2010 May 27 - Thu

Naked Market Orders and the Market Meltdown

At Security Industry News, Tom Steinert-Threlkeld suggests that naked market orders helped escalate the 'flash crash' and subsequent recovery on May 6. I gather the market-makers, who provide liquidity through limit orders couldn't handle the deluge. And I think that we still don't know what the hair trigger was that set off the deluge of sell orders.

I learned a new lesson today. The best way of submitting market orders, in order to get the trade, is to use limit orders to create 'collars' around the price of a stock to reduce risks in trades. To go along with this, use algorithms that expressly include risk controls.

Speculation is that the naked market orders were used by the less experienced: some smaller high-frequency traders and some semi- professional traders.