On market makers / option expiration day

First off, apologies if anyone finds this inappropriate for the subreddit. I thought this would be the best place to try to spark a discussion because the community here seems much more well learned and productive than most other related subreddits and it does pertain to HFT/algorithms/market making.

So, this past Friday saw a relatively large options expiration in the usual culprits, with AMZN near the top of the list. As most of us would agree on, market makers like citadel will chase the price of a stock higher delta-hedging as it moves from out of to in-the-money. After the late august melt up, many take tandem stock and volatility movement to hint that there was a strong dealer hedging presence in the market, so with volumes + that I’m assuming that when AMZN closed almost 5% higher Monday, a dealer somewhere was holding a big bag of shares.

So 3:59 Friday rolls around, and by now AMZN was trading significantly lower than it had been on Monday, so presumably a large amount of call options are about to expire worthless. In that last minute of the trading day, AMZN flash crashed from ~3280 to 3160, only to jump back into the 3250’s on the very next tick after the options rolled off at 4:00.

I was hoping some members of the community here with a bit more market making / HFT knowledge than me could shed some light on how exactly a megacap, highly liquid stock like this can crash nearly 4% in under a minute, and then jump back to nearly unchanged in a single tick? Obviously, some market maker had a large amount of AMZN that they no longer needed after those options rolled off, but shouldn’t there have been sufficient buyers/algos stepping in to buy at prices far above 3160 – and shouldn’t sellers/buyers have been placing asks/bids far below 3250 after the crash?

Was there some kind of ‘rug pull’ on liquidity, or spoofing, or some HFT feedback loop, etc.? Super interested in this kind of thing, so any ideas or discussions are appreciated. Hope this fits the subreddit, thanks

Submitted October 18, 2020 at 02:16PM by tripledigitvix
via https://ift.tt/2HdgHYe

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