May 7, 2010


I still have not read an accurate description of the market drop that happened yesterday.  We know one thing though.  That is what the world looks like when liquidity dries up.  To be clear, liquidity is the ability to convert an asset to cash quickly.  And it is enabled by many many people wanting to buy and sell that liquidity.  With lots of people come lots of interpretations of what that security is worth; a demand curve if you will.  The more people, the smoother that demand curve is.  There are no big gaps or 'spreads' in the price interpretations. It doesn't mean prices won't be volatile because they will.  It just means the price movement and the ability to buy and sell the asset at the current market price is smooth.  Yesterday that didn't happen. ACN went to $0.01!  A ridiculous price.  If there were no buyers between $40 and $0.01 then a market sell order would cause the price to clear that gap.  The question now is why were there no buyers?  Did something get jammed in the electronics?  Did algorithms shut down all the buyers?  Did algorithms shut down the market makers?  I'm not sure we know.

One other thing.  No one made money on those price movements.  While the prices were volatile, no one was getting their orders hit.  It was just this weird anomolous moment in the market.

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