Hedge Fund Stock Market Crash
WSJ Suspects Hedge Fund's Trade Caused Stock Crash
The recent crash in the market (and same-day partial recovery) may have been caused by a trading error, or it could have been brought on by a hedge fund's big bet. The Journal focuses on a trade by the hedge fund Universa Investments LP on Thursday about twenty minutes before stocks tumbled. Universa bet that stocks would continue to decline which, given the market instability at the time, the $7.5 million trade for 50,000 options contracts may have played a key part in the
stock market's crash that day.
The trade by Universa, a hedge fund advised by Nassim Taleb, author of "Black Swan: The Impact of the Highly Improbable," led traders on the other side of the transaction to do their own selling to offset some of the risk, according to traders in Chicago.
Then, as the market fell, those declines are likely to have forced even more "hedging" sales, creating a tsunami of pressure that spread to nearly all parts of the market.
The tidal wave of selling fed into a market already on edge about the economy in Europe. As the selling spread, a blast of orders appears to have jarred the flow of data going into brokerage firms, such as Barclays Capital, according to people familiar with the matter.
Exchanges, in turn, were clogged by huge volumes of offers to buy and sell stocks, say traders and exchange executives. Even before some individual stocks collapsed to just a penny a share, data from the NYSE Euronext's electronic Arca exchange started to appear questionable, say traders. Source
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