Performativ…stupidity, ATP Oil & Gas edition

From Felix Salmon (whose blog is so good it makes me not want to write anything, just point a big finger at him) comes a story that pops up from time to time. Usually it is some kind of technical snafu, when a trader sits on the keyboard or accidentally keys in a sell rather than a buy order.

Though as a total aside, the recent May incident where P&G dumped 1/3 of its value, then rebounded (from $60 to $40 back to $60) in 4 1/2 minutes seems more complicated than an accidental trade. In fact, the joint SEC-CFTC report (that’s a .pdf) is something of a doozy:

The quantitative evidence presented above suggest that a confluence of economic events, market forces, and trading system functionality led to a significant dislocation of liquidity in the June 2010 E-mini S&P 500 futures contract sometime between 2:30 p.m. and 3:00 p.m. on May 6, 2010.

Prior to that time, a number of economic events and market developments led to a broad-based market desire to lessen risk exposures. This translated into a downward movement in prices across financial markets in conjunction with significant trading volume. At or about 2:30 p.m., the electronic limit order book in the E-mini S&P 500 futures market exhibited a significant imbalance of sell orders and buy orders. In the backdrop of declining prices, this imbalance appears to have contributed to a sudden liquidity dislocation despite increased trading volume. At approximately 2:45 p.m., several sell orders executed deep into the limit order book, which coincided with a significant loss of depth, triggering the Stop Logic functionality. The Stop Logic functionality in the E-mini S&P 500 contract has been triggered a number of times in the past few years, including several times during the financial crisis in the fall of 2008, when market conditions may have resembled those seen on May 6, 2010. Activation of the Stop Logic functionality on May 6, 2010, initiated a five second pause in trading in the E-mini S&P 500 futures contract. After the five second pause, the limit order book became more balanced, which is its typical state, and the price of the E-mini S&P 500 futures contract recovered.

This is being called the Flash Crash of May 6, 2010.

Anyhoozle, the ATP Oil & Gas Corporation. The analyst for JP Morgan who covers the company, named Joseph Allman (in case you want to know whose work you can’t trust down the road), calculated that the company would need $500 million in additional capital, more than its entire market capitalization. You can see what happened, on June 13, 2010:

That’s end of trading day Monday. On Thursday, JP Morgan put out a second note, as Salmon quotes: “In our July 13 note, we stated that it appeared that ATPG would need $500MM of external capital. This model corrects that error and reduces that need to $50MM.”


The lessons Salmon draws are things like, yep, people read sell-side research and act on it, and yep, stocks are hella volatile nowadays, and you betcha, listening to sell-side research without doing your own homework is hazardous to your wealth.

To me, what’s amazing here is how time horizons are highly shortened, and market reflexes are hair-trigger, and trading technologies are tightly coupled. Add people, mix, and there will inevitably be periodic blowups.

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