The Fed Finger: More Observations On The ESH0 Incident

X!nG

Seawave, Cobra and some of other HTers talked about this hugh mysterious volume spike yesterday, here is something interesing:



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What happened at 12:03pm Eastern Time?  There were no reports out, the 10-YR Note auction wasn’t until 12pm, and the S&P500 was a bit stonewalled just under 1137.00 after a rally from the day’s low.  As the market advanced slowly through the congestion it hit: a MASSIVE order, or series of orders, lifted the offer in the e-minis.  But it wasn’t your garden variety large order of 2,000 mini’s – I’m talking about 114 times that size.

At 11:03am today at the Chicago Board of Trade (12:03pm EST) over a quarter of a million mini-S&P500 orders traded north of 1137.00!  (228,000 last count)

I looked at the attached chart in disbelief.  Could this be real I wondered?  Was it some sort of computer malfunction that added too many zeros to the reported, yet smaller, trades?  

No, that’s not what happened.  In fact, a bit of a hullabaloo occurred around my trading booth on the floor of the CBOT as many locals, brokers, and compliance members stared at the aforementioned volume chart in disbelief.  As it turns out, all of the trades were indeed valid.  None were busted.  Moreover, as one of the compliance members told me, he saw the trades listed sequentially (1,000 or 2,000 lot orders) and they all occurred with milliseconds of one another until the massive order was completed.

This order size takes a SERIOUS bankroll to get done.  If you are wrong by one-point on a 228,000 lot ES order, you can say goodbye to $11,400,000.00.  If you contemplate this size your margin requirement is $1,282,500,000.00, while the notional value is $12,961,800,000.00.

Has a new “playha” hit the scene?  Is his nickname “Helicopter?”  Has high frequency trading (HFT) taken root in the mini-S&P in a huge way?

In the end it may turn out to have been a “cross trade,” where one institutional firm prearranges a large order with another to clear it in an orderly fashion.

As of now I don’t have a firm answer, but whether it was HFT activity, the “Helicopter,” or a massive cross trade, it sure set the bottom in for the afternoon.  Everyone in the Dow, Nasdaq, and S&P pits were talking about it and nobody was willing to sell into that massive bid.

yaobooyao

More like a cross order.  Otherwise the impact on price will be huge!

Cobra

More like a cross order.  Otherwise the impact on price will be huge!
yaobooyao 发表于 2010-1-14 11:46

Agrli. 价格没咋动，应该是prearranged。

X!nG

Same thing discussed by Market-ticker:

-----Original Message-----
From: CME Globex Control Center
Sent: Wednesday, January 13, 2010 4:54 PM
Subject: ESH0 Event
Importance: High

Between 11:03 and 11:04 CT today, there were a series of transactions in ESH0 in which a market participant appears to have inadvertently traded approximately 200,000 contracts as both buyer and seller. CME maintains trade practice and risk management rules and procedures respecting such matters. In keeping with standard practices and CME's self-regulatory responsibilities, CME is reviewing the circumstances of this event.

As both buyer and seller?  Uh.... wait a second.  On the same order?


That was roughly 94,000 contracts on a one-minute bar, as you can see, an absolutely massive amount of volume compared to that in the immediate vicinity.  

Needless to say that spooked people.  My initial thought when I saw it (and I did see the blocks go by on T&S - there were a lot of 1,000 and 2,000 contract orders that filled!) was that they were buy stops just above the overnight range set at about 7:00 AM Central.  The "barker" in the pit also characterized it this way - understandable, since that's exactly what it looked like.  Of course the pit folks saw it, assumed it was a big buy stop and piled in.

But both the CME email and the volume bar implies that the same "market participant" was both the buyer AND THE SELLER.

