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Stock Market Sell-Off Might Stem From Trader's Fat Finger
s122604 points out a CNBC story according to which "the catalyst for today's extraordinary price swing (at one point the Dow lost almost 9 percent in less than an hour) may have been because a trader entered a 'B' for billions instead of an 'M' for millions on a trade of Procter and Gamble: 'According to multiple sources, a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble, a component in the Dow. (CNBC's Jim Cramer noted suspicious price movement in P&G stock on air during the height of the market selloff).' Unbelievable there are no safeguards to protect against this."
I suspect that I speak for everyone with their retirement money and/or savings invested in the markets when I say: HO-LY SHIT.
Frankly, I was more comfortable with the concept that the DOW could drop 1000 points in one afternoon due to some obscure overseas debt concerns than I am the idea that the DOW can drop 1000 points in one afternoon because of a fucking typo. I realize that markets and the economy in general are collective illusions to begin with and all that, but do we really need to be reminded quite so forcefully?
Might be time to invest my money in something a little more solid, like canned food and ammunition.
Every year during my review, I just pray the words "slashdot.org" aren't mentioned.
Seems the market's still dropping in after market trading....
Tomorrow's going to be a wild ride.
They make money when this happens. It's like a blessing in disguise.
Accenture went down to 1 cent today as well. Did they fat finger that one too?
Thats a f*ing fat finger if it hit b instead of m! or maybe its not a qwerty
www.RacquetUp.org - Helping Detroit Youth
That's one huge B-M problem...
I can relate because one time I typed :q! instead of :w, losing about 5 minutes worth of typing. The typed text had sentimental value worth billions.
CBC Story about software controls for selling on the market: http://www.cbc.ca/money/story/2010/05/06/tsx-markets.html
Nuts to fat finger keyboards, there are automated software controls in the industry that caught-on to the sale and snowballed this individual's mistake into something really big. The issue wasn't just in this guy's mistake, but the fact that potentially billions of dollars changed hands because of a trust relationship these systems have with market indicators.
Not that there's anything wrong with that: on a good day this could protect big firms from being the guy caught holding the bill, but I think we've discovered where the next upgrade in broker software might be :)
-Matt
--- Need web hosting?
So you implement some protection. Then some prima donna trader comes by and asks that they be disabled and his trades unquestioned. If the company makes good profit off the guy, down the protection goes.
Reminds me of this story on a commodities trader that not only didn't close his position, but actually ended up taking physical delivery of the commodity. Oops. Sure there were protections, but the guy had them disabled.
http://thedailywtf.com/articles/special-delivery.aspx
Hell, for all we know, this is exactly what happened - most traders can't enter in a "b", except a succint few well-trusted individuals. Just one of the "gods" managed to fumble it.
I mean with a quarter of Europe circling the drain and the whole country of Iceland looking for a buyer that will assume their debt. Add in the south eastern US coast may be facing a depression since they depend on tourism and the ocean for 90% of their income. Do I even have to bring up the rest of the country? They were lucky some one didn't post a "Buy" notice on canned food and shotguns.
It may have been a system problem, that's quite possible. But institutional traders don't type in "b" or "m" next to some number they type in of stock they want.
But even in some strange world where they did, entering in a standard lot quantity that required an "m" (much less a "b") for the stock that is suspected to be the issue at hand (PG), would result in an order that exceeded the 30-day avg vol for PG by a factor of 10.
And that's not even considering that the firm's risk management would, in theory, have caught the issue already.
I am, obviously, doubtful of this explanation.
They've been saying for some time the market was due for a correction. Mind you, at the height of the financial meltdown, the Dow was at 6500, and has almost doubled value in about a year, it was rising too fast considering that the recovery still really hasn't come (i.e., there are still no jobs).
The only people making money are the same ones that are always making money -- the fat cats. Now it looks like the market will correct, and probably stablize around 10k, maybe 9. And even more people will lose their jobs and the cycle will continue until America admits that it is bankrupt.
Then will come some really hard times, but, once we address the real issues plauging the country, we'll come out of it stronger. But first, we need to start getting rid of all the lawyers....
If telephones are outlawed, then only outlaws will have telephones.
Please reference the standard practice of entering numbers in trading systems with letters INSTEAD of digits.
Slashdot: News FROM Idiots Because It DOESN'T matter.
Morons.
Yours In Odessa,
Kilgore Trout
Between the key 'B' and 'M' is the key 'N' on the keyboard. The distance between 'B' and 'M' is about 1.5 inch apart.
Not that there isn't some finance-clippy that pops up and asks "You appear to be tanking the Dow, would you like help with that?", or that people are allowed to do whatever stupid shit they want with the assets they have(the amount of stupid shit that people are allowed to do with assets that they don't have is somewhat concerning, however).
However, I am somewhat surprised that the guys who do UI design for financial systems don't design systems to make things like power-of-ten or million/billion errors very difficult. Having a 3 factors of 10 difference be just one key away(and phonetically not all that dissimilar) seems like a mess waiting to happen.
I've seen in doctor's offices(and I know pharmacists and pharmacy techs, especially ones where compounding and other tougher than "dispense stock pill" type activities go on get drilled hard on this) outlining acceptable and unacceptable notetaking protocols to reduce the risk of power-of-ten dosing errors(things like ".2 is wrong, there should always be a leading zero to clue you in to the decimal point, use 0.2.") Some of them are even domain specific conventions, specifically trading off other factors in favor of reducing the risk of error. In science, for instance, saying 2.0, or even 2.0000 if you have that much precision, instead of 2 is a good thing. It tells your reader how precise the value they are looking at is. In prescriptions and medical notes, "2.0" is dangerously close to "20", and is thus avoided.
One would think that, even if it meant making up arbitrary symbols, or using UI element sizes to convey magnitudes, or something, financial UIs would adopt a similar set of domain-specific tricks to head off the most common and dangerous errors.
Might be time to invest my money in something a little more solid, like canned food and ammunition.
Yes, because fat fingers and ammunition go together well...as long as you don't invest in a gun too.
These posts express my own personal views, not those of my employer
anyone who believes this bullshit excuse is retarded.
If they were running Vista, they would have to click through "Are you sure you want to do this?" and "Are you really sure you want to do this?" popups, as well as a popup of Clippy asking "It looks like you are trying to trigger a stock market panic. How can I help?" No fat-finger problems there!
I've abandoned my search for truth; now I'm just looking for some useful delusions.
But when I worked on Wall Street in the late 80's, you had to enter zeroes to make a trade. None of this B or M bullshit. It's just a few extra keystrokes, but the trader's intent is always clear, they pretty fucking well know the difference between 6 and 9 zeroes.
cat
I have kind of an off topic question. How is a stock's value tied to a company's performance? If a stock's value is based purely on the demand for the stock and what other's bid for it, what incentive do they have to buy the stock? It's almost like I am buying a turd under the pretense that someone else will be stupid enough to come along and buy that turd for more money. All the explanations of stock price I see seem to have no relation to the value of the company, except in those cases where the company pays a dividend. So for non-dividend paying stocks why would there be a demand for the stock? Why do people want to own the stock other than to hope someone else will want it more?
You read that headline right. This should happen ALL THE TIME. It would be good for the markets.
Speculators would be driven out, or driven insane. Emotionally driven traders would have heart attacks.
Sound judgments made based on factual data would not be affected.
Next week, people like me won't give a toot that this ever happened. However, a lot of day traders just pooped their pants. I'm buying men's underwear stocks.
The person who made the mistake will be punished dearly.
Shouldn't this hot topic be debated on /. in, say, a week?
