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House Calls For Hearing On Stock Market "Glitch"
Lucas123 writes "The House Financial Services securities subcommittee plans to hold a hearing next Tuesday to examine what caused the US stock market to plunge almost 1,000 points in a half hour Thursday, and it called on the SEC to investigate possible problems with computer algorithms that may have exacerbated a human order-entry error and led to the precipitous drop. 'Reports have surfaced that much of this movement was potentially as a result of a computer glitch,' Committee Chairman Kanjorski said. 'We cannot allow a technological error to spook the markets and cause panic. This is unacceptable. In this day and age and with the use of such complex technology, we should be able to make sure that our financial markets are effectively monitored and investors are protected.'"
I mean.. they *have* the logs, i hope. I mean they *have* some software anyway which does data-mining to analyze for unusual things....
It doesn't take a subcommittee hearing to figure out that people are finicky and the system is remarkably fragile.
"This is unacceptable. In this day and age and with the use of such complex technology, we should be able to make sure that our financial markets are effectively monitored and investors are protected." ... because protectig investors is more important than protecting the economy.
Who decides that? And what happens to a smart invester that buys stock at $0.01 that usually trades at $40, to quickly later sell it at $30? Will the $0.01 buys be cancelled, but the $30 sells not be cancelled? But that would leave you with a short position, having to buy them back at $40. May be very expensive.
Games have rules, strategies, inspectors, and punishment too. Nobody wants to admit it, but these markets are full of shams at all levels -- "legislation and regulation" is just enough to keep the whole game from collapsing, not to make it honest. These "glitches", "crashes", and "abuses" provide occasional glimpses of a not-so-welcome, much deeper iceberg reality. End naive belief, and see overall it's unsustainable long-term, as more profit and waste comes out, and less rational, productive labor goes in. It's not work, economy, and productivity for years, just money gaming. Play according to greed and ability. Enron, Arthur Anderson, Madoff, "subprime" investors, etc were caught in their bluff, but many, many others continue just fine, thank you. But don't let the masses discover it has no foundation, or they will pull out what holds it up - their belief it it, which deposits follow. But marketing works wonders, and the show goes on. Until the structure collapses under it's own weight, or there is no money in the world left to keep pumping in. In the 'cold war' there were two sides, not really so different. One fell under it's own weight of lies. The other stands, so far. With no "social superstructure", there will still be human beings, and their minds and abilities, good or not.
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Oddly enough, in this case the Politician would be on the right side. Wall street firms make most of their money by swindling. Excessive fees, buying/selling with knowledge of the future price, trading off market and sweet heart deals are rampant. It is oddly ironic that you still get the same idiots that decry anti-trust actions as being jealous of success when the success itself is based upon gaming the system in ways that aren't available to the general public and are indeed grossly anti-competitive.
It's something for the politicians to do to continue painting a big red X on Wall Street so they can take it over and control it themselves. I'm beginning to think Congress' job is to take over things and run them in a constant state of deficient funds.
Every time I start to have faith in humanity, I ruin it by driving to work between 7 and 8 am.
Precisely. If you can't take the heat, stay out of the kitchen. Lots of OTHER people had automatic buy orders kick in when the stocks dropped, and they _made_ money on the deal. Would you be crying for them if the drop turned out to be long-term instead of ephemeral? Volatility is one of the risks of being in the stock market. You bet that any severe drop would be long-term, and you lost. They bet it would be ephemeral, and they won. I bet neither way (I have stock which dropped and recovered on Thursday, but no automatic orders) and came out roughly even.
If you want to be invested in equity but want someone else to manage the day-to-day risk, there are plenty of companies which will do that for you. You will of course have to accept a lower expected rate of return in exchange for the reduced risk.
First of all, stop losses are not a "strategy", they are a tactic. My strategy is to invest in solid, widely traded, predominantly blue chip companies or in broad indices via ETFs. None of these types of investments should gyrate 10% in value in a matter of minutes because that means hundreds of billions or even trillions of dollars are vanishing and/or appearing. Of course, sometimes oil wells explode and big companies can take an instantaneous hit in their market cap (stop losses salvaged a year's gains on my BP stock just one week ago). Those types of events are fortunately rare, affect one or a small group of companies and are what stop losses are mostly for. Thursday was more like a magician's trick. One minute the trillion dollars is in his left hand. Then a blink later it's in his right. I suppose it doesn't matter to you that the "left hand" was largely small investors like me and the "right hand" was hedge funds, high frequency programmed traders and banks, but to me something smells rotten.
How exactly does micro-penny programmed trading accomplish this? Positions are bought and sold in microseconds skimming micropennies on each share transacted. The computer with the fastest network access wins. This, you assert, is efficient allocation of capital? This is good because it transfers capital from "panicky emotional investors" to people who will better allocate it? What is the real economic benefit of this activity, because one undeniable side affect of it is to distort and destabilize the market.
I very rarely find myself in favor of increased regulation, but in this case I think the rules do indeed need to be changed. If the majority of people lose faith in the market capital allocation will be severely and negatively impacted.
The more you regulate a company, the worse its products become.
You've apparently never written a trading system. Any such mechanism that is sufficiently stringent to catch the majority of such errors is by definition going to generate a number false positives--legitimately oversized trades that do need to be executed. Pretty soon the traders start clicking "allow" by reflex, and then the check becomes useless. Humans being visual creatures, the one mechanism I've seen work is to show the trader a graph of the stock price with the estimated market impact of the trade they're about to execute. When the image of that squiggly line suddenly going up or down 50% or more hits the trader's brain, it causes a reflexive "uh-oh" that makes them question what they're about to do.