When we look at the order book in real time, we get to see only top 5 buy and sell orders in the book. That is just the tip of the iceberg and one is left wondering how much of the iceberg is really below the surface. As it turns out, not much!
Thanks to the flash crash, we just got a sneak peek below the surface.
Two things stand out:
1) As shown by the blue line, for the smaller transacted values, the drop is roughly proportional to the transacted value. Even in this range, the impact cost is already above 5%. Market simply cannot absorb more than 5 Cr worth of transaction in a single name nifty component.
2) There is a cluster of names around 20% drop. These are likely to be passive limit orders in the system where the buyer didn't really expect to be hit. Since emkay did not ask for trades to be reversed, that's one lucky and/or smart buyer.
I wonder what would have happened if there were limit buy orders at totally ridiculous prices. Maybe we could have seen the trades like Accenture trading at 1 cent which happened in US market flash crash on May 6, 2010.
Note to self: Figure out how to automatically put in ridiculous buy orders every day at open. Chances of getting lucky are non-zero.
Update (11/Oct/2012):
In the post I speculated about smart/lucky guy having limit orders 20% below CMP. Today's Economic times story confirms that hypothesis.
How Inventure's client made a killing from Nifty's Friday crash
"He randomly puts many buy orders in stocks that are part of the Nifty at 20% below the market value. On Friday, this bet clicked."
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