The Mini Flash Crash of 2015, or, How I Made $5,000 in 30 Minutes

“Be fearful when others are greedy and greedy when others are fearful” says Warren Buffett.  At the opening of the stock market last Monday on August 24, 2015, we saw a ton of fear.  Following Buffett’s advice, I got greedy.

Out of sheer luck I happened to be sitting in front of the computer at the opening bell.  I was looking at my index fund tracker at Yahoo Finance when I saw one of my recent purchases plummet over 30% for no reason at all.  Sure, the entire market was down 5-6%, but that didn’t explain the drastic drop I saw.  Then I checked a few other ETFs in my portfolio and noticed they were also down by ridiculous amounts of 30% or more.

After scratching my head for a few minutes, I realized what a galactic treat the cosmos just dropped in my lap.  Index fund ETFs at 25% off their intrinsic value!  Guns ablazin’, I fired off two trades in my Fidelity account as quickly as I could.  I placed an order to buy 100 shares of IJS (iShares Small Cap Value ETF) at $82 and another order to buy 100 shares of IUSV (iShares Large Cap Core ETF) at $92.

The $82 purchase of IJS didn’t execute immediately even though the price was quoted in real time below $82.  Strange.

I checked the IUSV order and realized the price shot up to $100 or so with a bid price of $98 and an ask of $101.  I immediately replaced my $92 buy order with a buy order at $102.  Yes, a buck above the best asking price which should guarantee immediate execution.  It didn’t.

Oh crap, I can’t access my order screen at Fidelity!  Then began an intense waiting game hoping that my trades were actually in Fidelity’s system and that those trades would be executed before the price recovered beyond my limit prices.  Tick tock tick tock.

After what felt like hours but was probably no more than ten or fifteen minutes (just about the right amount of time to go cook a bowl of oatmeal), the order screen at Fidelity came back to life.

First the IJS trade confirmation appeared.  100 shares bought at $82 per share.  Then the IUSV trade confirmation appeared.  I was the proud new owner of 100 shares of IUSV at $100.85 per share (right at the asking price when I submitted my order and more than $1 below my bid price).  Ca-ching!

ijs-mini-flash-crash-profit

That’s a 29% profit in 30 minutes, folks.

While I enjoyed the glutinous texture of my slow-cooked oatmeal, I sated my gluttonous appetite for wealth with a nearly instant profit of almost $5,000.  I refreshed the quotes on IJS and IUSV a few times and watched them climb up, up, and up just as swiftly and linearly as they dropped thirty minutes earlier.

And that is how I spent the Mini Flash Crash of 2015.  Eating a $0.10 bowl of oatmeal (the bulk, slow cooked kind with added cinnamon, raisins, and brown sugar) and making $5,000 from a few well timed trades.

 

What caused the Mini Flash Crash of 2015?

During the first 30 minutes after the opening bell I noticed a lot of weird stuff going on.  The bid/ask spreads on the ETFs I followed went bananas.  At times, there was a $20 or $30 spread between the bid price (what buyers are willing to pay) and the ask price (what sellers ask for the shares they want to sell).  Typically bid/ask spreads are no more than a few pennies in heavily traded ETFs and perhaps $0.20-0.30 in thinly traded ETFs.  Something was definitely wrong.

Being the generous but greedy person that I am, I stepped in to narrow those bid/ask spreads and provide a little liquidity to the market.

But what caused the insanity of the Mini Flash Crash?

  • market makers stepped away from the market due to risk
  • HFT and algo traders walked away, also due to risk
  • Arbitrage traders that swap back and forth between owning an ETF and the basket of stocks within the ETF (that’s why they’re called arbitrage) abandoned the market, too.

The arbitrage guys couldn’t get quotes on the basket of stocks owned within the ETF since some stocks didn’t open for trading for 30 minutes or more.  Without stock quotes across the market, the arbitrageurs couldn’t mathematically determine the Net Asset Value (NAV) of the ETF and therefore they couldn’t stomach the risk of buying the ETF and selling the basket of stocks within at unknown prices.  The arbitrageurs walked away, too.

In general terms, take away all of the huge market participants and you get severely limited liquidity and horrible bid/ask spreads.

For a more in depth read, check out ETF.com’s commentary on the Mini Flash Crash of 2015.