It's a bit of a smoke screen story. I doubt it is even true. It's to cover up the real issue of automated trading. Denninger covers this in his Ticker for today:
http://market-ticker.denninger.net/archives/2282-Mr.-President-Unplug-the-Fing-Computers.html
I'm no fan of Yamhead, his Perma-Bear status is a problem, but he does call out the systemic problems and the systemic FRAUD in the market correctly.
because in central EU(let me speak for Germany) - 10^6 is a "Million" you would say million (we all agree) - 10^9 is a "Milliarde" you would say billion - 10^12 is a "Billion" you would say trillion We also have a trillion but if our state debt would be measured in trillions of euros, we all would have "fun" like in the 1930s. Ok this is totally missing logic, he just had fat fingers.
yes, I remember another newsworthy trading mistake where the trader bought 1000 times more stock than he wanted. I think the trading keyboards have ",000" keys on them so the poor dears don't have to press 0 three times.
Of course today, 1 guy cocks it up, and then all the automated systems pick up on the trade and start selling off which quickly snowballs. This is why the stock market is so eager to drop. when they've figured it out expect the prices to rise back as suddenly. It makes it difficult for the small investor, but too bad - the big boys don't really give a damn about you.
When you can make money hand over fist doing nothing, a very bad thing has happened: work has ceased to become a rewarded function. Instead, it's who you can screw over with dodgy investment strategies and exotic financial instruments that are not only worthless, but a liability. It's time that we end the casino markets and return to investing in things that are actually part of the economy that creates jobs - manufacturing, infrastructure, and technology.
Fund managers who literally do nothing but piss away money are making $1,000 an hour, and the people who educate our children are making less than $20 an hour. Something is seriously wrong with this picture.
A NYSE Spokesman disagrees with this: http://www.marketwatch.com/story/no-bad-procter-gamble-trades-at-nyse-spokesman-2010-05-06
Sturgeon was an optimist.
.... or something. Shit, I always do that.
I always mess up some mundane detail."
So what if a trader types in T for thousands instead of K? Does he sell 1 trillion?
clueless idiots, everyone is just parroting the "financial" media line. amazing how CNBS knew about this bad trade a few minutes after the market popped back up 600 points. if anyone really believes this, they should be euthanized.
Okay, I have no knowledge of the everyday aspect of trading besides the small personal investing I do but why are they typing orders with words? Next thing we know, the DOW will be down 5000 and it will be attributed to someone accidentally typing "T" instead of "M" at the same time bumping the adjacent "r" because he can't use a keyboard with his friggin bear paws of hands.
I wouldn't want to absolutely state some institution doesn't have a system that takes in 'b' or 'm' after quantity... but I'll admit, I can't see it either. They were talking about the stock future, not the stock itself, though; that's slightly more credible.
My bet would be someone made a much more complex screw up and this is just the story people are hearing instead.
I make the unjustified claim PPT has stepped in and saved the market once again. Seems exactly what they were suited for.
Slashdot's rate-of-post filter: Preventing you from posting too many great ideas at once.
just a rumor and not a very credible one.. eurjpy dropped some 4% 5 minutes before the big fall -- the rest was correlation algos and stop losses imho
I demand that whoever went long at spx 1050 today pays for the next bailout...
So you're basically saying "sell low, buy high?" I love you, man. I'll be sure to thank you for the killer deals I get on my retirement portfolio next week.
The World Wide Web is dying. Soon, we shall have only the Internet.
Oh boy.. yet another reason the current admin. will be pushing for more gov't controls, I bet. Time to get out the popcorn and sit back and watch.
I agree. It smells like a narrative cooked up to soothe investor fears and prevent a broader sell-off.
What's being talked about here isn't the general decline in the market today, but a very suspicious "blip" that occurred in a huge number of stock prices at 2:45 EST, followed by immediate recovery.
Look at the blip:
Adobe
Google
Westlake Chemical
Cabela's Incorporated
Apple
Microsoft
Titanium Metals
Fidelity IIS
This shit is across the board, with very few exceptions. You try explaining how something like that happens apart from some major fuckup somewhere.
It amazes me that the financial industry continually gets a free pass on matters that would result in public outrage towards any other industry that deals with people's livelihoods.
This explanation, whether true or not, is equivalent to saying that an airplane crashed because of a single faulty sensor.
Or a bridge fell due to one rusted bolt.
But, here, one fat finger led to the temporary destruction of nearly 1 trillion dollars of value! Would we tolerate such bogus explanations from aerospace engineers or architects? Why can we not demand the same from our financial "engineers"?
Hedgefund shorting the PG engineered something. That's my guess.
Obesity is destroying America!
The DOW and stock prices in general have no relation to the economy, or to the health of the company. It's just a number. A number that can make people with a lot of money in paper feel very good, or very bad.
Other nations like England have small taxes that slow down trading, because you have to pay a "token tax" every time you make a trade. It doesn't seem to make much of a difference, but I think it's a good idea. A better idea would be forcing traders to hold their investments for even one month - all of this market volatility nonsense would disappear. Or even just to force holding a short sale for a week. It's a different moment when you're about to dump five hundred thousand in a particular company, when you know you can't decide to sell it in the next moment. It may make it harder for large companies to raise capital, but they don't appear to do anything useful with it anyways.
The rumor that a fat finger caused this is a joke. It looks more like someone knew what they were doing and lead the regular HFT gang right into a trap. The big question is if they will keep doing it, we could be in for a very wild ride.
Well, I(nor does anyone right now, really) have no idea of the details of the trading platform being used (if, indeed, its even relevant). However, I've never seen (nor heard of, nor have the folks who I've talked to who have worked with institutional investing) a system where you type in the amount of stock you want and then put a letter after it.
Your comment is spot on. Look at the volume of shares traded for PG today. There is no statistically significant spike in volume today that correlates with the price drop. If the sell was staggered, the price drop should have been staggered. Since it isn't, either Google's volume is way off or this story is a crock. Based on the volume data, the sell-off started well before the major drop in stock price.
I suspect that something funny did happen though, in TFA they are quoting that PG was trading down at $30 per share at some point, so something definitely slipped. Fortunately, we managed to avoid another Black Monday, where the DOW went down and stayed down.
Gentlemen! You can't fight in here, this is the war room!
I agree. It smells like a narrative cooked up to soothe investor fears and prevent a broader sell-off.
Eh, I don't think its a conspiracy based on some sort of "hidden true valuation" of the market as a whole. I think it was a system error, just not a typo (the situation is very similar to Black Monday, after all).
Just think... they sold high and then when everything else triggered a selloff, they could go back and correct the "mistake" and buy the 999M back at reduced prices.
We all know this and have known this for decades. The people who operate within the market like to think of themselves as sensitive to trends and currents and activities, but the reality is further from the truth -- a bunch of people doing what everyone else is doing hoping that the person in front of them knows where they are going.
The cure for much of this (not all of it) is setting up rules that limit the number of times a single item can be bought or sold in a day. Whatever the real "best solution" is (and I'm sure my notion isn't even close) it should probably focus on getting rid of the lemming factor that tends to send people marching off the edge of a cliff taking the whole market with them.
Maybe this was a cyber-terror attack and it is being covered up.
-Todd
Omne ignotum pro magnifico.
On the Dvorak keyboard, B is right next to M. That said, I use Dvorak, and have never personally caused a stock market fiasco. Maybe I should change professions...
Hey, it looks like your trying to destroy Western Capitalism, would you like some help with that? (annoying paperclip)
It wasn't a typo, it was Bernie Sanders speaking for an hour on the Senate floor today, pushing for a bill to audit the Fed. Everyone who is anyone knows what we will find if we audit the Fed, and it isn't good. Not just for us, but for the world. Which is why Obama threatened to veto this bill, citing national security. The dollar is the world's reserve currency. If all the plebeians of the world found out how utterly worthless our currency is, we would suffer a crash that would make the last one look like a cake-walk.
As for Greece, though, that crisis is actually pushing investors back to America.
- None can love freedom heartily, but good men; the rest love not freedom, but license. -- John Milton
ZOMG Skynet!
Can someone explain how a stock that is not part of the S&P index would be effected by a trading error made on an SP future?
