It is sometimes helpful to understand the infrastructure of Wall Street and LaSalle Street. Consider what must go through the minds of margin clerks and risk managers and heads of firms when the market can spike up by 20+ S&P points in one minute on light volume. That’s a $5000 per contract move in the big S&P, and any margin account that couldn’t stand that and be in good shape at the time, would cause great trepidation. Consider also, the others hanging onto their shorts. “Dear, don’t give me that ‘d#mned broker’ stuff any more. If it had stayed up there for one more minute, you could have gotten a call and we would have had to cancel the vacation and send Joe to State College. Promise me that you won’t put us in that position again.” You can try also to put yourself in the minds of those who were short and saw themselves on their knees or backs, and were repreived when Clever Hanses knocked the price back from 1398 to 1376. “My goodness, tell me again how close to death I was before they defilibrated me? I promise I’ll give up smoking now.”

Jason Goepfert replies:

While difficult, I would suggest that everyone try to find a way to observe the inner workings of a brokerage firm margin department.

I managed such in the late 90s for the discount side of a large bank. When traders are heavily margined and facing a call, the vast majority do not use objective analysis, or even limited intelligence, in making their decisions. They use raw emotion.

And what most don’t realize is that those on the other end of the phone are subject to the same. There is an extraordinary amount of pressure on the margin clerks and managers, and when faced with settlement deadlines, their pulse quickens as well - it is not all about rules and procedure.

One nasty day in particular a large client dipped below his equity requirement and was up for a forced sell out. None of my margin clerks could reach him - it turns out he was in the championship of the World Series of Poker at the time.

At the 11th hour, he called frantically insisting that he had the funds available in a bank safe, denominated in poker chips. Given the amount and the client, the decision of whether to sell him out went all the way up to just under the CEO. He said sell, so we did, adding not a little pressure to the current market decline.

The client promptly sued us. And won. A lot.

While I believe the impact of margin selling on overall market performance is greatly exaggerated most of the time, in times of duress it is not as wave after wave of sell orders emanate from these shops, often in close proximity as the guidelines from firm to firm are fairly close.

Dr. Kim Zussman adds:

Adaptive Optics is a technology used by astronomers to counteract atmospheric blurring effects which degrade images for earth-based telescopes.

One method uses a laser to project to the upper atmosphere, creating an “artificial star”. Images of this star, which contain information about how light waveforms are distorted as they fall through the local atmosphere, is used to modulate a flexible mirror which corrects the wavefront and greatly sharpens actual star images.

Might “fat finger” events or other strange/large trades represent a form of artificial star designed to perturb markets for the purpose of sharpening the real picture? If so, who are these astronomers and can we benefit with our own specs?

Vincent Andres responds:

Another image which comes to my mind is that such events may be a voluntary stress applied to the market in order to visualize where may be germs of possible fracture lines.

Not obvious to exploit when seeing only the input signal’s echo and without precise dating.


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