Lessons learned

Even financial advisers get bungled up in temporary market craziness like last Monday’s Mini Flash Crash.  From the Wall Street Journal:

Lansing, Mich.-based financial adviser Theodore Feight had set up an automatic sale [a.k.a. a stop loss order] for iShares Core U.S. Value ETF [IUSV] if it were to fall a certain amount. The ETF tumbled 34% in early trading, and instead of Mr. Feight’s position selling at his target price of $108.69, down 14%, it sold at $87.32, off 31%. By noon, the ETF had bounced back, and it ended the day down 4.3% at $121.18.

“I’m really disappointed,” said Mr. Feight, who invested in ETFs for more than a decade. “They weren’t as liquid as they should have been.”

Ouch.  Mr. Feight used a stop loss order hoping it would limit losses in his IUSV position.  Instead, when the stop loss target of $108.69 was reached on the plunge down, it became a market order, ready for execution at any price.  The next price available in the market was $87.32, a full 20% lower than his stop loss target price.  A market beset with a lack of liquidity and frozen by intermittent circuit breakers does not mix well with stop loss orders.

Moral of the story: don’t use stop loss orders unless you really really want to sell at any cost and you really really don’t care how much you lose.  Limit orders would have prevented the presumably unintended sale of Mr. Feight’s IUSV shares at 31% below the previous closing value.  Mr. Feight didn’t respond to the questions I asked him by email four days ago, so I can only make assumptions about his intentions at this point.

Stop loss orders are dangerous because they do not come with a limit on the sale price.  They are essentially market orders that get executed once a security drops to a certain target.  Save yourself from a big mistake and don’t use stop loss orders or market orders.

Stick with limit orders.  It’ll guarantee future market weirdness won’t snatch your shares at an unconscionable price.  If you absolutely have to sell something, set the limit price low enough to guarantee it’ll execute (somewhere just below the current bid price) and you should get the same price as a market order coupled with the security of a minimum price limit.

Same advice on the buy side of a trade.  If you really really really have to buy something, set the limit price a bit above the current ask price (as I did with the IUSV trade with limit at $102 when the ask was around $101).  You won’t get stuck with a wonky trade if the market moves wildly before your trade is executed.

Some other routine trading advice bears mentioning.  If you’re buying or selling ETFs and want a decent price without a lot of uncertainty in the markets, avoid the first 30 minutes and the last 30 minutes of the trading day.  Those time periods are typically the most volatile and wild price swings right at the open or close can be problematic if you aren’t really careful with limit order prices.

 

The future of the market

It also bears mentioning that the opportunities I found last Monday rarely present themselves.  The markets have traded with decent liquidity since the last Flash Crash five years ago.  That’s over 8,000 hours of highly reliable market operations punctuated by a half hour of a big chunk of the market temporarily falling apart.  In percentage terms, the market functioned properly 99.994% of the time since the 2010 Flash Crash.

99.994% is so close to perfect that it doesn’t bother me the slightest to continue owning ETF’s and occasionally placing limit orders in the stock market when I need to invest new money, raise cash for living expenses, or rebalance my portfolio to my target asset allocation.

Some critics say the HFT’s, algo traders, opportunist arbitrageurs, and the faceless boogeymen of hi tech capitalism have ruined the integrity of the stock market forever.  Except they haven’t.  99.994% of the time they provide liquidity to the markets, improve bid/ask spreads, and make it easier to complete trades in the market by serving as a willing counterparty.

 

 

Where were you during the Great Mini Flash Crash of 2015?  Did you snap up any winners?

 

 

photo credit: Stock Market Crash by zemistor at flickr under creative commons license BY-ND 2.0

50 comments

  • I didn’t snap up any winners, but I am glad that I read this article. I was unaware that ETFs had these liquidity problems and would be prone to large up and downs in the first and last 30 minutes of trading, but the logic behind it makes sense. Most of my investments are in mutual funds now, but I still own a few ETFs.

    Before I had enough money to diversify into all the mutual funds I wanted to be in I had purchased ETFs since you don’t need $3K to get into those. I routinely made my purchases (up to 4 per week on Monday mornings) with market orders during the first 30 minutes of trading and didn’t think anything off it. I never checked to see if I had gotten a steal in a micro crash, or got hosed in a micro run-up. Certainly good to know that this can happen and to keep an eye out for it, Going forward I will certainly be using limit orders on ETF purchases and sales.

