Flash Crashes, Quote Stuffing and Banging the Close – Oh My!

The original "Flash"

There is a whole new language of electronic trading being invented.

Since the May 6th “flash crash” in which the Dow Jones Industrial Average fell 700 points in a matter of minutes, reports of “quote stuffing” and “banging the close” have been in the news.

Much of what happened during the “flash crash” was the result of liquidity in the market for a given stock being split between numerous locations.

Some of what happened was the result of opportunistic traders trying to game the system.

And, some of it was simply much to do about nothing.

In the category of attempting to game the system, “quote stuffing” has to rate at or near the top.

Quote stuffing” is when a trader enters thousands of orders into the market electronically in order to slow down the market for a given stock in hopes of disrupting the market and, thereby, exacerbating the stock’s fall in price as other traders are prevented from entering orders. The Wall Street Journal reports that at one point during the “flash crash”, orders for Abbott Labs went from 30 per second to over 10,000 in one second with all but 14 orders immediately cancelled.

I do not know the rules in the stock market, but in the futures markets this would have resulted in serious consequences for the traders and the clearing firm involved.

Banging the close” is another new term meant to describe when a trader puts orders into the market at the very end of the trading day with the intention of pushing the market one way or another. The trader’s purpose in “banging the close” is to make his position look better than it would have looked otherwise. The term “banging the close” may be new, but trying to push the market in a favorable direction at the end of the day predates all of us.

When I traded on the floor, certain traders would try to move the close one way or another to enhance their position.

This practice didn’t have a name, but it did have a face.

The face was that of one of the older grain brokers who would turn bright red as he sold the current future with the intention of pushing the market to a lower closing price so that his cash grain firm could buy grain overnight using a lower price than would have otherwise been possible.

This, however, was not a one-sided trade.  Realizing that the red-faced cash grain trader would be selling the nearby futures contract on the close, other traders would sell the next month out at the beginning of the close. Then, these other traders would buy the nearby month at the lower price from the red-faced trader; thereby, putting on the spread at a slightly better difference than would have otherwise been possible.

My experience seeing traders try to push the close in one direction or another would indicate that, even when pushed higher or lower at the last second on the close, the market will return to where supply and demand dictates when the market reopens the next day.

As to trading stock on various competing marketplaces, I have little personal experience as I have always traded futures.

However, it stands to reason that the “flash crash” was, in part, the unintended consequence of diverse competing stock markets that work well when things are quiet, but lack the depth of liquidity and supervision to handle dramatic increases in volatility.

Futures, on the other hand, have one centralized, well-regulated market for each important contract. When something unprecedented happens, a la the “flash crash”, you stand a better chance of having a predictable outcome in the exchange traded futures markets than you do in the fragmented stock markets.

Wishing you success in your trading,


Copyright © 2010 by Jeff Quinto, all rights reserved

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Jeff Quinto has been called "America's Preeminent Futures Trading Mentor". Jeff is a 40-year veteran futures trader, former CME member and a world-class trading coach. He has coached hundreds of futures traders, including traders from Hong Kong, France, China, England, Australia, the US and Canada.

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