15 billion dollars cannot move the markets that way, even if it was an accident. That's like trying to blame 2008 on the fraudster at "Societée Generale". It wasn't just the US stock market, it was all the currency markets too. This is trillions of dollars we're talking about, moving away from the Euro and the US dollar and into Asian currencies. The trouble in Greece and the uncertainty about the UK elections were the excuse. The Chinese made a major move into the Japanese Yen yesterday, strengthening it. Today european bankers followed suit. As a result the Yen gained nearly 10% against the dollar, with Cable (GBP.USD) and Fiber (EUR.USD) dropping quite a bit too. This panicked the equities markets.
Seven puppies were harmed during the making of this post.
Well, perhaps we ought to consider lifetime revocations of trader certifications - or, where a fraud has been committed that costs more than $1meg - consider death penalties. These well educated investors/brokers/traders/managers would be deterred if a few were executed. Unlike the fools who rob and murder who can't conceive of the consequences of their acts.
Imagine the crowd outside the prison if the law mandated Bernie Madoff pay the ultimate price. Would we even have had a Madoff embezzlement if Ivan Boesky and Michael Milken had been subject to the death penalty twenty years earlier.
If we are ever going to hold these traders accountable - then I am for an effective death penalty for financial mis/mal/nonfeasance in excess of $1meg. Cull the herd.
The brief halts on the NYSE when stocks fall 10% allow for big moves on low volume elsewhere, where they continue to trade electronically. Hence Procter & Gamble was halted at $56 on the NYSE, fell to $39 elsewhere, and then reopened back near $56 on the NYSE. That's what really triggered that 15-minute, 7% decline in the market, and it's the real culprit that needs fixing here - we either need a real circuit breaker system, or the good old fashioned uptick rule brought back. http://www.internetnews.com/bus-news/article.php/3880681
Everyone should know by now that 90% (or more) of the trades in the markets are done by bots. Traders are moving their offices from Chicago to New Jersey where the trading floors (computers)
are because the time it takes for a TCPIP packet to make it from Chicago to New Jersey in too long.
I am sure these trading bots are given about as much QA time as it takes to do one of these trades.
Give a man a fish and you have fed him for today. Teach a man to fish, and he'll say "WHERE'S MY FISH, YOU IDIOT?"
Financial engineers as a whole are a bunch of Dilettantes. They literally play guessing games disguised with fake knowledge. Any scientist would look at the markets as an optimization or stochastic problem. Not financial engineers. They look at indicators that have minimal mathematical basis and "psychological" levels.
That brings me to an interesting point, / . is just "the ramblings of socially-inept, technology-literate news-mongers".
I am, obviously, doubtful of this explanation.
Yes, it seems strange that something like this could be allowed to happen.
If you knew exactly when this was going to happen, you could stand to make a lot of money.
China did it.
That brings me to an interesting point, / . is just "the ramblings of socially-inept, technology-literate news-mongers".
The volume can be explained away if the order was for a basket, and there were lots of stocks that behaved at least similarly to PG (but then the trade isn't quite so outsize). The circumstances around PG may have made it worse than the others.
Nerd rage is the funniest rage.
Bridges aren't supposed to be speculation. You aren't expected to stop at the start of the bridge and gauge the risks, decide whether or not you are likely to make it across, etc. The stock market is a gamble. It's an "investment" risk. Things happen.
That said, it's a pretty bad excuse.
Fund managers who literally do nothing but piss away money are making $1,000 an hour, and the people who educate our children are making less than $20 an hour. Something is seriously wrong with this picture.
Yes. And further, consider how Wall Street has attracted the best and the brightest of all of our people, math PhD's, engineers, those with an excellent ability to see the broad patterns in society. Our most brilliant citizens are pulled into Wall Street as "quants" or traders or corporate lawyers, and are often paid six and seven figure remuneration per year. And to do what? To game the system in favor of their wealthy masters at the expense of the middle classes. Do they create wealth, or are they merely helping to transfer it from the hands of the many to the hands of the few who can afford their services. Wall Street quants were supposed to make recessions a thing of the past. We all know how that turned out.
Meanwhile fields like science, engineering and medicine lose the most brilliant individuals. Citizens who would formerly have become professors, providing independent analysis of society's problems instead become selfish multimillionaires, who then retire at 40 to a life unproductive leisure. Think of what these brilliant people could have done if their abilities were harnessed in the right fields and with the right motivation. Think of the problems that could have been solved. Think of the knowledge that could have been gained. Think of the lives that could be saved by new medical discoveries. Think of the new technologies that could have been developed for the common good. Wall Street's co-opting of so many of the geniuses in our society will have profound consequences for our civilization. I can only hope that we can undo much of the damage been done by this corruption.
This and no other is the root from which a tyrant springs; when first he appears as a protector - Plato (423 to 327 BC)
I mean really? What do these traders produce? Nothing. But they earn money, quite big money solely on speculation. What is the purpose of this at all?
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when they use iPads with touch-screen keyboards. It'll be perfect, I tell you, PERFECT!
Browsing at +1 - no ACs, I ignore their posts. So refreshing!
While there's a certain populist appeal there... i don't think it needs to go that far. Western societies have pretty robust ways of dealing with industries critical to the functioning of society, but somehow we cannot manage to bring banking and finance under this umbrella where it absolutely must be.
Doctors, lawyers, accountants and (real) engineers all have strict ethics rules and standards they must follow. They are personally liable for their conduct.
If an engineering firm builds a bridge for a county for $X, while taking a huge profit because the bridge was really built with a combination of super glue and balsa wood, I am pretty sure the whole firm will be done for, fortunes wiped out and many would go to prison.
Similarly fraudulent activity happens in the financial sphere and in the end we must bail them out with tax dollars because of all the damage they have done!
I feel like our whole society is standing on a financial balsa wood bridge, with the financial masters of the universe holding a big hammer ready to take out one of the supports if we dare threaten their right to "innovate".
Anyone? Anyone?
Naw, its Goldman Sachs selling their holdings to pay for lawyers.
Of course equities are risky. So are operations. That does not give a doctor malpractice immunity if I die during a heart transplant because he confused the scalpel for a bone saw.
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I am, obviously, doubtful of this explanation.
Quiet, you! The establishment media has spoken. It was nothing more than accidentally hitting b instead of m. Ignoring the fact that they're on opposite sides of the keyboard, a fact easily explained by Venus reflecting off swamp gas. Now, if you'll just pay close attention to the red dot on this this inanimate carbon rod, I'll explain everything...
Having worked connecting clients on the sell side of brokerage, I can assure you that we would frequently field requests to disable client trading limits (or balloon them astronomically) when a client's legitimate trade would hit them (maybe they've traded for 5 years and their favourite high-volume stock has gone up in price 10x).
Add in the fact that electronic trading software is often written with no thought to the UI, I'm surprised fat finger issues don't happen more frequently. Well, I guess they do, they just don't make the news very often as they don't cause this kind of a market swing...
In my experience, a lot of capital markets software is crap compared to the commercial stuff you use day-to-day, and a LOT clunkier than even the worst of the worst in open source UIs. When they say they're using the highest tech stuff out there, it doesn't mean it's actually good.
I remember when the NYSE first traded a billion (10^9) shares in one day. It was a really big deal that defined the value of the 'Market'. Now private exchanges trade more shares than that in an hour. Hell, there are some automated exchanges, dealing mostly in arbitrage, that trade over a million (10^6) shares per second.
Accenture (ACN) went down to 1 cent from about 40, for all of one or two minutes, then went back to about 40. The iShares Russell 1000 Value Index Fund (IWD) had a similar ride, from around 60 to 8 cents. Centerpoint Energy (CNP) went from 14 to somewhere under a penny (I saw a number, but I can't remember if it was 0.007 or 0.0007). There may well be other cases like these.
I really suspect there was a software bug that affected several stocks, not fat fingers.
Are you adequate?
> one fat finger led to the temporary destruction of nearly 1 trillion dollars of value!