    • Yeah, definitely use those limit orders. It used to be you paid a little more for limit orders vs market orders but I think that’s gone by the wayside for the most part.

  • Well done. We didn’t snap up any big winners like yourself but we did add more shares to our index funds. As Mrs. Budgets said..Let’s Shop!

  • During the last flash crash in May 2010, there was a lot of weird activity as fell with some blue chip companies going from $60 – $70 to 1 cent and then recovering back.

    The moral of the story is to not use stop loss orders, and to not show your “hand” to the fickle mr Market. I would also caution against margin investing, since a temporary drop based on abnormal volatility could cause a margin call and total wipeout.

    Now it might be beneficial to place buy limit orders at 10 – 15% below current prices on most ETF’s, and hope for a fill.. I am surprised the HFT people are not doing just that. One such investment could pay off big time for several years.

    • I’ve seen a number of investors mention exactly that 10-15% below market ETF limit strategy on the online ER forums. I’d love to but think it would be a pain to update it constantly as the market fluctuates. And to have to do that for years before possibly striking pay dirt. And needing to keep cash on hand at all times to cover those trades in case they execute. Seems like work 🙂 But there must be some hedgies or someone with a programmable trading interface that could implement that strategy successfully.

      I almost did a huge arbitrage trade by selling $100k or so of my VBR Vanguard small cap value ETF and using the proceeds to buy the very similar IJS ishares small cap value ETF. Instant $25k profit. Except I couldn’t sell the VBR fast enough and the IJS recovered too quickly. Oh well, there’s always next Flash Crash.

  • It’s great that you keep cash to be able to hop on opportunities like this. I did nothing. I kept with my personal strategy which is invest, whenever I get paid. I usually invest 100% of my cash in my checking account over my next 30 days of expected cash outflows ASAP, not dependent on the market. So therefore I usually don’t have the ability on a daily basis to attack things like last Monday. But I’m okay with that. I’m just here to ride the ride 🙂

    • That’s how I’ve invested 99% of the time. Just saw an incredible opportunity that only lasted a few minutes and had to jump on it. I would have invested more but I literally dumped 2/3 of our available cash on hand into those investments, so I couldn’t stomach putting the last $10k or so into the markets. I was sure I’d make tons of money last Monday, but not THAT sure. 🙂

  • That was very nice indeed! I hope you have a positive gain in August with that. On Monday morning last week, I was sound asleep as usual and didn’t notice the DOW’s 1000 point drop. I look at the large trends and the end prices to determine my orders and yeah, I always place my orders at the end of the day when prices are more or less stabilized and the market is predictable.

    We’re down today (Monday) again. I think the next week or so will determine the market trend. We could be out of the correction territory or the recovery was false and there is more on the downside. I’m still up 13% this year so I’m just playing with the house money.

    • Unfortunately that $5k gain didn’t put a dent in August’s losses. It looks like we’re down something like $70-75k depending on how the market closes today (not looking real pretty). Not a ridiculously horrible month, but one of the worse ones in a while.

      Kudos to your +13% YTD gains. What are you invested in? I’m pretty sure I’m down for the year but haven’t bothered to look yet.

      • I mostly trade options and ETFs following market cycles. This year, the market has been trading in a range so that wasn’t difficult to figure out upper and lower resistance levels. You buy at the lower bounds and sell at the upper bounds. Usually the round numbers are very hard to break through though. In 2000 and 2008, both bear markets happened when the S&P500 was around 1500. This year, it’s at 2000 and struggling, which is expected. It may stay at this level for some time but if it does break through, we’ll have another bull run. Otherwise…. it’s bad news. However, with the Fed Reserve’s meeting on interest rate in 2 weeks or so, the upside is stronger than downside.

  • That is nice making some quick money in the recent dip. Also, excellent advice on using limit and stop loss orders. I sat on the side lines bogged down with other things and did not purchase – other than my normal retirement contributions.

    Another way to leverage the dip would be to buy some call options on a couple individual company stocks you follow. Setting the strike price since the market price could fluctuate rapidly, and buy with an expiration date 6 months out or more. This gives you the option of selling the call on the rebound or buying the actual shares of the company. Either way it can significantly leverage your money with a small cash investment.

