This isn’t a recipe for dis­as­ter or any­thing...nope:

One big order, thou­sands of small ones, seen behind oil tum­ble

By Jea­nine Prezioso and David Shep­pard

NEW YORK, Sept 18 | Wed Sep 19, 2012 4:59am IST

(Reuters) — A sin­gle large sell order in the bench­mark Euro­pean Brent oil mar­ket, fol­lowed by an abrupt U‑turn among high-fre­quen­cy traders, may have caused one of the most abrupt price routs ever, bro­kers and ana­lysts said on Tues­day.

As the dust set­tled on Mon­day’s four-minute, near­ly $4 plunge, oth­er pos­si­ble caus­es such as an erro­neous “fat fin­ger” trade, a com­put­er pro­gram run amok or a broad, rumor-dri­ven sell-off were set aside in favor of a com­bi­na­tion of one big trade — poten­tial­ly as much as 12 mil­lion bar­rels worth some $1.4 bil­lion — and tens of thou­sands of com­put­er­ized orders.

“There was most like­ly a large fun­da­men­tal sell­er in the mar­ket yes­ter­day,” said Eric Scott Hun­sad­er, Chief Exec­u­tive of Nanex, a trad­ing con­sul­tan­cy that reg­u­lar­ly con­ducts detailed foren­sic analy­sis of errat­ic mar­ket activ­i­ty.

But assum­ing a sin­gle sell­er got the ball rolling low­er, it was algo­rith­mic traders that almost cer­tain­ly extend­ed and inten­si­fied the decline, caus­ing a 20-fold spike in vol­ume as risk lim­its or auto­mat­ed price trig­gers fueled sell­ing.

Prices fell mod­er­ate­ly at first, with Brent crude drop­ping by just 98 cents over the first three min­utes. But the sell-off inten­si­fied over 46 sec­onds after 13:53:56 p.m., at which point mar­ket-mak­ers may have been forced to liq­ui­date.

“We can see from look­ing at the tick data that ini­tial­ly the High Fre­quen­cy mar­ket mak­ers were will­ing to absorb their posi­tion around $98 a bar­rel in U.S. crude,” said Hun­sad­er, who exam­ined detailed trad­ing data in the NYMEX mar­ket.

Sep­a­rate­ly, sev­er­al bro­ker sources said the sell-off orig­i­nat­ed in the Brent mar­ket.

“This cre­at­ed what the CFTC has described in the past as a ‘hot pota­to’ event, where the posi­tion was rapid­ly passed on in a way that looks very sim­i­lar to the equi­ty mar­ket ‘flash crash’ in May 2010.”

Talk of more nefar­i­ous caus­es was deemed high­ly unlike­ly. High-fre­quen­cy firms rarely ini­ti­ate big one-off trades. A mis­tak­en trade exe­cu­tion would like­ly have pro­voked an imme­di­ate rebound as the sell­er scram­bled to buy back posi­tions.

“Based upon our ini­tial review, it does not appear that a fat fin­ger is the like­ly cause of the oil price dive yes­ter­day,” CFTC com­mis­sion­er Bart Chilton said in an inter­view. “We have been por­ing over the data.”

BUT WHY?

What remains unclear, and may not be known for weeks if ever, was who placed the first order that might have set the rout in motion — and why.

Was it a hedge fund in dis­tress, or one that had sim­ply changed its view on prices? An oil trade that spilled over into oth­er com­modi­ties, which also fell, or a cross-asset macro-trade? Why would any­one choose one of the most sub­dued peri­ods of the trad­ing day to exe­cute such a mam­moth deal?

Find­ing the root cause is hard­er now than before.

Unlike five years ago, when the con­stant human chat­ter of the New York oil trad­ing pit would like­ly have pin­point­ed a cul­prit in short order, oil mar­kets are now trad­ed almost whol­ly elec­tron­i­cal­ly, fur­ther dis­guis­ing the par­tic­i­pants of a noto­ri­ous­ly secre­tive and opaque mar­ket­place.

...

Regard­less of the cause, some fear that the grow­ing role of com­put­er-dri­ven traders — now esti­mat­ed to account for half or more of oil mar­ket liq­uid­i­ty — might make these events more com­mon.

“This rais­es a larg­er ques­tions about whether these mar­kets con­tin­ue to ful­fill the fun­da­men­tal pur­pose — hedge risk and price dis­cov­ery,” said the CFTC’s Chilton.