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An Open Letter to the CFO’s of Thermo Fisher Scientific and Pall Corp. On Why Their Stocks Flash Crashed

24

February, 2012

Dear Thermo Fisher and Pall Corporation CFO’s,

We were wondering if any executives from your listing exchange called you to explain why your stocks both dropped more than 5% on heavy volume yesterday at 9:55am only to rebound in the next few minutes? Considering that you both pay a substantial amount of money each year in listing fees, we would expect that you would have received a call. Only problem is that even if you did get a call, most likely you didn’t get a very good reason why your stocks experienced a mini-flash crash yesterday.

To fully understand what happened to your stocks, you have to understand how the equity market operates nowadays. There is no longer a central pool of liquidity where you stock is traded. Your stock is now tossed around intraday in a hot-potato fashion amongst 13 stock exchanges and over 40 dark pools. While this hot potato game is going on, high frequency traders attempt to arbitrage profits either by collecting liquidity rebates or by taking advantage of the slowness of your stock quote. On normal days, this high speed dance goes unnoticed and the HFT traders are happy to collect their almost risk free profits and flatten out by the end of the day. But some days, things don’t quite work out as expected. Some days there are technical glitches in those algorithms and things can get ugly pretty quick. The most egregious example of this was the May 6, 2010 flash crash when the entire market was sent spiraling out of control.

The Economist just published an article titled “The Fast and The Furious” and in it they pretty much explained what probably happened to your stocks yesterday:

“Often they result from algorithms interacting with each other and forming an infinite loop. For a simplified example, take two algorithms that are both programmed always to outbid the best offer in the market, so they will go on outbidding each other. Usually such loops are spotted and stopped, sometimes manually and sometimes automatically, without many people noticing. But the fact that they happen at all feeds the perception that today’s equity markets have turned into something more akin to science fiction than a device for the efficient allocation of capital.”

We are sure you both run very good companies and are focused on growing your revenues and keeping your expenses down. You probably are interacting regularly with some Wall Street analysts to help them understand the benefits of your company. The reason why you went public was probably so you could tap into the capital markets to help your company grow and expand. You probably pay your annual listing fees to your listing exchange and just assume that they are looking out for your company.

Somewhere along the line, however, the equity market changed. Your stock is now being traded mostly by high frequency traders who really don’t care about you or your company. The specialist that used to maintain an orderly market in your stock is no more. You see, the economics of the brokerage industry changed, and the penny spread that now exists in your stock is not enough to compensate a real liquidity provider any longer.

Anyway, this letter is already too long and we can go on for many more pages. If you would like to know what really happens during the day and why your stock dropped over 5% in less than a minute yesterday, give us a call. We would be happy to discuss with you.

Sincerely,
Themis Trading

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