Multi-Level Marketing Mini-Flash Crash Pin Action


The above chart probably looks very familiar to many astute market observers.  It is a chart from yesterday’s mini-flash crash of the stock Usana Health Service (USNA) .  At 13:01:42 pm yesterday, USNA lost over $100 million in market value on no apparent news.  The stock dropped $7.65 and went from $80.65 down to $73.00 on heavy volume.  This was not just one bad print caused by a keypunch error.  Multiple trades occurred across multiple market centers.  After about one minute, USNA recovered much of what it had just lost in the past minute.

Right now, you’re probably thinking, “big deal, another mini-flash crash, they happen all the time”.  But this one was a bit different and a bit more destructive.

USNA is part of the volatile multi-level marketing sector that has received so much attention lately.  It has a market cap of $1 billion and is up 140% this year. It is not exactly a “liquid” stock and only trades about 150,000 shares per day. There are only 13.5 million shares outstanding and 44% of the 6.4 million share float is short.  These factors all could lead you to conclude that this is a volatile stock and one that would be a ripe candidate for a mini-flash crash.

The problem with the USNA flash crash was that it also hit a few other stocks in its sector.  Take a look at the below two charts of Herbalife (HLF)  and Nu Skin Enterprises (NUS).  These stocks also flash crashed at the exact same time as USNA.




HLF and NUS traded on very heavy volume during the minutes surrounding the USNA flash crash event.  No doubt correlation algos identified the USNA event and starting hitting HLF and NUS.  Also, most likely “liquidity providing” market makers noticed the action and started withdrawing their liquidity and quite possibly started competing to hit bids.  As this is a volatile sector, many risk averse investors probably had placed stop loss orders.  When USNA flash crashed, the stop loss orders in all three stocks most likely were activated. Talk about some mini-flash crash pin action.

Defenders of our current market structure will no doubt say that investors who placed stop limit orders got what they deserved and don’t deserve any recourse.  They will argue that the stock price reverted back to its value prior to the mini flash crash which proves that markets are efficient.

We would argue that prudent investors lost their position because of our inefficient market structure.  How are investors supposed to feel confident if something like a stop limit order is so easily manipulated? We would also argue that mini flash crashes prove that our markets are anything but efficient.  When a small spark can trigger a five alarm fire in milliseconds, that’s not efficiency.