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Report: ‘Black Swan’ Author May Have Triggered Crash

Tuesday, 11 May 2010 11:22 AM

Ironically, a hedge fund advised by Nassim Taleb, author of “Black Swan: The Impact Of The Highly Improbable,” reportedly may have inadvertently contributed to last week’s "flash crash" in the stock market.

The fund, Universa Investments, placed a $7.5 million bet on 50,000 options that stocks would continue to decline sharply.

This led traders on the other side of the transaction — including Barclays Capital, the brokerage arm of British bank Barclays — to do their own selling to offset some of the risk, traders in Chicago told The Wall Street Journal.

The bets became self-fulfilling prophecies feeding a selling frenzy that sent a blast of orders which appears to have jarred the flow of data going into brokerage firms and clogged exchanges. That situation ultimately may have caused some huge superfast-trading hedge funds that now provide much of the liquidity for the stock market to stop trading in a "Black Swan" moment, a rare, unforeseen event that can have devastating consequences, the Journal reported.

"Universa alone couldn't have caused the meltdown," said Mark Spitznagel, Universa's founder. "We had reached a critical point in the market, and it was poised to collapse." Barclays Capital declined to comment.

In a less apprehensive environment, Universa’s bet might have caused a temporary downward movement, but both markets and investors were unsettled and already poised to flee.

As the turmoil unfolded, every second saw some 300,000 pieces of stock information — stock-price moves, trades — pour into Barclays' system, far more than the usual peak of some 60,000 ticks a second.

And, as the market plunged, it took about two minutes rather than the usual fraction of a second to unwind trades.

With the high-frequency funds either selling or pulling out of the market, Wall Street brokerage firms pulling back and the NYSE stock exchange temporarily halting trading on some stocks, offers to buy stocks vanished from underneath the market.

Even before some individual stocks collapsed and rival exchange Nasdaq announced it would route quotes to the NYSE’s Euronext’s electronic Arca exchange, some traders say that data from Arca had begun to appear questionable.

The market’s rapid growth over the past few years has moved the main trading venue from the NYSE to distant computer servers, making it tougher to maintain order as making trades became cheaper and faster.

Today, high-frequency traders from for-profit hedge funds make up an estimated two-thirds of stock-market volume — and their sole concern is making money for their investors, not keeping the market orderly.

Officials from the Securities and Exchange Commission and the major stock exchanges have agreed to immediately revise marketwide circuit breakers that temporarily halt stock trading in the event of a major decline, and to draft similar measures for individual stocks that will be applied uniformly across markets, The New York Times reports.

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Ironically, a hedge fund advised by Nassim Taleb, author of Black Swan: The Impact Of The Highly Improbable, reportedly may have inadvertently contributed to last week s flash crash in the stock market. The fund, Universa Investments, placed a $7.5 million bet on...

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