began to plummet.
A Minyanville investigation has revealed that during that crucial time period the trader, Darrell Brown, 49, of Lake Forest, Illinois, inadvertently entered a market order to sell all 1000 of his shares in Citigroup (C), very likely triggering the steep decline in global markets.
As his order went through, the futures index on the Chicago Mercantile Exchange began to plummet.
"Sheesh, I totally fat fingered it," Brown said. "What happened is I was trying to put in a stop loss order for C at $4.01 'cause the guy on CNBC with the glasses? The short one? He was talking about that one guy with the weird last name that is always bullish on stuff? Next thing you know, whammo."
Seeing his mistake, Brown immediately entered an order through his online broker to buy three June 65 calls on the iShares Dow Jones US Financial Sector Index Fund (IYF). "I didn't want to go right back in and buy C, so I was thinking why not pick up the out-of-the-money calls on the IYF at $0.45? Cheap, right?" Once filled, however, Brown got nervous again and immediately sold the calls for a small loss.
"They say your first loss is your best loss," he said. "I mean, well, technically the Citi sell was my first loss, so this was my second loss, but it's all about risk management, you know?"
As the market decline began to worsen, Brown said he switched over to his 401(k) account and began initiating random fund changes. "I admit it, I panicked," he said. "When I saw we were down 900 on the Dow, I sold my tech fund, my S&P index fund, my emerging markets fund, and put everything in a short-term money market fund; sometimes the best offense is a good defense."
Mr. Brown’s comments about causing the crash came as a relief to regulators who, in the five days since the markets suffered what Mary L. Schapiro, chairwoman of the Securities and Exchange Commission, called a “profoundly disappointing and troubling” break in the stock market’s stability and integrity, have struggled to identify a precise cause.While regulators continue to investigate the market's behavior following the trader's errant trades, for his part Brown is unbowed and unbroken. "I'm back on the horse," Brown said. "Trading is an art, not a science, and you gotta plan your trade and trade your plan, so I'm eyeing the Gold Miners ETF (GDX) to buy on a break above $60 and buying puts whenever Research in Motion (RIMM) breaks $65 cause it's a moving average death cross or something."
2. Seriously, Market Inquiry Focuses on One Trader
Okay, enough of that. The main points of that jokey piece, a take-off of one that appeared in the New York Times this morning, are that the origins of the mini-crash are both irrelevant and probably not even discoverable. What is important is to understand the conditions that caused the crash to happen in the first place.
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