And explosion in a power plant destroys value, a drop in the stock price of the power company doesn't: all the plants, factories and offices you might have aquired a share of are still there and just as well as they have been yesterday. Why is it that people begin to like their stock or even the houses the live in less just because of a different price tag? The dividend doesn't depend on the quotation and the house will still be as big as it has been yesterday, so why should you care what others are currently willing to pay for it? - That is, unless you are trying to make a living as a gambler or hustler for sucker bets (aka trader), in which case you simply made an error of judgement by not correctly considering the fat finger factor when placing your bets and have only yourself to blame.
I did work experience at a large broker once, and spent a day watching the actual traders (there were only two, even for that large company, on text-based terminals). They say that quite regularly traders at other firms enter the price wrong, e.g. leaving the zero off the end of the price of a large sell order, which eats through all the buy orders and reduces the price quite significantly... they said that most of the traders were pretty good about reversing such transactions.
So things something like the OP describes can and do happen.
That's why they should be required to type in all the zeros. If it's big number, it deserves a little more time.
no trader with million's autonomy would work without a safeguard of sorts. Nice rumour, but no thanks.
Financial engineers as a whole are a bunch of Dilettantes. They literally play guessing games disguised with fake knowledge. Any scientist would look at the markets as an optimization or stochastic problem. Not financial engineers. They look at indicators that have minimal mathematical basis and "psychological" levels.
They're also damn good at what they do. No offense to scientists, but anyone trading using the scientific method is just going to be giving money to people who use more effective methods. The simple explanation is that the scientific method is far from optimal for the problem of rapidly evaluating the price of a security in real time. Market trading also isn't an optimization or stochastic problem. Those are approximations for the real deal. As I see it, a seat-of-your-pants market maker is going to know more and make better trades.
Pardon me while I make a brief appeal to authority here. I have a PhD in math. It's not in financial mathematics, but I'm acquainted with what they do here. The math/computation part is in getting a good estimate of what things are worth and how they correlate with other securities over certain time scales. It enables the trading of complex derivatives and execution of automated strategies (especially hedging and arbitrage related trading). IMHO, there's no magic math algorithm that will trade well understood securities far better than current methods. That vein is probably almost mined out. There might be something there, but I doubt it. The current play seems more in those complex derivatives.
I see a lot of the current problems more as social engineering problems. For example, I bet every single bank and investment firm that collapsed in 2008 had incentives (and lack of accountability) in place for the traders and managers to accumulate highly leveraged risk. Guessing right on a highly leveraged strategy can get you excellent bonuses. A prudent strategy can lose you your job, even if you are right in the end. The last of the outcomes, guessing wrong with highly leveraged risk just loses your job again (the company might go belly up as well, but it's not your problem any more).
As I see it, the fundamental problem with most such businesses (and most publicly traded companies as a whole) is simply that the owners do not run the business. The people making the decisions risking the capital are completely divorced from the owners of the assets. The decision-makers only stand to lose their jobs.
No, more like saying that an airplane crashed because of one faulty pilot.
Flying straight into a mountain isn't the yoke's fault, even if the pilot actually should have pushed it up instead of down.
"temporary destruction of nearly 1 trillion dollars of value" barely even makes any sense.
I suppose that is where investment is sort of different than gambling; in theory, 5 trades of $1,000 each can drive up the price of a $50 billion dollar company by $5 billion dollars, using $5,000 to "create" $5 billion of value, which is then "destroyed" by another $5,000 in trades (those numbers are wack, but they get the idea across). In gambling, there is always a winner, with the games fixed so that the house makes money over time.
(So, notionally, no one really won or lost the $499,995,000 involved in the investment increasing and decreasing, but damn if it isn't fun to talk about 'all that value' getting destroyed)
Nerd rage is the funniest rage.
Great comment. The key problem you pointed out is the lack of accountability from those who are in a position to do serious damage.
Let financial "innovators" do whatever they want, with their own capital. If a financial institution has failed due to poor risk management, and is systemically important, I want to see every last cent of the personal assets of management stripped before a dime is contributed by the taxpayer. Then we'll see if risk management is taken seriously, and who are the real innovators and who are the turkeys flying in a tornado.
A one character typo should never, ever be capable of causing the damage that was done today. It is literally an affront to decades of research in numerous branches of computer science and engineering.
For starters, there are algorithms designed to deal with Byzantine agreement, used in a number of fields. While I'm not an aerospace engineer, to my knowledge this is used for example when a having to come to a decision on what to do given a number of sensors readings, when one or more could be not only failing, but showing arbitrary, incorrect behaviour.
This has been researched since the 1980s. Now compare that to a simple rule:
if (trade.value() > Constants.RIDICULOUSLY_LARGE_AMOUNT) Alert ("Um, are you sure about this?");
It's due to personal responsibility, or rather, the liberal concept that people are rational beings who are capable of making their own decisions. There's an ingrained attitude with all things financial that people are rational actors behaving in their own best interests. If this story is true, someone sold a bunch of stock, and then other people decided afterwards, on their own, to sell all kinds of stock as well. To add to your analogy, this would be more like a faulty sensor on a plane telling the pilot that he his altitude was 238,857 miles above sea level, where he made the logical decision that he needed to suddenly and steeply dive in order to get back to Earth.
It's all a legitimately crazy system, but people put up with it because, for the most part, it's people making decisions to buy and sell things. For this same reason it's also incredibly difficult and complex to regulate. It seems like it could use with some forced latency in the transactions -- after all, if computers are making decisions to buy and sell, then it's not necessarily rational, right? -- but a change like this is not only nearly impossible to implement, but would with certainty produce strange and unintended side effects.
And that's before even delving into the actual arguments against such types of regulation. If these kinds of computer-driven sale behavior is banned in New York, what is going to stop traders in London from taking advantage of the financiers in New York? What would stop all the New Yorkers from packing up shop and doing their trading in London? If this behavior is regulated in NYC and London, what is going to stop the traders in Hong Kong from taking advantage of the situation, or what would stop the companies moving their trading to Hong Kong? If it's banned in NYC, London, and Hong Kong, wouldn't a new trading hub form? Since this is 'rational' behavior of individual actors, not only is it likely, it's almost guaranteed -- just as individual economic centers have sprung up across the globe independently of one another in the first place.
That's not to be apologetic towards the Wall St type, as the negative stereotypes and negative behavior are fairly well known, and have been for hundreds of years. They hardly need to be embellished. It's just that everybody has yet to come up with something better, that is more efficient and less dangerous. As others have pointed out, Wall Street has attracted all kinds of intelligent people who may have gone on to do much better things, but that glosses over the fact that Wall Street itself is responsible for great things of its own -- it's just easy to lose it in the murk of the individual greed. Until we as humanity come up with something better, that works, and is more than a pipe dream, it will continue to lure many of our best and brightest, and who can really blame them?
It amazes me that the financial industry continually gets a free pass on matters that would result in public outrage towards any other industry that deals with people's livelihoods.
Uuum, and who gives the guys a free pass that give the financial industry a free pass?
That would be: Us!
So? What are your plans to stop that?
Any sufficiently advanced intelligence is indistinguishable from stupidity.
I am a mathematics grad student so perhaps Im a bit out of my league, but here I go. Perhaps I misspoke when I refer to financial engineers. I was more so referring to finance professionals in general. Too many of them use indicators without much knowledge behind what its actually doing. "Ahh, this stochastic oscillator is going up and the price is above the moving average! Time to put in a long!". Another example is, "Look, here is a 50 percent retracement of the recent low!" type of thing. It seems to me that these psychological levels are completely arbitrary, i.e. because a person or people a long time ago said it was so, it persists. Coming from a math background that level of understanding is criminal. As far as optimization, isn't that what constructing a portfolio is for a rational investor? Minimization of risk, maximization of profits, ect. We just did an applications section on it for my optimization class. As far as stochastic, Im sure you can approximate certain behaviors with stochastic models. Interest rates, commodities, stocks? It may not actually work out exactly the way it does in reality, but the theory is there. I agree completely that there is no magic math formula short of modeling every investors brain, politicians brain, voters brain, managements brain, and possibly the planet's natural progression, and somehow coming up with the initial condition for the thing to start off right.
