What Was THAT? (Friday Market Close)

Friday’s close was "interesting", to put it mildly.

Here’s a chart of Friday’s price action in the /ES, the S&P 500 "Electronic" Futures:

Notice the huge volume spike (the blue underlay) on the chart at the close.

There were 146,083 contracts traded in that one-minute period between 14:59 and 15:00 (Central); the next minute, when the real dislocation hit, traded 91,774 – after the cash market bell had rung.

The closing bell is usually busy.  But this sort of volume is absolutely unheard of.  To put it in perspective yesterday the same time recorded 26,540 contracts, and 36,642 the minute after.

Volume was light all day, as is somewhat common in the summer on a Friday.  The close started its usual increase, and was up to 23,000 contracts at 14:57 with two minutes remaining.

Then all hell broke loose.

"Paper", or institutional representation, was stalking the close; the pit audio feed so stated.  Directly in front of the bell 1,000 contracts were bought – as near as I could tell at the market.

Those are "Big" contracts, each being 5 of the /ES minis; this was, in effect, a 5,000 contract /ES market order.

The reaction was instantaneous.  The offer side of the market collapsed and the /ES rocketed higher.  In the pit, trades went off as high as 925, but on the E-Mini trades were recorded as high as 927.75.  As quickly as it got there, it collapsed back to 922 – a nearly six-handle (3/4 of one percent) straight-up and down spike.

Now here’s the problem:

For me to believe this was "organic", that is, this was an un-forced order, I have to believe that someone wanted to go home net long the equivalent of 5,000 /ES contracts into the weekend at a severely disadvantaged price.  The market had been calm all day; if you wanted to buy 1,000 spoos (equivalent to 5,000 E-Minis) there was plenty of opportunity to do so all day long.  This sort of market order was guaranteed to dislocate the market – so the buyer had to simply not give a damn what sort of price they got.

How bad of a fill was this?  To put this in perspective each /ES point is worth $50 per contract. 

Each single point that was disadvantaged to the buyer by this execution cost him a cool quarter-million bucks, and on average, the "disadvantage" was likely around five full handles, meaning that the buyer of these contracts, if this was an "organic" order, willingly ate $1.25 million dollars.

I don’t believe for one second that is what happened.

There are only two possibilities that I can come up with, and both demand answers:

1. "Someone" was forcibly liquidated out of a short position – a fairly big one.  1,000 S&P "big" contracts has a maintenance margin requirement of $22,500,000 – that’s not a small position, and each point, as noted, has a $250,000 move associated with it.  Who was it and why?
2. "Someone" who didn’t give a damn if they lost a sizable amount of money intentionally wanted to shove the cash market up through the 200DMA, a critical technical level.  They were 1 minute late; they succeeded in doing so in the futures, but not the cash!

#2 makes for great conspiracy theories, but my money is on scenario #1 – someone got forcibly liquidated into the close, perhaps a big customer, perhaps a hedge fund, but someone.

Whoever it was the coupling between the pit and the Globex futures guaranteed the result.  There are computers and traders looking for differences between the pit and E-minis every day who try to pick up those nickels in front of a steamroller.  When the offer side collapsed the computers took over and stops got run all the way up to 927.75 before quickly collapsing back down to 922.

Here’s the cash chart, as of the close this afternoon:

That’s a very pretty potential double-top in the oval, and it coincides with the 200MA.

This is not to say that this level will necessarily hold.  We are, in fact, only at the 38.2% retrace from the decline that initiated last fall!  It would not be unusual for a bear market rally to go as far as the 61.8% retrace before its over, which is up around 1060ish, or the 50% retrace around 990.

What does this all mean?  A few things:

1. The stops up there are gone.  They were potential rocket fuel for next week and the propellant to take us to – and potentially through – the 200DMA on the cash.
2. A bunch of someones had a lot of contracts that were short taken out on them.  Those nearly 250,000 E-mini contracts did change hands, and odds are a very large percentage of them constituted stop-loss orders on contracts sold short from when we were up toward 933 a few weeks ago.  Those traders are going to be quite pissed off, but that’s the risk of the game.

Next week is very likely to be extraordinarily violent, especially Monday.  /ZN (10 year Treasury futures) has seen an insane drop in open interest over the last few weeks.  This little game undoubtedly severely damaged open interest in the E-Mini /ES contract.

Thin markets are dangerous markets.  While the E-Mini still is very liquid, the removal of these stops from the order book leaves the door open for both little resistance if the market decides to move higher early next week, and also provides the potential for irritated shorts to re-establish their positions short, driving the market lower.  Those who wound up long during that little ramp job are likely to be rather nervous as well.

For my part I shorted that spike.  Not large, and I am fully prepared to hedge it Sunday evening if necessary or just take it down, as there is every possibility, this close to the 200MA, that we will at least hit it on the cash, and blowing through it on volume and continuing higher cannot be ruled out.

I will note, however, that the last time we saw this sort of dislocation activity start up into the close it it too began with these sorts of "rocket shot" moves higher – and once the shorts were all blown out by having their stops run, the market essentially pancaked.

Look sharp – the sharks are in the water and you taste good.

Disclosure: Mildly short (~5% position) the broad market.