What’s Behind The Flash Crash In S&P Futures?

And now, a moment of silence for broken markets.

U.S. equity futures nosedived out of the gate on Wednesday evening in a harrowing plunge that conjured uncomfortable memories of flash crashes past.

Here’s ES with annotations marking notable events:

And here’s the zoomed in version of this evening’s proceedings:

The proximate cause of today’s mini-crash is as yet unknown. Earlier on Sunday, the Globe and Mail reported that Canada has arrested Huawei Technologies CFO Wanzhou Meng, who now faces extradition to the U.S. in connection with allegedly running afoul of U.S. sanctions on Iran.

She’s the deputy chair of Huawei’s board and also the daughter of the company’s founder. Her detention came at the request of U.S. authorities.

Clearly, that’s not the best news for U.S.-China relations at a delicate time, but if that was the proximate cause of the problem, you’d expect it to show up in the offshore yuan. That’s not happening yet to any dramatic extent, but USDCNH is starting to move higher.

Some folks suggested the market is broken (see the reply in the thread below).

pic.twitter.com/imFAaoyKSU

— Kit Lowe (@kit_lowe) December 5, 2018

At one point, S&P futures were down as much as 1.9%, with something like 36k contracts trading in the space of 10 minutes. It’s possible all of this may be a funhouse mirror-type deal after Wednesday’s closure. Some traders are worried that trades will be canceled once this is all sorted out.

None of that sounds great and indeed, it sounds eerily reminiscent of what’s starting to unfold across purportedly liquid markets all too often these days.

You’re reminded that futures liquidity and market depth have remained diminished since the February rout. On Tuesday, in our post-mortem, we rolled out the following chart from Goldman’s Rocky Fishman:

(Goldman)

That chart is from a presentation that’s now over a month old, but the message is clear enough and it echoes a more comprehensive analysis from Fishman out in July.

“Months after the VIX spike, bid/ask depth is still not back to normal and even adjusting for volatility, top-of-book depth is below its pre-2018 range”, Fishman wrote over the summer, adding that “while in late 2017 over $40mm notional was on each side of E-mini futures’ bid/ask at a median moment, recently the median range has been $10-20mm notional.”

(Goldman)

And look, we don’t want to speculate beyond that. Some of the above might not even be applicable to this particular situation and there could be any number of factors at play here.

This could be anything from a “simple” (and that might be something of a misnomer in this context, but you get the point) glitch to a “real” expression of ongoing  consternation about the feasibility of Washington and Beijing striking a “real” trade deal before the 90-day ceasefire expires.

In the same vein, it’s possible that the Huawei news weighed on already delicate sentiment.

The most likely explanation is that it’s some combination of the above.

But one thing we would say definitively is that if this is some kind of “glitch”, it needs to work itself out in fairly short order, because just about the last thing everyone wants to see on Thursday is another inexplicable plunge in S&P futures amid rampant speculation that algos and systematic flows are playing havoc with fragile markets.

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