That brings me to an interesting point, / . is just "the ramblings of socially-inept, technology-literate news-mongers".
As a start, we need to reverse exactly this race-to-the-bottom thinking throughout the world. Slavery was long considered a necessary evil, since to eliminate it would be to reduce a region's 'competitiveness'. We see the same trend today of wages being squeezed while money floats effortlessly to a small tier at the top.
A small example: If banks want to move abroad to escape regulation? Fine. Revoke their license to conduct business in your country. Perhaps simplistic, but in principle, it should be as easy as that.
Well, "us", maybe in Switzerland or another direct democracy. In most of the rest of the world, it should be our elected representatives doing this. Vote for who you believe will enact change.
I work on a traditional trading floor. Meaning, phone calls from institutional customers and none of this program trading.
The scene was chaotic, to say the least. However, because human beings were at the controls, no one got burned- or burned their customers. At around 2:40, the junior people on each desk (equities, options, FX, etc) who are responsible for keeping their eyes firmly glued to market conditions began screaming at each other. "What's the news?!?! What's the effing news?!?!" Within a few seconds, when all were in agreement that there was no news, an error was suspected. All stop orders were disabled and everyone was told to wait it out. Some traders made moves in their prop accounts and did very well, but all customer orders were on hold.
The moral of the story? If you do not see a report of a massive terrorist attack, the default of a significant nation, an asteroid leveling a capital, or some other calamitous event, then the market is not actually dropping at a rate of 100 points a minute. That being said, if you are willing to risk your career to profit from an irrational movement, go right ahead.
Leave humans in the loop.
Investors certainly DO have a purpose! They (well, the good ones) don't just throw darts at a board, rather they analyze businesses and markets and sectors to decide which of them will produce the greatest return on investment, then they...invest! Giving money to those companies that will make the most of it IS EXACTLY HOW YOU MAXIMIZE GROWTH FOR THE ECONOMY. This is only true for longer-term investors, however. Short-term and "day traders" truly do offer very little beyond making the market "more efficient" in theory (and "more volatile" in practice)...
Ibpossible.
I bean, It's just ibpossible to bistype an "b" as a "b".
Or did they use google to place the transaction?
All you nerds who complain when Grammar Nazis point out the difference between "b" for bits and "B" for bytes, or "m" for milli and "M" for mega?
http://www.salon.com/news/opinion/feature/2010/05/01/trillion_dollar_fraud
The decision-makers only stand to lose their jobs.
This is a problem with companies in general. Corporate structures are supposed to insulate shareholders from the risk of the company value going below zero. Problem is, that risk doesn't disappear, it's merely transferred to all those who deal with the company including buyers, sellers and employees.
Because the risk has been arbitrarily reallocated this means that financial incentives are out of whack and you get market failures of various kinds e.g. Shell companies engaging in unstable high risk, high return strategies because the downside is bounded.
---
DRM breaks ownership, the basis of capitalism and the free market.
In the early 2000's, I worked as a software guy at a Wall Street firm. It's common practice for the QA department to enter "test orders" to exercise the software. Well one of these test orders, for 10 million shares, somehow reached the market (due to bad architecture). It got canceled, but not before it moved the price of the stock. I wonder how often this kind of thing happens and we don't hear about it.
... a butherfucking mig bistake!
Have gnu, will travel.
If you put anything under the mattress, it shouldn't be US dollars or any other fiat currency. Gold has never gone to zero.
Neither has the US dollar. If you want to compare metals aluminum has never gone to zero and neither has boron, tungsten, copper, zinc or nickel.
It's likely that the trade was actually for an ETF that contained many of the stocks and not just P&G.
1987 was about computerized program trading, or at least that's the most common explanation - which seems to have been a contributing factor today too (high-frequency algo trading).
Let's face it, traders are better armed and funded; the best regulators can do is clean up the last mess. Sure would be good if they actually got in front of something for a change...
Based on fundamentals, world politics, the overtime they're putting in at the printing presses, the fact that Obama just can't figure out that you can't borrow and tax yourself into prosperity, and the recovery that just won't show up to the party, the DOW should be around 4000, not 11000. There's absolutely no excuse for the valuation we're seeing in equities right now.. none at all. There's nothing underpinning it except a bunch of hot air.
The US debt will exceed GDP very soon, and the budget deficit has already ballooned to nearly 15% of it. These are not good numbers, and there is no end in sight. The current administration's solution is to increase the rate of borrowing and spending and decrease revenue by destroying the economy.
In fact, DOW 4000 might be a little generous. Maybe 2000.
1. if someone input falsely, that's a total good excuse for a real market drop covered
2. if some corp really states that it's their fault, then i suggest that corp go bankcrupt
thus, no one will be telling u the fault are theirs
thus, this 'fault' will be the final truth itself for this non-claimable faulty fault
XD
maybe just a trick to dump the bonds so to release the debts to the black hole
Agree, it is total BS
It said "windows 98 or better" so I installed Linux
On the Dvorak keyboard, M and B next to each other (B => N, M => M). To add to the fun, you almost have to touch type if you're a Dvorak user such as I.
? The Fed's books are already open and reviewed by accountants regularly.
Really? Then please direct me to the assets in Maiden Lanes 1,2,3. Now, I don't mean the 'extend and pretend' valuations they report. Any external reporting is sent over with a topline valuation. Period. They do not provide enough information for any external party to establish values.
Please direct me to FRB NY's communications, oh let's go back 5 years. I don't want it all, just the stuff where it was decided AIG's creditors were paid 1:1 for debt obligations where a haircut (pennies on the dollar) is the norm. And... what about all those side bets that were made good?
Finally, it's not an either 'Business As Usual' or 'Politicize the Fed.' choice. That kind of rhetoric, by design, goes nowhere. Discarding the whole notion of greater transparency for the Fed has already cost us a trillion or so dollars. I'd like to use that money for other things.
http://www.maxineudall.com/2010/02/should-economists-be-sued-for-malpractice.html
US will NEVER do this, it's impossible. It will print and print USD into hyper-inflation.
That's a nice theory. Complete nonsense of course. The US has been in this situation before multiple times.
The US has never defaulted. Not once - even when the national debt was a much higher percent of GDP than it is now, which happened after WWII. It also was approximately as high as it is now around 1880 as well as throughout the 1930s and in the 1950s and 1960s. Sure the numbers are bigger (inflation does that) but our GDP is bigger too. The solution to the deficit is fairly simple - cut spending on some combination of the military, social security and/or medicare. Not politically easy of course but certainly possible.
The reason your argument is nonsense is that if the US were to continue to just print money without regard to the consequences, the economy would crater since no one would trade with the US, and the government would be cast out of office. Your assumption that people can never accept any legislation that is good for the country but not them personally is demonstrably wrong and pathetically cynical. It also assumes that the people in charge have no clue or sense of responsibility or fear of losing power. As much as we criticize our government, they aren't complete fools - at least not all the time.
Like we should listen to the ramblings of a user with the name "religious freak" you can't even think clearly about life if you are openly saying you are a religious freak!
Modern economic theory is a sham and many of its followers are acting on beliefs; a religious belief in an economic theory that is unsound and has not been fully in effect for all that long -- just long enough for most schools to mess it up and the actual system slide further into the rabbit hole.
The "economy" is not another god, but people sure act like it -- more than they do with actual god; who is less directly involved in our lives.
Wall Street has attracted the best and the brightest of all of our people, math PhD's, ... Our most brilliant citizens are pulled into Wall Street as "quants" ... And to do what? To game the system in favor of their wealthy masters at the expense of the middle classes.
Then the PHBs misunderstand and misapply the PHDs' work, and the whole thing comes crashing down on them.
Case in point: Mortgage-backed securities.
Risk on such things is hard to estimate, because it takes a lot of investigation and skull-sweat to evaluate the risk on each mortgage. Evaluating the risk on a bundle of mortgages was so much work it was not practical.
