II. Effects ~ Delayed price data leads to uncertainty, fear, and panic.

Stub Quotes

The main chart shows when significant stub quote trades occurred (light blue dots) and the relative intensity of stub quote trades in the Stub Trades color ribbon.

Other reports point to Stub Quotes as a factor in the Flash Crash. This is not supported  the data.  Nearly all Stub Quote Trades, which are trades executed at stub quotes, occur after the market bottomed and therefore stub quotes could not have been a cause of the crash.

Stub quote trades may have been the result of a combination of a lack of liquidity and panic induced market orders based on delayed quote data.  People watching television news sources showing the plunging Dow Index (which we now know was delayed 2+ minutes) may have been one source of stub quote trades. Also, the triggering of stop loss orders, which become market orders when hit, may have resulted in stub quote trades.

However, it is interesting to note that a significant number of stub quote trades appear immediately after the perceived bottom of the market -- when the very much delayed Dow Index makes it's low. In fact, for those with timely quote data,  the market was actually rocketing higher when nearly all stub quote trades executed.

NYSE Slow Mode or  Liquidity Replenishment Points (LRPs)

The NYSE employs a circuit breaker known as the Liquidity Replenishment Point or LRP. Each NYSE stock has a LRP which is essentially a predetermined price above and below the trade price of that stock. If the price of a trade in that stock exceeds the upper or lower LRP price, software at the NYSE automatically turns off NYSE's auto-execution system and places the stock in Slow Quote Mode, which means it's handled differently by that stock's Designated Market Maker.

When an LRP is triggered, the NYSE will send out a quote with a special tag indicating that stock is now in Slow Quote Mode. That quote is sent out the same way that other quotes are disseminated, which means if the quotation system is overloaded and delayed (recall the NYSE-CQS Delay), the quote with the special tag will be delayed too. This means a lot of orders can get sent between the time the switchover to LRP mode occurs on the NYSE floor and the reception of the quote indicating the switchover occurred.

We have noticed that trade executions in a stock immediately after it hits an LRP are often at substantially lower prices than bid prices on other markets. It was this reason why we began our flash crash by first investigating LRP's role in the flash crash.  However we found that the number of stocks switching to Slow Mode did not become significant until well after the market had already bottomed.

Anemic Recovery Volume

The Trade Rate color ribbon shows trading activity first surged at 14:42:44 (bright red), again at 14:43:20, 14:43:45, 14:44:05, and then at 14:44:30 and remained high until about 14:46:20, where it began slowing considerably (changing to green and cyan) and except for a brief surge ar 14:49:25, remained low. The Quote Rate ribbon (directly above the Trade Rate ribbon) shows a strong correlation and also begins to slow around 14:46:20 (note this is also about the same time the NYSE-CQS Delay peaked).

This drop in quote and trading volume also occurs shortly after the market bottomed (though the perceived bottom for those using the DJI as a proxy, would not come for another 40 seconds at 14:47).  Yet prices of stocks rocketed higher. By 14:48, the SPY, and many other stocks, had regained all they had lost from the drop at 14:42:44 and on significantly lower volume.

Applying simple supply and demand logic to these events might suggest the recovery was not driven by stong demand, but rather a lack of supply; perhaps there were few sellers left.

Large eMini Futures Discount (ES.M10 - SPY)

Beginning at 14:46:35  the difference between the price of the SPY equity and the eMini futures contract grew to about 3% at 14:48:50, and returned to normal at 14:50:40. A considerable arbitrage opportunity, selling SPY and buying the future contract, existed for nearly 4 minutes. Some of this difference could have been due to the Waddell 75,000 contract eMini sell program that reportedly took place between 14:32 and 14:52.