Ok. What made shares in about a dozen MLP’s (Master Limited Partnerships) crash 7% within minutes, only to mostly recover by day’s end? Does this remind you of May 6th, 2010, albeit on a much smaller scale? It should. The pattern is identical. The charts for the four MLP products illustrate the moves below, and incidentally these are all NYSE-listed products. The other exchange-listed MLP’s did not have this problem apparently.

What exactly happened? Aren’t these MLP products normally low volume, low-volatility yield plays? According to an article in the FT, the selloffs did not appear related to any news, and they also affected prices in a few exchange-traded notes that track pipeline stocks in general, like the JPMorgan Alerian MLP Index Fund.

What do we think happened? Was it:

a) Algo testing gone bad by one HFT firm, which triggered the HFT hot potato liquidity vacuum, race to hit bids ahead, followed by a race to take offers?

b) An errant basket sell order sent by one non-savvy firm, which triggered the HFT hot potato liquidity vacuum, race to hit bids ahead, followed by a race to take offers?

c) Did some retail trader try to send a sell order in PPA, but instead typed in PAA, which triggered the HFT hot potato liquidity vacuum, race to hit bids ahead, followed by a race to take offers?

d) Did some Financial planner try to sell some MSCI Pacific ETF (EPP) but in error type in EEP instead, which triggered the HFT hot potato liquidity vacuum, race to hit bids ahead, followed by a race to take offers?

This could go on for hours; it is speculation as to what the trigger was, of course. The SEC must surely know by now, as must the good people at NYSE. Perhaps NYSE can offer an explanation in their blog, or anywhere in the public, so as to put the speculation to rest.

The important point, in our opinion however, is not what the trigger was. Regardless the trigger, the structure of the market is set up with land mines and booby traps to take advantage of market structure flaws. The HFT market-maker-withdrawal-vacuum is proof positive of unfair advantages by those who can see orders coming, and react and strike.

Is this par for the course in today’s trading market? Of course. Does it inspire the confidence of investors, who know that alligator jaws are all around them, at all times? No.