Then the young math whiz proved that price of mortgages was very strongly correlated with risk, and came up with a formula that, given price, estimated risk very well. (Well, DUH! They're correlated because smart buyers and sellers were researching the mortgages, determining the risk, and basing their trading prices on them.)
THen the PHBs came up with something like bonds backed by a "basket of mortgages" (to "average out the risk of individual defaults). Buy the bonds (to finance the mortgages), get paid dividends from the borrowers' payments. Sell THREE sets of bonds against each "basket" of mortgages, with missed payments coming out of the dividends of the third, then the second, then the first, so investors could get different prices and risk/reward tradeoffs from the same basket. So far so good...
But to sell these bonds they needed a rating. So they talked the rating companies into using the shiny new risk-estimating tool to rate them. Oops! Any controls engineer who understands these bonds and the market will recognize that this substituted a positive feedback loop for the signal from the real world. Higher price -> lower risk estimate -> higher price... (The guy who did the original work said not to use it this way - but nobody listened. And he moved on to other things.)
And now that they could get a rating they could get a rating from reputable companies they could sell a bunch of these bonds. So they could buy up mortgages to make more. So this raised the demand for mortgages, which raised the price. The positive feedback loop was kicked off with a big up-push, the ratings went sky high, the prices of the bonds climbed, and the bubble was on.
With the price skyrocketing more people wanted to buy in. So the demand for mortgages went through the roof. Banks and the like could sell any mortgage they could write, even to "NINJA" borrowers with no income, job, or assets. Who cares if some of the loans in the basket are "subprime"? The price says the aggregate risk is low and it will all average out, right?
So the bubble blew up bigger and bigger, with developers building more houses that were bought by more subprime borrowers with more and more unconventional mortgages - until finally there were enough defaults to actually cause problems.
The last straw was probably because a gas price hike made the commute expensive enough that people commuting between big cities and the "executive homes" tightly clustered in former farmers' fields a two-hour commute away from their job could no longer afford both the gas and the payments.
So enough mortgages defaulted that some of the bonds were doing worse than expected. So the demand for them went down. Oops! The positive feedback loop was still in place and it finally got a signal strong enough to get it out of saturation. Lower demand -> lower price -> higher risk estimate -> lower rating -> lower price. Rinse and repeat. Prices for mortgages drop, interest rates rise, more defaults, more positive feedback.
And thus the subprime mortgage market collapsed.
(Then the government throws a trillion or so of our money into pumping it back up...)
Now stock market guys are used to this sort of thing: It's the old chartist vs. value investor dichotomy. Every so often somebody finds a
Bantam Dominique roosters crow a four-note song. Once you've heard it as "Happy BIRTHday" you can't NOT hear it that way
I know far more people who have been screwed over by doctors, mechanics, and contractors than by accountants or investors.
I am a certified accountant. If you believe that, you don't understand accounting at all. I have a textbook downstairs which is all about how accountants can fudge the numbers. Even the best financial records have a lot of slop in them and it is REALLY easy to commit fraud as an accountant often on a very large scale. Even if no laws are broken, finance experts can seriously screw you, often without you even being aware of it. I'm not required to take classes on ethics every year because accountants have been so honorable in the past. If accountants were so honest there would be little need for audits.
No, I'm afraid accountants and finance professionals are no more ethical than anyone else.
Yes, teachers should be paid more, but there should be higher standards for teachers as well.
You get paid more for doing things that either A) other people can't do or B) other people don't want to do. Teaching generally falls into neither category. The ability to teach is not a rare ability and plenty of people chose it as a career. (note that I did not say teach well - that's a different issue) Ergo supply being relatively high compared with demand dictates that teaching will not be a lucrative profession.
There's no reason that teaching should be any less a noble profession (as determined by the general population, not Slashdotters) than being a doctor or professor.
Who said it is less noble? It just pays less. Being a college professor or a doctor requires a PhD or an MD and there are fewer people who have the brainpower and dedication to earn those degrees. Nobility of a profession isn't determined by pay and being a teacher is generally quite well respected.
I am a mathematics grad student so perhaps Im a bit out of my league, but here I go. Perhaps I misspoke when I refer to financial engineers. I was more so referring to finance professionals in general. Too many of them use indicators without much knowledge behind what its actually doing. "Ahh, this stochastic oscillator is going up and the price is above the moving average! Time to put in a long!". Another example is, "Look, here is a 50 percent retracement of the recent low!" type of thing. It seems to me that these psychological levels are completely arbitrary, i.e. because a person or people a long time ago said it was so, it persists.
That is a good point. There are a variety of these myths. Another common one is the idea that the trader is taking money from dumb people. Odds are really good that those people are just as smart, they just don't have the time to get as good a price as the trader can get. I don't know whether a lot of professional traders believe in this stuff or not, but it does sell well to the general public. The sort of advice that someone will spill on CNBC is likely to be of this kind. It's a bit of fluff that they can use to justify whatever claim they happen to make.
IMHO, there is some rational basis to "psychological levels". Human traders are likely to use round numbers for making decisions, eg, "sell when stock hits 80", not "sell when stock hits 79.625" and collectively that can impart a bias on behavior of securities around certain values. Also, if you have large traders who decide to trade at certain ranges, that can be misinterpreted as "psychological" when several of them settle on the same range (here, the pundit doesn't see a single large bidder driving the trading range). The effect is still there, the cause is just misattributed.
Coming from a math background that level of understanding is criminal. As far as optimization, isn't that what constructing a portfolio is for a rational investor? Minimization of risk, maximization of profits, ect. We just did an applications section on it for my optimization class. As far as stochastic, Im sure you can approximate certain behaviors with stochastic models. Interest rates, commodities, stocks? It may not actually work out exactly the way it does in reality, but the theory is there. I agree completely that there is no magic math formula short of modeling every investors brain, politicians brain, voters brain, managements brain, and possibly the planet's natural progression, and somehow coming up with the initial condition for the thing to start off right.
Minimization of risk is not actually a good idea unless you really have to watch the cash flow (eg, you are the market exchange itself or a cash poor business that wants to get a little bit more off of cash when you have it) or you deliberately trade arbitrage where acceptance of any risk is dangerous to the strategy. There is a premium for assuming risk. One of the many decisions a business or trader makes is to decide how much risk to assume and whether to attempt to mitigate that risk (say through diversification or hedging). These sorts of decisions can be considered optimization problems, but my limited experience is more that traders and investors don't simply trade in the thing with the current highest estimated, risk-adjusted ROI. They instead have a list of potential investments or markets and spread the assets over anything that exceeds thresholds of likely profitability. They also set aside money to put into any good deals that suddenly crop up. So it's perhaps a combination of pushing money around interesting investments of the desired time frame and catching fleeting but unusually profitable opportunities. The actually mix depends on the strategy, goals, activity level of the trader, and market environment.
They have to make fast decisions and it is possible to get burned. For example, I have a story about Carly Fiorina, who used to be CEO of HP. For a couple of years, I worked at
They are just reasonably clever and by far and away the most sociopathic. That's the distinction. There are any number of more intelligent people out there, in various fields, who are extremely brilliant and productive and of worth to society. They just aren't extreme slimeballs by nature, so they aren't attracted to the thievery way of life.
They were able to game the system and create legal counterfeiting (the Fed) and legal paperwork colonialism ("investment" rigged casino banking) three generations ago, and just followed on with those practices. There's a cyclic nature to their grand thefts, they can pull off smaller ones fairly often, but the huge ripoffs and wealth transfer actions (great depression one, the 80's oil soaked rips, then now, today, the derivatives scams) only happen once in a generation. That pisses their victims (everyone else) off enough that they have to cool it for some years, weather the storms of "we need more regulation", etc. Once that cools down, they get the laws changed back again so they can set up their next cons.
The best way to beat that system is don't be in it (and just stop living on credit, get as far out of all debt as possible, everything, quit feeding those economic trolls). There are any number of more practical ways to invest any of your surplus cash. Handing your money to those crooks is the easiest way to lose it.