    • I haven’t looked at buying calls lately but they have to be crazy expensive right now given the VIX is so high. I hope to explore options a little more once Mrs. RoG quits work since right now her employer subjects her to FINRA regulations preventing short term trading (30 day minimum holding time).

  • I transferred 10k to our Roth and i401k last Monday. I didn’t get in at the lowest price because the order executed at the end of the day. It was still good, though. I was waiting for something like this to contribute our Roth.
    I don’t like a stop loss order either. My stocks are high quality and I’m pretty sure it will come back up. I don’t mind holding.
    I’m not very good at market timing and rarely buy individual stocks at the right time. It always seem to go down more after I buy…

    • Awesome. I’m very close to pulling the trigger on some traditional IRA and solo 401k contributions but still not sure whether I want/need those deductions this year due to Mrs. RoG’s unknown retirement schedule. Seems like a decent time to make those annual contributions though!

      Oh, and I generally suck at market timing too so I try to avoid it in general.

  • According to the Wall St Journal, the flash crash was due to a ‘computer glitch’ at the Bank of NY Mellon. It will be interesting to see how this plays out. Taking a look at your chart (supposedly there were some 50 ETF’s affected), trading spiked from a typical 100k daily volume to something like 500k shares traded… multiply that by 20 bucks and 50 funds, and some serious money traded hands. In the short run, BNY profited from the trading volume, but surely the sellers will demand to be made whole if their sale was caused by mispricing…
    http://blogs.barrons.com/focusonfunds/2015/08/31/bny-mellons-fund-pricing-is-up-to-date-nav-gate-is-over/?mod=yahoobarrons&ru=yahoo

    • I’m interested in the continuing developments analyzing this recent flash crash. I think the jury is still somewhat out on what caused the 2010 crash (though there are strong theories, one of which involves a single dude hacking away at his trading terminal in his mom’s basement).

      Definitely a lot of money gained and lost on last Monday. I know bid and ask lot sizes seemed relatively normal when I was looking, and there must have been huge volume across the board because that’s probably what locked me out of my fidelity order screen.

  • Wow well done, I didn’t snap up any winners, would have loved to do that. 🙁

  • I made a purely speculative play on oil (via USO) after it dropped a lot. Then it dropped a lot more but I’m almost back to breaking even. Those oil majors seem like solid long term opportunities but I figure I’m heavy into them already with my index fund investments.

  • Nicely played. I didn’t add anything during the flash crash, but I would have if I’d had the extra cash laying around. My auto deposits go in at the beginning of the month, so I’m about to add some to The Hoard, but I didn’t get the killer prices that were available.

    Excellent point about limit orders. Always. Use. Limit. Orders. Whether you’re buying individual stocks (heaven forbid :)) or ETFs. A nice reminder.

    Also, isn’t oatmeal the best? I’ve been known to eat quick oats with milk and cinnamon without even cooking them.

  • Good work! I was in front of my computer, too. I bought what I could with the liquidity I had available at the moment and then transferred more into my account for larger purchases on Tuesday. I bought heavily into commodities and oil, which rebounded much more than the overall market over the last couple of days with WTI gaining around 27% in 3 days.

    The market rewards patience and last week offered some great opportunities!

    -DP

    • Good job on the oil. I almost bought a bunch more of that then hesitated. At least what we already bought is almost back to even where we bought it. 🙂

  • I’m in automated mode and my purchases will happen at the beginning of the month. I’ll still get a ffew bargain prices, but nothing as good as what you had

  • While I did not pick up any bargains that day, I occasionally find anomalies in the options area I play in, namely selling puts and covered calls. Usually the premium will be much higher than normal and will level out before long, but one can sometimes catch a lucky break.

    Congratulations on the quick 5K. I love to see that happen for myself and others.

  • It took me a couple days to transfer $ into our Vanguard account, but I did score a few thousand dollars worth of VTI at a price we hadn’t paid in about a year. That, with buying into our 401Ks with today’s market close (down another almost 1%) feels like a win to me since we definitely don’t play the market timing game.

  • Probably didn’t make as good as money as you did but I have been playing the energy market this week and have made some decent money with ARP and PER.

  • Way to use the crash to your advantage!

    • Another reason to have some extra cash on hand I guess. 🙂 I always figured it would be nice to have a little cash in case I needed it to snap up an opportunity and I finally found it.

