When In Doubt, Do Nothing: The NASDAQ Slow-Freeze of August 22, 2013
Just when traders start to gain confidence in the robustness of the U.S. trading markets, and just as the lingering effects of black swan events like the 'flash-crash' start to wane, traders get hit with something new.
Mid-day and without warning, the NASDAQ (NASDAQ: NDAQ) suspended all quotes and trades for about three hours. The details of the incident are still fuzzy as the only statement from the Nasdaq was that they saw a problem and that they quickly fixed it.
Luckily, the markets did not have a colossal disaster when they resumed trading with just about 20 minutes left in the trading day. Traders were bracing for impact as the reopen could have been much uglier and disorderly.
When In Doubt...
There are a few universal rules that responsible traders shouldn't break in trading and atop them should be the adage: when in doubt do nothing. Surely today's Nasdaq Slow-Freeze event qualifies as 'doubt.' So, traders who probably spent the better part of the morning setting up trades to execute today it would have been prudent to postpone them for at least another day.
This may sound drastic and unnecessary, but for illustration purposes, consider a trade set up in Goldman Sachs (NYSE: GS) where a trader wants to go long the stock. The set up: Few can argue that fundamentally it is not a well managed company with a bright future ahead. Technically the stock looks like it's wants make the turn upwards from a down trend and that more upside is likely than downside.
But what about the unknown? Usually traders don't often fret the unknown; on days like today they should. Such doubt should prompt traders to push the pause button since no one knows who or what was the cause of today's incident. What if tomorrow they announce that the error was attributable to a certain investment house? Or that a certain bank's systems triggered the freak chain of events.
All of this is unlikely, but on a day where a major unlikely event actually occurred, the 'unlikely' inches closer to 'probable;' hence raising the caution flags.
Another case in point should sway traders from holding an Apple (NASDAQ: AAPL) trade before they get more clarity of cause and complete effects of today's debacle. Why Apple? CNBC programming suggested that the start of Nasdaq mess coincided closely with a large drop in Apple's stock price As illustrated in the chart below (Time axis is P.S.T).
To further complicate matters, there was also another Icahn tweet regarding Apple during the halt. This too could be coincidental. But when doubt looms, delaying the deployment of new position is the responsible thing to do.
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