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Alternative Market Briefing

What the high frequency traders did last week during the market plunge

Thursday, May 13, 2010

From Kirsten Bischoff, Opalesque New York:

Regulatory agencies are scrambling to recreate timelines of activity across several trading markets in order to uncover what drove the US markets plunge on Thursday May 6th, 2010. However, what if the market plunge itself wasn’t actually due to what one firm did, but rather to what many firms did not do?

As of Wednesday – SEC head Mary Schapiro said that numerous subpoenas had been sent out (to as yet un-named recipients) as the agency continues to try and analyze the different events that unfolded on the afternoon of May 6th.

In the media, most of the focus has been on a few different firms. One, an un-named, “bona fide hedger” that sold approximately 9% of the volume of stock-index derivative contract known as 500 e-mini futures; another, Universa Investments, which placed a $7.5m options bet (which is 50,000 contract options) that the S&P 500 would decline to 800 by June 2010.

While the blame for the market plunge has yet to be placed on any single “smoking gun”, many groups have been called to task as potential contributors to the extreme activity. But the main focus immediately turned to the possible negative contribution of high frequency traders.

This group is often cast as the market villain during times of volatility, largely due to the fact that few people understand exactly how their activity affects the markets. However, last Thursday’s severe drop off may in fact provide some......................

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