Here's the problem, in a nutshell:

There is no way you could come in with 200,000 contracts worth of bid without lifting the entire offer chain and spiking the market 20 handles or more north instantly.  Yet that didn't happen, which strongly implies that whoever entered the "buy" also, at the same time, entered a "sell" at the same strike and time, which the email from CME seems to confirm. The fact that the executions came literal milliseconds apart and were in even-lot blocks of 1,000 and 2,000 contracts further implies that this was some sort of manipulative game.

"Mistake" eh?  

This entire little episode smells like dead fish.  Someone was either "lying in wait" with enough liquidity to soak that up and not generate a price spike, whoever did it was on both sides (and thus GUARANTEED there would be no material price spike) or one of the oddest coincidences I've ever seen in the futures markets - 100,000 contracts magically appearing on both bid and offer from two different people at the same precise instant - magically occurred.

If the intent was to scare the bejeezus out of anyone who would "dare" to short a potentially-failed breakout, they succeeded.  Who's going to try to short into someone who has 100,000 contracts that will magically appear opposite your offer at the most-opportune time (for them) and bury you 6 feet under?  

Of course this begs the obvious question: Who has the margin capacity to execute a trade like that ($5,625 per contract required for initial margin), or $562,500,000 - yes, $562.5 million) - on each side of the trade? (this assumes the volume I have here is right - if its really 200,000+ contracts, double that.)

Hmmmm....

I'll bet my last nickel neither the CME or SEC will do a damn thing about this, despite the outrageously blatant character and the clear implication of the event.  Nor will we see ANY update from the CME or SEC on what did actually happen or who was responsible.  

You can take that to the bank.

Charles Biderman of Trimtabs (a very well-respected research outfit) has argued for a while now that the rally for the last several months cannot be explained by buying coming from any of the trackable sources.  That is, it's not coming from institutions, it's not coming from households (individual investors), it's not coming from pension funds or hedge funds.  He therefore argues, as a matter of exhaustion (who's left?) that it likely is coming directly from The Federal Reserve and/or Treasury via intervention in the equity markets.

Are we all trading in a rigged casino?  I have not been a subscriber to these sorts of theories over the years, but when you see activity like I saw today in the futures market without a clear, cogent explanation of what actually happened that also fits the facts you have to wonder.

X!nG

Agrli. 价格没咋动，应该是prearranged。
Cobra 发表于 2010-1-14 12:01

Even if it is "prearranged", who would that be?

Margin requirement: $1,282,500,000.00...

olderfrog

Cobra?
5# X!nG

X!nG

Cobra?
5# X!nG
olderfrog 发表于 2010-1-14 12:25

Must be!

Seawave

1# X!nG
我也立此存照了，看到的就是一个order， 170K with no price change, occurred at 12:04：10。可能是GS偷偷把接力棒传给了PPT。:(13):

ByStander

Even if it is "prearranged", who would that be?

Margin requirement: $1,282,500,000.00...
X!nG 发表于 2010-1-14 12:18

如果我没数错0的话, 这也就是大约$1.28BILLION. 如果MARGIN是4:1, 需要的钱大概是3千多万. 能拿出这么多钱的HF应该会有几十个吧

X!nG

如果我没数错0的话, 这也就是大约$1.28BILLION. 如果MARGIN是4:1, 需要的钱大概是3千多万. 能拿出这么多钱的HF应该会有几十个吧
ByStander 发表于 2010-1-14 14:07

是你看错了,那$1.2bn就是保证金...

ByStander

是你看错了,那$1.2bn就是保证金...
X!nG 发表于 2010-1-14 14:14

$1.2B对HF来说好象也不是太大数目吧?反正也就是临时调用一下.

livefreakss

margin maintenance requirement of $1.2bn is a lot for hedge fund.... if no px changed, a cross trade happened between one broker and one big hedge fund...

Most equity hedge fund size is about 1 to 10 bn, and it is just one trade, a bit bet. If the direction is wrong, this hedge fund will be wiped out......

coexist

Even if it is "prearranged", who would that be?

Margin requirement: $1,282,500,000.00...
X!nG 发表于 2010-1-14 13:18