  • I snapped up a bunch of O shares, on the dip in the markets last week. It is around 5% yield right now for most REITS. That will help me one day retire like you. Good luck buying more shares.

  • I totally wanted to buy some shares in our brokerage account, but we are in cash accumulation phase till the end of the year. I’m trying to fatten the piggy bank, so we have more flexibility next year. Our IRAs are maxed for the year and 401K contributions are automatic every two weeks (paychecks).

    • I get that – you need to have adequate cash on hand to cover emergencies and planned expenditures. The last thing you want is to put too much into the market and be forced to sell when it’s lower because you have to have the money quickly.

  • We’re not at the point where we can invest, but I really hope that I’ll be able to act like you when the time comes. The stock market tends to make me nervous because it’s built so much on optimism/fear. As stock prices take a downturn, shareholders sell off. Thereby lowering the price. Which causes other stockholders to bail.

    So yeah, I think that it’d be silly to sell as the price plummets. Unless it were due to some major upheaval that you don’t think the company can come back from. Otherwise, you’re just guaranteeing a loss — even though the market historically corrects itself.

    • I go back to that Buffett quote because it says it all so well. When everyone else is fearful, that’s the best time to get greedy and buy buy buy. It’s a little tough because you have to accept that the market will grow over the long term as the economy grows and productivity increases, but that’s been a solid bet the last several centuries.

  • Thanks for sharing this. I felt bad not having any cash available at the time of the crash. 🙂

  • Way to own black monday! That is great and Im happy to hear you were able to take advantage of the situation like that.

  • Kudos on being prepared to jump on this opportunity! Question on the details of the cash available for purchase. I have a Scottrade account linked to my CapitalOne savings where my cash sits, but I’m not sure how quickly I could transfer cash for a purchase like this. Scottrade pays next to zero interest, so I don’t like to keep much cash sitting there. I’m not familiar with Fidelity. Do you keep cash in there earning nil interest, just for opportunities like this, or how do you facilitate such an instant trade?

    • I keep next to nothing in cash at Fidelity because they also pay near zero interest. I set the taxable account up with margin trading capability primarily so I could do exactly this – buy whatever I want up to the margin limit and then transfer the money in within the 3 day settlement period. I’d suggest getting margin account access set up on any of your taxable brokerage accounts for this exact reason.

      There’s also a technical reason to have margin trading. If you were to trade a lot of things in one day (like day trading), you break some rule if you buy-sell-buy-sell the same day I think. I can’t recall the exact rule but it’s something about the first sell-buy trade has to settle before you can sell a second time. With margin, they don’t care about the frequent trading and you can trade an unlimited amount in a day. I don’t endorse day trading, but there are situations where it might make sense (like this flash crash where there is a lot of intraday volatility and you want to get in and out quickly and the opportunity to cash out arises multiple times in 1 day).

      But I don’t recommend trading on margin in general (unless it’s just a cashflow management tool and you have the cash sitting elsewhere to cover the margin balance). I’ve been burned bad many years ago in the dot com bust on a margin squeeze. Not fun at all.

  • Great blog, have to say it again. It definitely makes my time at work pass by quicker;-) From reading your posts I can see that you have a preference toward ETF’s vs Mutual funds, or am I wrong? I’d like to hear you point of view of pros?cons on both and why you prefer one over the other?

  • I think you can use stop-limit orders that combine features of both (a trigger price + a limit price). I’ve used them a a couple of times (but I am not a very active trader…)
    Have never used market orders, always limit orders (buy or sell).

    • I trade about 4-5 times per year at the most. Needless to say I’m not a very sophisticated trader 🙂 I always use limit orders and usually set them right at the bid or ask or maybe a penny or two off. I just want an execution roughly at the current spot price.

  • It’s remarkable that you noticed things in time and were able to execute these trades. There’s a lot to be said for having your time at your beck and call. $5000 hat-tip to you!

    • It was crazy – I happened to log on and take a look at my portfolio or something, and happened to notice some ETFs that were many percent down for the day in spite of not much happening to other investments. I figured out what was up and put in as many orders as I could before the system crashed and then once it came back up the fun was over as prices reverted back to the correct levels. 🙂 I was like a kid in the street after someone dumped a crate full of money – just trying to grab as much as I could.

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