They are in business to take money from you, short or long range. They are not in business to make anyone else money, and anyone-you are bonkers if you believe they are, just because they say so. "Give us your money all the time and we'll invest it for you, for your retirement" What crap. They want your money and...stop right there, because that's it. They want you to hand your money over, so they can keep it eventually. Oh yes they will send you statements and so on for some years, perhaps some dividends, but eventually, they will crash the system on purpose and be left holding the pot, and tell you "sorry, the market crashed".
It will be done on purpose. Happens once a generation, and then the lesson is lost.
They are not in business to make corporations become better. They are in business to skim wealth as fast and as hard as they can, just like any other con artists, they are leeches and parasites, conmen just with exalted titles and who rotate in and out of government. They control the process, so they can skim wealth the easiest way possible, and have it be "legal" at that scale, and to be able to hide behind plausible deniability when the crimes occur, so they don't get charged with high crimes. They own the government, so no matter how high the thievery goes, how many congressional investigations occur, the worst that happens to them is a few patsies get busted and thrown in jail, a few little small fines occur, and that's all. Then they go right back to doing what they always do.
"If you fingers are too fat to use the keypad and you need a dialing wand, please mash the keypad now."
If you think that the markets reward long term investments that don't turn up in quarterly reports, you're not paying attention.
I'll take Warren Buffet's opinion on that over yours. Here's a hint: he disagrees with you. Yes the markets can be myopic but long term success gets rewarded handsomely. Companies of all sizes make investments with time horizons measured in decades on a daily basis. If few thought long term, the companies that did would have a heck of an advantage.
Moving jobs to third world countries is rewarded in the stock market, not building American factories to employ American workers.
Actually neither of those things is rewarded in the stock market. Profits and growth of profits are rewarded. Nothing else. If you can grow profits with American workers, the stock market is fine with that.
The problem wasn't the original trade, it was what followed. People in the market often use "stop-losses" which are essentially computer programs instructed to sell if a stock goes too low. For example, if a share is trading at 50$ you might set a stop loss at 40$ so if something were to go wrong you would (ideally) not loose more than 10$ a share.
What happened is that the original trade dropped P&G enough to tip a few of these algorithmic trading programs and started a snowball that hit P&G all the way down in a matter of seconds. Sellers couldn't react fast enough to keep P&G at its actual price.
Now P&G makes up enough of the dow index that this sudden spike knocked the index down around a hundred points, enough to send a shock-wave of confusion across the trading floor. Everyone was jittery to begin with and the first thoughts were "Did something happen to Greece? What do they know that we don't?" which set off a general panicked sell across the board. As you can imagine, more stop losses jumped in and many completely unrelated regular people ended up selling 50-60$ securities at as low as 0.01$. It would be horrible to have lost money to this insanity.
You've just discovered the ugly truth at the heart of the global economy.
Just like all the other unusual trading activity or glitches, the exchange will cancel the trades and minimal harm will have been done. This has happened several times before. Stocks settle trade+3 days, so the just bust all the trades prior to settlement, control send the funds back through the NSCC and it's a wash.
Suppose that the article is correct and some high-power trader accidentally placed an order 1000X the size of the intended order.
The mere fact that there is ANYONE in this market with this sort of power is all the evidence I need to convince me that the stock market is a rigged game and the big financial firms have the deck stacked in their favor. If their advantage was merely a result of sophisticated research and analysis and they played the game according to the same rules as everyone else, more power to them. When they can game the market with high frequency trades and cause wild price swings with a single keystroke however, they're just preying on the small investors who can't pull the same stunts.
If someone can do this "accidentally", then they could also "deliberately" skim off profits from anyone with stop-losses in place. I cringe to think of what happened to some small traders who might have had margin purchases in their E-Trade accounts and were auto-liquidated to meet margin requirements. Seems like the big fish could also game the options market.
To err is human, but to really foul things up you need a computer. In a similar vein, Mitch Radcliffe said "A computer lets you make more mistakes faster than any other invention in human history, with the possible exception of handguns and tequila."
Have you got your LWN subscription yet?
Well, Italy didn't do much where a massive engineering firm created a dam that failed. See: http://en.wikipedia.org/wiki/Vajont_Dam
"Tort Reform" has capped the liability for physicians in many states - despite criminals like Michael Swango, M.D. poisoning patients and co-workers. http://abcnews.go.com/US/story?id=96548&page=1
The number of crooked lawyers (my own profession) is burgeoning and many are directly involved in the economic meltdown. http://www.mcclatchydc.com/2010/04/21/92637/goldmans-connections-to-white.html
Time to take a had line approach to a class of criminal that would actually BE deterred if they knew that they would certainly be executed. Hell, make the next of kin push the button. Add a real fear of retaliation from a disgruntled spouse and those "masters of the universe" would dot every "i" and cross every "t."
Some guy: Sal, are you in here? SAL? SAL?
Traders: SELL! SELL! SELL!
What happened is that the original trade dropped P&G enough to tip a few of these algorithmic trading programs
I disagree. I was in the currency markets today and it was clear that there was a problem LONG before 2:50pm EST. China bought billions of dollars worth of Japanese yen well before the market opened. The Japanese yen began falling vs. the dollar (ie strong yen, weak dollar) all morning as European banks followed suit, dumping USD and euros in favor of Japanese Yen. At this point the dow was only down 150 points or so - this is no big deal usually. Then suddenly the Euro dropped, the pound dropped, and the Japanese yen gained strength, almost in panic fashion (I am talking a drop of 5% inside 10 minutes). This caused a panic in equities, the US stock market being the only one open at the time. I imagine banks and mutual funds dumped their holdings all at once.
P&G is only a side issue. Gold spiked long before 2pm. The Euro and pound plummeted long before 2pm. Heck, even the Brazilian "Real" fell sharply against the yen way way before the US market dropped. This was a global phenomenon. Don't listen to ignorant reporters trying to sell you the story of a trillion dollar "fat finger". This is real money moving from the US dollar, the British pound, and the Euro, into the Japanese yen, thus increasing the strength of that currency.
Of course, when you have US government policy that says you can print all the money you need, and Europe following suit, well, what do you expect? This was an attack on the US dollar, and nothing less.
Seven puppies were harmed during the making of this post.
Thanks for the discussion. It was an interesting read. Have a good evening.
That brings me to an interesting point, / . is just "the ramblings of socially-inept, technology-literate news-mongers".
Perhaps it was an individual that made the mistake, but if it were a business then there should a fairly obvious set of safeguards. For example, the guy watching the stocks is OKed for trades in the "k" range, but if he tries to make a trade in the "m" range then a middle manager has to sign off on it. For trades in the "b" range I'd imagine the CEO would kinda want to be privy to that decision. Basically, the idea being that for unusually large transactions, get confirmation from someone who isn't doing the exact same thing.
Besides preventing errors like this one, such a system should be present just because it's good management. Also, how much damage do you want to enable one guy to do? He could become disgruntled, or have a brief psychotic episode or something and ruin a company without oversight! (That said, I'm posting this on Slashdot where many an IT folk could probably send their company to the stone age for a month and kill it that way...)
When I said "Accenture went down to 1 cent from about 40," I assumed everybody would understand that the "40" referred to 40 dollars. Likewise for the others.
Are you adequate?
If you buy a stock now at $X a share, in 10-15 years it will be obvious whether $X was a good price to pay for that stock. Because by then it will be obvious whether it was a good buy, so its price will be an accurate reflection of whether it did well over those 10-15 years. More on this below.
There are a few reasons why the stock of profitable companies is still valuable in our market even if they pay no dividend:
Here's another way to look at it: the value of a company is made of two parts:
So, the argument that the stock market is moderately efficient over the long term, in these terms, would be that a profitable company will see its book value increase significantly over the long term, as the once only-potential profits become actual over the years. So while the stock price will always be uncertain, the lower bound on the reasonable prices will go up over the years.
The major lesson here should be that stocks are really best as long-term investments, and diversify your portfolio very widely (e.g. by using a total market index fund). If the economy actually grows over the term that you invest, you will almost certainly profit from a widely diversified stock investment.
