Why are there flash crashes in the stock market but no flash rallies?

[Van_der_Voort_4]

There was a major flash rally in equities that was of epic proportions. I'll offer a cookie to anyone who can identify it. We'll find out who really trades on this forum now.

January 3rd 2001 when Fed made surprise rate cut.
later,next few days Indexes gave back gains from that move

 

[Maverick74]

In 2008, I think on the September expiration Friday, European stocks all gapped up massively. Not really a 'flash' rally though. Biggest broad market gap I've seen... That was definitely epic in my book.

And the Knight Capital error blew in both directions...

You get the cookie. I almost took it back though. That Friday, Sept, 18, 2008, was the biggest rally in history almost inversely identical to the 1987 one day crash. That Thursday night the Federal Reserve issued a ban on short selling on over 700 financial stocks. What fueled this epic move is they did this shit on option expiration. To give you specific numbers, the Russell 2k went out Thursday evening around 690 on cash. Pre-market the next day we traded 850!!!!!!!! That is a 23% move in one day!!!!!!!!!!! We ultimately traded back down by the opening bell to about 760 which was still a 10% gap. I have never seen anything like that before and probably will not ever again. I knew something was up because option prices in the RUT were 1.00 over 100 pts out of the money! They were going to settle on the opening settlement print the next morning. I just figured Vol was high and nobody knew what the Fed was going to pull but there were all sorts of rumors. A lot of option market makers ended their career that morning. They were blown out.

 

[JackRab]

You get the cookie. I almost took it back though. That Friday, Sept, 18, 2008, was the biggest rally in history almost inversely identical to the 1987 one day crash. That Thursday night the Federal Reserve issued a ban on short selling on over 700 financial stocks. What fueled this epic move is they did this shit on option expiration. To give you specific numbers, the Russell 2k went out Thursday evening around 690 on cash. Pre-market the next day we traded 850!!!!!!!! That is a 23% move in one day!!!!!!!!!!! We ultimately traded back down by the opening bell to about 760 which was still a 10% gap. I have never seen anything like that before and probably will not ever again. I knew something was up because option prices in the RUT were 1.00 over 100 pts out of the money! They were going to settle on the opening settlement print the next morning. I just figured Vol was high and nobody knew what the Fed was going to pull but there were all sorts of rumors. A lot of option market makers ended their career that morning. They were blown out.

Thanks for the cookie

Yep, we had big losers and big winners that morning (Europe). Vols were high anyway, and in general last few days before expiry we tried to keep up and down risks flat. But on 20-30% gaps across the board you will have something open. I think our index boys pretty much vomited on open... but overall we did pretty good.

 

[tradingjournals]

Stocks are risky, but cash has "zero" risk. The name of the game is to make cash from cash,and stocks are just a mean to an end. which is to make more cash. Cash is coward, chicken and protected: It comes out only in drips on the way up, but leaves out fast and in herds at the first sign of trouble.... etc. Implied vol in OTM puts is higher than implied in OTM calls.

 

[JackRab]

Stocks are risky, but cash has "zero" risk. The name of the game is to make cash from cash,and stocks are just a mean to an end. which is to make more cash...

Nah...

Cash doesn't have zero risk. The biggest risk is reduction in purchasing power... technical term is inflation. Which is where investments come into play.... most do well on inflation. So stocks are not a means to make more cash... they are there to increase purchasing power, or at least not lose any.

 

[Pekelo]

As a closing to this thread and short answer:

Life is full of dangers, so bad news coming out of nowhere and effecting the market is 10-20 times (or whatever) more likely than a good news doing the same. Thus the prevalence of sudden reaction mostly to the downside.

 

[tomorton]

I hope the thread's not winding down, as there's a danger we're coming to the wrong conclusions. The frequency of 1-day price drops in the US stock market is over-stated. By some measures the magnitude of 1-day price changes favours the upside. There is also data showing that most significant 1-day price drops come out of bear markets, not out of the blue.

 

[Pekelo]

The frequency of 1-day price drops in

That is not a flash crash. It kind of helps the discussion if we are all talking about the same thing.

Flash crash/rally: Sudden and big price change that gets corrected on the very same day...

 

[tomorton]

That is not a flash crash. It kind of helps the discussion if we are all talking about the same thing.

Flash crash/rally: Sudden and big price change that gets corrected on the very same day...

I agree with your definition, but the OP has a more relaxed interpretation by inclusion of the 1987 event, which I agree was not a flash crash. So he's not just talking about intra-day events and neither were other posters.

 

[Maverick74]

Stocks are risky, but cash has "zero" risk. The name of the game is to make cash from cash,and stocks are just a mean to an end. which is to make more cash. Cash is coward, chicken and protected: It comes out only in drips on the way up, but leaves out fast and in herds at the first sign of trouble.... etc. Implied vol in OTM puts is higher than implied in OTM calls.

Well look whose back. My buddy TJ! Cash certainly is not zero risk. Ask the Venezuelans about that.