For those of you who are not tracking the stock market in real time, you should be aware that over the span of about 5 minutes (Thursday from 2:45 pm to 2:50 pm EST), you lost and subsequently recovered about 7% of your investments insofar that you match the market which I know many of you intentionally do.

The DJ was dropping more than 250 points per minute. It was that fast.

As a result, the market was essentially in free fall with trading breaking down completely in several stocks with prices being quoted randomly over a wide range since the bids have zero depth and everything suddenly became market orders with almost zero liquidity. Some stocks were qouted at $0.01. Having the finger on the trigger, I managed to buy 300 shares of WIN paying about $500 less than what the shares have traded at for the past week. I wasn’t planning to buy anything, but this deal (steal) was too good to pass on.

Due to some postfactum legislation trades which were more than 60% off were canceled for certain stocks. I strongly disagree with this interference. If your trading strategy failed, you should take the hit. Quit with the bailouts already, please! Grownups shouldn’t get do overs!

Fortunately my trades were 30% off tops (I don’t know how they calculated this deviation except the price I paid was 9% and 27% off yesterday’s closing price. Pretty nice!)

I learned this morning that some WIN trades were canceled. Mine were confirmed though.

According to the latest rumor this break down was due to a typo (billion instead of million) on an order of 15 billion of S&P 500 e-Mini contracts. These are futures driving $500 times the index, that is, they’re valued at $500 times the index or roughly half a million bucks each. You can imagine what a sell order of 15 billion contracts of those suckers would do.

This is exactly the kind of “diversification risk” I was talking about just a couple of days ago. I did not expect to be able to provide an example so soon.

I guess my motto remains: “I told you so” 😛

[If you want to isolate yourself from meltdowns like this, small caps would be and were largely unaffected since institutional players are too wealthy to own them. Small caps are, however, rarely followed by Wall Street (for the same reason) and therefore you have to do your own investment analysis. This is something a reasonably bright person can learn in a couple of years though.]

Originally posted 2010-05-06 23:27:18.