Are you adequate?
Unbelievable there are no safeguards to protect against this.
Just listening to the story about this earlier, the safeguard worked, just not in the way we would expect it to. Things got really bad really fast for a minute there because there are safeguards in the computer systems that say "If stock X drops to price Y then sell." So P&G fell below that point and the computers compounded the problem by auto-selling the stock. Safeguards were in place, but who will safeguard the safeguards??
Subject says it all.
Maybe someone hacked into a trading system or two and said "pay me $x million into swiss bank account xyz or your portfolio value will drop."
Or maybe the Chinese did it via remote control.
Yeah, I'm wearing a tin foil hat now.
Given that most of the "sell now" were automatically triggered, it just looks like someone massively shorted an index.
Or there is a spill-over somewhere, with one automated system detecting severe drop in dow component, and executing a rule that says "when physical stuff goes to hell, dump all virtual/electronics". So you automatically have a sell-off in Google, which triggers Microsoft, Apple, Adobe (or something similar, with other rules saying "if one index component goes down more than 5%, take action against index")
Hyperom.com
There's real PANIC now! It's not some fat guy's finger! LOL, the media make so much shit up nowadays.
"A Fat Finger", how about the media is a "Big Turd", I swear you can't make this shit up anymore. Better to stay in Vegas if you want to gamble, instead of the stock market.
Clippy: "It looks like you are trying to sell a million shares. Would you like me to make that a billion for you? Hit Enter to confirm."
I know a lot of Slashdot might feel that genius = morally superior
Not morally superior, just evolutionarilly superior. We outthink the masses and keep ourselves at the top of the food chain. Like predators, there may be few of us compared to everyone else, but we're damn good at preying upon those who forage in our hunting range.
And we eat very, very well.
> Unbelievable there are no safeguards to protect against this.
There ARE safeguards to protect against this at the exchange level, and they did their job, which is why P&G dropped to $40 from $60 and not to zero. Safeguards to protect against this at the brokerage level are left to the independent brokers, and have to be weighed against the cost of extra time to complete trades - and at the end of the day only the original trader is likely to take a significant loss. Other triggered sell orders would have been extremely limited by the tripped circuit breakers from the original trade - P&G only ended up losing $1.41 over the day, and after-hours trading pushed the friday open price to only 57 cents less than the wednesday close. By the middle of next week this situation will have corrected itself completely.
2. Make a "mistake"
3. Lose your bonus
4. Close all the short positions
5. PROFIT!
Forget "Clippy", popups and CAPTCHAs. COBOL would have forced the trader to type out "BILLION" or "BILLIONS" instead of "MIL...".
Skip that, never mind, I'm an imbecile.
This link is to a quick-time file of audio from the S&P trading pits. The "fat finger" hypothesis is a product of the american propaganda machine. The market REALLY dove yesterday.
Seven puppies were harmed during the making of this post.
Maybe someone read too much Tom Clancy?
http://en.wikipedia.org/wiki/Debt_of_Honor
(...) An immediate retaliation is forestalled by the second element of the Japanese plan: an economic attack. Even as the military mission begins, the Japanese cabal engineers the collapse of the American stock market by exploiting flaws in the program trading systems at major brokerages, and then deletes all trade records.
I used to work for Salomon Brothers (Wall Street firm, bought by Smith Barney in the 90's). When I started, part of the orientation spiel was a story the CTO told about a young trader that mistakenly keyed in " of shares" to buy/sell instead of doing what he was told, which was to buy/sell " of DOLLARS WORTH of shares". The story goes that since a trader's word is his bond, he was beholden to make the trade, which he did, and it swung the market wildly that day.
He knew he was fired, so when he was called in to his superior's office, he was willing to suffer the consequences. After a royal ass chewing, he said he'd be out forthwith; the superior countered with, "Son, we just paid a hell of a lot of money for your experience; we're not going to throw that away too. Get back to work."
I'm sure this was apocryphal, but I also suspect this sort of thing happens quite a lot, and this was the perfect storm of an uneasy market, a 3 orders of magnitude mistake, on a component of an extremely leveraged indicator.
Before you design for reuse, make sure to design it for use.
A professional Stock Broker, with more years of experience in selling stocks than I've been alive accidentally "Shorts" the DOW 1000 points; riiiiiiiiiiiiiiiiiiiiiiight.
I dunno about you, but we had a guy who tried to plan an SUV with a bomb in times square, what if they have a small group in wallstreet trying to pull something like that off with the stocks and yesterday was a dry run to see what would trigger what etc etc? One could almost see a few 500pt drops strategically placed over a few days throttling it..
I have a fat cat, you should see what she does to my keyboard when I am at work all day! Getting a single B for an M would be the least of my worries.
Gold is a soft metal. It can neither be eaten or drunk. It is poor for constructing shelters. In and of itself, it provides no net increase in production of useful goods. In essence, gold is only as valuable as people think it is. You might be better off buying diamonds, since at least they can be made into useful tools. Regardless such an investment is not likely to increase in effective value without soft external factors.
Real investments should have some use or purpose that can directly be used to increase wealth. A good example of this is land. Until interstellar travel picks up some, it really is a limited resource. It can be used directly to create food. Water can also be harvested. Shelter can be constructed. If you have more than you need, you can rent it out to others in exchange for something else.
Other less direct example are goods that directly improve productivity such as plows, tractors, fertilizers, power plants, etc. If such items are too expensive for an individual, groups can collectively fund these investments and share the benefits.
The idea of stocks are to collectively fund such investments. The problem is that investments are sometimes difficult to liquidate. That's where stocks come in. The problem is that people are treating stocks as the investment "with buy low and sell high" instead of simply as a tool to liquidate shared investments. The primary gain from investment should (and theoretically must) come from the improved productivity of the investment and increased value of infrastructure. Unfortunately, this effect appears to be lost in the noise of the stock market, only being visible in the long term.
Perhaps there are better charts available, but from what I see, the cliff-drop in P&G preceded the big action in the USD vs Yen by a good couple hours.
Why on Earth would someone write a stock trading program that used words en lieu of numbers. I could see if he typed in 1000000 shares, and it autofilled to a billion. That would make sense. I seriously doubt the mistake of B vs M. IMHO, the most likely reason is some institution wanted to liquidate their index shares (for the conspiracy theorists out there: because he know unemployment was going to 9.9% instead of staying at 9.7% or dropping to 9.6% ~:-). This caused a big dip. Then stop limit orders started tripping. This would cause a crash, until the humans had time to figure out what was happening and started acting accordingly. This scenario is much more plausible. Now excuse m, as I have to go out and buy a tin foil hat.
I would tend to agree more with the article linked below. Human traders have little or no input into trades nowadays, the big money is in high frequency trading on the margins, when this programs go wrong the impact is quite massive. http://www.ritholtz.com/blog/2010/05/high-speed-trading-glitch/
Well, at least in my bank traders actually WERE typing T for thousand. I don't think we had an alias for K at all.
And if that Alert causes a 1 second delay in a legitimate trade being accepted that costs the company who would have made the trade any money at all, that rule will be gone before you can say "Be careful".
I remember seeing a show on the local news a few weeks back that talked about how financial companies were paying large amounts of money for office space as close to the trading houses as they could get. Why? Network latency . Yes, a delay of a few hundred nanoseconds (the time for light to travel a few hundred feet) was significant for their business. And you want to force them to click on a dialog button to approve that trade? The consequences/fines for not doing so would have to be dire indeed (putting the individual trades in stocks or taking away executive bonuses) to force the companies to implement such a system.
This is unbelievable? Really? How would you make the computer smart enough to this prevent this?
Trader: Sell 200b shares
Computer: 200b really?
Trader: y
Computer: Are you really, really sure?
Trader: y
Computer: Really?
Trader: y
Computer: Selling 200b shares
Trader: (beat) Wait 200 billion?!? Shit!
There has not been a computer yet invented that can get a human to double-check their work.