First, public complacency was the highest since the summer of 2007. Every bailout and new government program reinforces the warm and fuzzy psyche of investors that allows us to believe that all will be well. The volatility index measures the cost of protecting your stock portfolio by purchasing put options. Put options are like buying portfolio insurance. If you hedged your $300,000 stock portfolio, it would have cost you approximately $8,500 in sales premiums to protect the full value of that portfolio through June from any downside risk. That same insurance policy in the afternoon would have been worth $23,625. Assuming that the value of his portfolio was equal to the stock market crash, he would have lost 3.25% of his $300,000 or $9,750. The difference between the $8,500 paid up front versus the current portfolio value of $290,250 plus the current insurance policy value of $23,625 means that your net worth on the biggest losing day in stock market history would actually have been INCREASED by $5,375. The rise in the VIX is the reason for the inflated option premium and the magnitude of the rally in the VIX testifies to the overall complacency of the market.

Second, all markets are linked to each other. That is why we are raw materials and derivatives advisors. In the age of electronic commerce, one topic always affects another, and this, in turn, affects another, and so on. Every trade in an absolute market like the S&P 500, the Euro or the Japanese Yen will have an effect on the other related markets. This, in effect, has created a giant butterfly effect. In the era of algorithmic trading, where the slightest market inefficiencies are exploited by aggressive capital placement, abnormal market movements will become self-sustaining. Many of these models use markers based on the model’s expectation of “normal” relationships with their data points. When things go beyond the model’s “normal” expectations, you have a case of, “If you liked ABC stock at $12 a share, you’re going to love it at $4 a share.” There were at least two stocks in the S&P 500 trading at 0 today. This means that they were broken, bankrupt, that they did not exist. Two Fortune 500 companies disappeared during someone’s lunch break and when the employee got home from work, no one knew the difference. Twenty minutes of electronic market butterfly effect.

Finally, as the market began to fall, the media was showing Greek police in full riot gear after passing their harsh austerity vote in an attempt to secure financing from the European Union. Furthermore, the context of the day’s discussion among the television pundits was the pessimism surrounding the demise of the European Union, civil protests and bankruptcy in Greece with the specter of Spain’s imminent default as a backdrop. Doom and Gloom sells. Traders, both retail and institutional, hear the end of the world as we know it as they watch the stock market crash and trading programs flag one sell order after another in an attempt to be the first to trade with their orders. The quest for higher bandwidth in their data sources, faster processors in their computers, and deeper levels of quantifiable algorithms put them ahead of the race to the bottom and the top. Welcome to the new era of 24-hour doom and gloom media coverage, full connectivity, and computer programs replacing common sense trading. We specialize in common sense trading.