Chances are you have had a difficult evening explaining your family members the stress and panic caused by the Dow Jones brief cave of nearly 1000 points. After all, it can’t be important as it hasn’t been on national television. And those gamma, vega and delta positions after a 15% gap down in the morning are hard to estimate and impossible to explain.
Rumor has it a Citi trader confused some figures while entering a trade, but I don’t buy this fat finger theory. Erroneous trade entries can shock markets. However, markets just aren’t supposed to be stable and crashes just happen now and then. Maybe difficult to accept without blaming some clown with fat fingers at Citi. Or the algo trading systems. Or any other quant driven trading machine. Maybe they messed up P&G and Accenture, but the market as a whole was happy to fall.The year 2010 has been fairly quiet so far in derivative trading, with implied volatilities melting away to extremely low levels. If you’re lucky you still have some left, prepare for skyrocketing volatilities.

Anyway – a lot of people must have missed the stock market’s dive altogether. It was the largest absolute drop in the Dow in history, and half of the 1987 crash. Here it is in replay – with Jim Cramer saving the market. (Hat tip to blikopdebeurs.com)

Jack
Jack