Bailout

Nassim Taleb didn?t cause the crash

By Felix Salmon

Of all the silly theories about the cause of Thursday’s stock-market plunge, I’m not entirely sure why the WSJ has decided to give particular credence to the idea that it can all be traced back to a single $7.5 million trade for 50,000 options contracts. Lots of options trades of that size take place every day, and just because this one happened just before the market fell doesn’t mean it was the cause of the crash.

It’s becoming increasingly clear that the crash was fundamentally the fault of weak market structures, especially in the smaller electronic exchanges. It wasn’t a fat finger, it wasn’t cyberterrorism, it wasn’t the sale of 16 billion e-mini S&P contracts rather than 16 million — and it wasn’t an options trade by Universa, either.

When your hard drive fails, you don’t ask for the proximate cause of the failure: even if such a thing existed, which it doesn’t in any meaningful sense, knowing what it was really wouldn’t help. The important thing is that your hard drive is prone to fail and therefore it’s a good idea to have redundant systems and make sure that when it fails, no great harm is done.

So let’s not start pointing fingers at Universa, Nassim Taleb, or anybody else. The thing to look at here is the way the entire market is designed, not the identity of any given trader.

Full post as published by Macroprudential on May 11, 2010 (boomark / email).