Revenge of the Squirrel Part Deux?

Trumbull Connecticut is a quaint little town.  It’s home to about 35, 000 folks who play in its wetlands, enjoy its stone bridges, and bask in the natural beauty abundant in the geography.  It’s an almost idyllic setting around the winter holidays – very Norman Rockwell.

Or so it would seem on the surface.

But Trumbull around the holidays is not all about caroling and wassail.  You see, Trumbull has squirrels – evil, conspiring, anti-Capitalist squirrels.

It’s December 9, 1987, 10:48 a.m.  Investors are still grappling the magnitude of October’s market crash and stock volumes are (back in those days) at historic highs.  Yet, thoughts are turning toward the welcome mental reprieve the holidays promise to bring.

Then it happened.

The NASDAQ went black.  Gone.  Vanished.

Call it mint jelly; it was on the lam.

For 82 excruciating minutes, the automated quote system went missing.  Over 20 million trades were stranded, as other markets felt the effects of the absence of pricing for OTC options.  For all intents and purposes the US stock markets were closed.

The local CT utility desperately tried to restore the juice, but an unintended power surge blew up the NASDAQ servers and crippled its backup generators.

By 12:05 p.m., a backup computer was placed online and trading slowly returned to the NASDAQ.  By the end of the day, normalcy had been more or less restored.

All that was left was the effort to find a cause.  After extensive forensic investigation it was determined the cause was…   a suicide squirrel.    It seems that a Trumbull squirrel, possibly mentally fragile and radicalized against the free markets (due to the rapidly rising costs of hickory nuts?), decided to do its impression of an under-amped fuse and closed a circuit that would have best been left open.

Fast forward to August 22, 2013, 12:09 p.m.  I was placing a trade to cover some calls we had shorted a month ago, when the call’s bid suddenly jumped from 13 cents to $998.00 (no, that’s not a typo).  The asking price stayed at 15 cents, only to disappear entirely moments later.  Confused, I cancelled my unexecuted trade and turned to the Bloomberg terminal to get a better sense of what was happening.  What came across the Bloomberg was surreal.  In less than a minute, 969 NASDAQ traded stocks were halted, citing “Extraordinary Market Activity.”  Specifically, it was called a “T6 Halt.”  From NASDAQ’s website, here is the definition of a T6 Halt:

Halt – Extraordinary Market Activity
Trading is halted when extraordinary market activity in the security is occurring; NASDAQ determines that such extraordinary market activity is likely to have a material effect on the market for that security; and 1) NASDAQ believes that such extraordinary market activity is caused by the misuse or malfunction of an electronic quotation, communication, reporting or execution system operated by or linked to NASDAQ; or 2) after consultation with either a national securities exchange trading the security on an unlisted trading privileges basis or a non-NASDAQ FINRA facility trading the security, NASDAQ believes such extraordinary market activity is caused by the misuse or malfunction of an electronic quotation, communication, reporting or execution system operated by or linked to such national securities exchange or non- NASDAQ FINRA facility.

The T6 Halt affected over 3, 000 stocks and countless OTC options.  What was most stunning; the problem wasn’t corrected for 3 hours and 19 minutes, making the 1987 outage pale by comparison.

Over half of the trading day was rendered inoperative.

While it is too soon to accurately attribute a cause to this halt (misuse, malfunction, hacking, an error in an AAPL trade, etc.), today’s experience served to make me just a little more cautious.  When the market re-opened, the NASDAQ surged to a 1.6% gain.  The other US indexes closed positive as well.

Intuition and experience might lead a person to believe that investor confidence would be reduced by a 3 hour 19 minute outage in the second largest stock exchange.  It would therefore follow that reduced confidence would be reflected in lower stock prices after the outage was resolved.

Alas, intuition and experience were wasted.

Having witnessed the collective yawn in response to what I (and many other professional investors) perceived as a frightening milestone event, I am led to one of two conclusions.

Conclusion 1:  The markets are now so thoroughly controlled by algorithmic and high frequency trading that experience and common sense have become archaic during periods of low trading volume.  Evidence of this can be seen in stocks like AAPL that immediately traded up to their VWAP once the market re-opened.  No change in fundamentals – just a return to VWAP.

Conclusion 2:  The sleeper cell of evil, anti-Capitalist squirrels has re-awakened.  Supporting this notion is the fact that I looked out at my bird feeder this evening and the usual collection of red and gray squirrels was conspicuously absent.  I’ll admit this data point is rather anecdotal, but 26 years ago we saw just what kind of damage a determined squirrel with an agenda can do.

Maybe Nassim Taleb would consider this a “Black Squirrel” event. – LL