Markets are UP, but how did they do that?
October 4, 2011 2:47 PM   Subscribe

Miraculous rally in the final forty five minutes today pushes all stock market indices above their three-year lows. Goldman Sachs, JPMorgan Chase, and Morgan Stanley all up by ten, twelve percent for the day. Can someone explain how this has happened?

"You can't explain that!", I expect to hear. But I think whatever stunt was just perpetrated in the markets deserves some more scrutiny. Does any one here have any ideas about what just happened?
posted by shipbreaker to Work & Money (18 answers total) 3 users marked this as a favorite
posted by shipbreaker at 2:49 PM on October 4, 2011

A friend of mine I was chatting with earlier put it best:

and rocketshot to the close
thank you high frequency trading algorithms, you rock

posted by Mister Fabulous at 2:51 PM on October 4, 2011 [2 favorites]

Anytime a big move like that happens, its almost always the result of automated trading.
posted by empath at 2:52 PM on October 4, 2011 [1 favorite]

Here's what the WSJ said:

"Stocks rallied in the final hour of trading after a report that European Union finance ministers are discussing ways to recapitalize the Continent's banks.

... The reversal [in the position of the market] comes after the Financial Times reported EU finance ministers, meeting in Luxembourg, concluded that they hadn't done enough to convince financial markets that Europe's banks could withstand the debt crisis.

Traders also pointed to news that Franco-Belgian lender Dexia is set to park assets into a "bad bank," a vehicle backed by guarantees from the French and Belgian governments."

But probably robotrades, too, as other posters note.
posted by Admiral Haddock at 2:53 PM on October 4, 2011

It's called day traders covering their short positions, cashing in on puts that were bought when the market was lower, taking the profits.
posted by cvoixjames at 3:11 PM on October 4, 2011

I heard on the news this morning on the way to work that Bernanke said (near market close) that the central bank was ready to take more steps to stimulate thet economy.

I would think that traders would take that to mean "omg QE3 is coming" ie printing some money in some shape or form.

Markets are desperate for some / any good news right now, it's taken a beating in the last week.
posted by xdvesper at 3:50 PM on October 4, 2011

Markets are desperate for good news, sure,
but there seems to be a robo-trading algorithm in place:


and I'd really like to know: why this works, how this works

?? !!!
posted by shipbreaker at 4:02 PM on October 4, 2011 [2 favorites]

no. no one can answer this. anyone who tries is just making things up. Short-term market commentary is basically hokum.

Like look at the Dexia news item AH lists - that was announced before the open in NY.

It could be algos, it could be HF covering shorts into the close. It could be anything.
posted by JPD at 4:03 PM on October 4, 2011 [4 favorites]

most trading algorithms don't care what the stock they are trading is, they just look for certain patterns of price movement and volumes.
posted by JPD at 4:06 PM on October 4, 2011

not to mention MS' close today is just back to where it was at the open on Monday.
posted by JPD at 4:09 PM on October 4, 2011

So this is how AI overthrows society? How anticlimactic.
posted by SomeOneElse at 5:09 PM on October 4, 2011 [2 favorites]

xdvesper, the problem I have with your explanation is: no one seems to loan Bernanke any credibility at this point. He's a paper tiger.

Markets have had some good news: Germany promising they won't let Greece fail; Greece agreeing to more austerity measures... The markets didn't bounce that high on those promises, so I can't see them doing it for Bernanke's hints.

I'm going with automated trading. But it's just a guess.
posted by IAmBroom at 7:50 PM on October 4, 2011

Oh - almost forgot. Marketplace from APM today suggested that the market had hit a new key low level before rebounding. That points to a lot of algorithmic sells, possibly poised "AMC" - "At Market Close" (IOW, the algorithms may have said: "IF MARKET_INDEX_Y <>
The algorithms aren't that simple, but you get the idea. The key point is AMC sell conditions. Realistically, they can't all sell at 4:29, because the communications traffic would create gridlock. So, the AMC orders are actually put in earlier, based on current traffic. As the order traffic increases, more orders are placed by algorithms (some merely "Market" = "sell immediately!!!") to avoid missing the low-point, and - voila.
posted by IAmBroom at 7:56 PM on October 4, 2011

Oops, I accidentally borked part of that:

IOW, the algorithms may have said:

posted by IAmBroom at 7:58 PM on October 4, 2011


It wasn't only investment bank stocks that rallied.
posted by empath at 8:20 PM on October 4, 2011

There is a style of trading called "technical". It has to do with using moving averages and the shapes of the curves of the price moves to determine the next move. (Things like "if the 30 day moving average is positive and the 200 day moving average is negative, do [this]." Or "if the shape of the curve looks like a tophat, that means [xyz]".) I view it as mostly tea-leaf reading, but there is some value in it. It's a way to gain some insight on how markets behave.

Anyhow, it, and a lot of other trading outlooks put a lot of emphasis on markets hitting lows. The older the low, the more important it is when it is reached. It's usually a sign that the market is on its way back up. It can be a self-fulfilling prophesy, but that doesn't really matter. The market hit a low, people believed it was going to start going back up again and started buying.

It wasn't a stunt. It was just the cumulative effect of a bunch of people buying at the same time. Maybe for the same reason, maybe not.
posted by gjc at 6:32 AM on October 5, 2011


Whoops, yeah, and thanks to empath for catching yet another mistake in my pseudo-code...

Back to writing safety software for mass transit. Sleep peacefully, kids.
posted by IAmBroom at 12:32 PM on October 5, 2011 [1 favorite]

you might as well ask why GS was trading off $6 into midday, but fwiw three things:

(1) positioning: market was very short risk (it's not just short bank stocks, it's long USD (esp against EUR), long fixed income, short equities etc etc ... if you're just watching the banks you're missing the larger macro picture. The entire market is highly correlated at present and driven off a single thematic: europe. Any positive shock forces traders to cover euro-negative positions which cascades through the market at large.

(2) newsflow: timely FT article suggesting european bank recapitalisation was on the cards, hence the particularly sharp recovery in global financial stocks, and

(3) optionality: there is a very large open interest in S&P500 october puts stuck at 1100. This results in significant delta + gamma hedge interest which, coupled with vol + variance swaps, can amplify market volatility about the key strike into market close ... for our purposes 'robotrading' will do.
posted by bookie at 5:01 PM on October 5, 2011

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