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New "Circuit Breaker" Imposed To Stop Market Crash
Lucas123 writes "The SEC and national securities exchanges announced a new rule that would help curb market volatility and help to prevent 'flash crashes' like the one that took place on May 6, when the Dow dropped almost 1,000 points in a half hour. That crash was blamed in part on automated trading systems, which process buy and sell orders in milliseconds. The new rule would pause trading on individual stocks that fluctuate up or down 10% in a five-minute period. 'I believe that circuit breakers for individual securities across the exchanges would help to limit significant volatility,' the SEC's chairman said. 'They would also increase market transparency, bolster investor protection, and bring uniformity to decisions regarding trading halts in individual securities.'"
This is what happens when people who aren't competent in a field start dictating the activities in it.
How many legislators are Series 7 licensed? Series 66? 63? 6? Do any of these buffoons know how the market works? No floor also means no ceiling, there is no cap to how much an investor can make/lose.
This sounds like a band-aid solution to a bigger problem. Millisecond trading is exploiting the system; it just sucks profit out of tiny variations in the market. Why is it allowed?
Exactly because "Millisecond trading is exploiting the system; it just sucks profit out of tiny variations in the market."
Oh, you mean why do the American People allow the stock market to exist without taxing the hell out of speculators? I blame a national battered wife syndrome.
More and more the markets seem decoupled from reality. Why is it so hyper-urgent for a trade to complete in milliseconds, even if it means selling at rock-bottom price? Isn't that just really dumb programming?
Imposing a global circuit breaker seems like one way of fixing it... but why is the trading so frenetic in the first place? Why this absolute pressure to trade nownowNOW?
These are real companies people are betting on. Companies have lives in the years to decades, and at best their profits are measured in quarters - and even that's far too short-term thinking compared to human society, the biosphere and the ecological damage our industrial activities are doing.
There just isn't any meaningful data that can be generated about the activities of corporations on the millisecond scale. Not really any on less than a yearly scale, if you think about it. The biggest news right now is the Deepwater Horizon oil spill, and what's the timeline for fixing that? Weeks to months.
What does society actually gain from ultra-fast gambling on the markets? Other than a cheap thrill and massively increased risk?
You are not a brain: http://books.google.com/books?id=2oV61CeDx-YC
Millisecond trading is exploiting the system
I don't think that word means what you think it means.
It just sucks profit out of tiny variations in the market.
How does one go about "sucking profits"? What does that even mean? If you're going to advocate telling people how, with whom, and when they are allowed to buy or sell items with other willing individuals, you should at least have the common courtesy to clearly explain why such voluntary trades should not be permitted to occur.
Problem solved!
I do not have that kind of access to get rich off of other investors. The big boys should not be any different.
I am sick and tired of these guys playing with my own money as well as, pensioners, my grandmas, and my employers money. A single mistake effects me and everyone reading this while the traders get bonuses. Where do you think your money goes when you deposit it? It does not sit in the bank or go to loans to help small businesses anymore. It goes to risky trading where you lose and the CEO of your bank gets rich if they gamble it right.
http://saveie6.com/
I do not know if sarcasm is intended or not.
If you are serious I would say its not capitalism as you and I do not have access to these systems with impossible barriers of entry. Fixed oligopolies and monopolists like Goldman Sachs have access to placing the super computers right under the trading floor at Wallstreet. Therefore its no different than communism where only 1 player exists to set supply and demand.
http://saveie6.com/
The guy who needs protection is the poor sap who wanted to cash out his account at that point in time, who submitted a market order expecting to get $60,000 and having it execute and come back with $2700 for him. Should have used a limit order... but still, this just isn't "fair" and not likely to encourage people to invest in the market. So, that trade gets busted, he gets his stock back and gets to try again. Still, the market doesn't like busted trades either, so we need new rules designed to decrease the likelihood this will happen again.
Awhile back I read a book on big boom/busts in history, such at the Dutch tulip fiasco.
The author's opinion was that some market bubbles had positive effects. One of the examples he cites was the rise of railroads in (IIRC) 19th century England. For awhile, it seems like everyone wanted to put money into making railroad lines. So a ton of lines were created, the market went bust, the individual lines went broke, and the few remaining players were able to snatch up the lines they needed from the bankrupt investors.
In the short term, the bust was harmful, in the long term, the author stated that it helped create the modern railroad industry in England.
Don't know if I agree with it, but it was an interesting idea.
Boom/busts may be the equivalent of the precambrian explosion. Lots of interesting ideas are tried out, and only the fittest survive.
How does one go about "sucking profits"? What does that even mean? If you're going to advocate telling people how, with whom, and when they are allowed to buy or sell items with other willing individuals, you should at least have the common courtesy to clearly explain why such voluntary trades should not be permitted to occur.
I'm pretty libertarian, but I agree these should be stopped. As the other poster said, it gives real estate closer to the market servers an advantage, I'm not quite clear how it works, but it is evident that it does because people are doing it. I assume they can recognize short term patterns and jump in ahead of anyone else who might try to take advantage of them.
Trading is something where we want to have as level a playing field as possible. It's also something specifically designed to serve humans. The speed of your computer and connection shouldn't give you an advantage. It keeps our market freer.
That's highly debatable. The causal link is tenuous at best. Indeed, JP Morgan Chase was the strongest banks throughout the crisis, and JP Morgan Chase would not have existed in its present form without Gramm-Leach-Bliley. From that perspective, it's quite possible that the financial crisis would have been *worse* without Gramm-Leach-Bliley,
There is a much stronger case that regulation caused the financial crisis. Fannie Mae and Freddie Mac played a huge role in the financial crisis. There were even calls to rein them in at the height of the bubble. There are videos on youtube of Barney Frank dressing down the regulator screaming that there is nothing wrong with Fannie Mae and Freddie Mac.
Of course, we found out the truth a few years later.
There is plenty of blame to go around. Trying to cast the sole blame on the lack of regulation is naive at best. At worst it is downright wrong and quite possibly dangerous.
The problem with regulation is that it is always trying to prevent the previous crisis and not the next one. There will be another financial crisis. It will look nothing like this one. Any regulation we pass now will almost assuredly do nothing to prevent it. So do we really need to regulate to prevent the exact same crisis from happening again? Even without regulation, there is a strong argument that it won't happen again simply because market actors know better this time.
Don't believe me? Not too long ago there was another financial crisis that resulted in greater regulation. The MCI-Worldcom and Enron Scandals. As a result, Congress passed Sarbanes-Oxley, which contained strong regulation in order to prevent MCI-Worldcom and Enron from happening again. Did Sarbanes-Oxley do anything to prevent the housing bubble and its subsequent collapse? Of course not. But it did result in billions of dollars being spent on compliance with new and complex requirements.
On a side note, I often laugh when liberals talk about all the deregulation we've had. It's true, we've had a lot of deregulation. But to talk about that and ignore the many new regulations we've had, such as Sarbanes Oxley, is disingenuous, at best.
Actually, the term is "arbitrage" (http://en.wikipedia.org/wiki/Arbitrage) and it really is "sucking profits". It is exploiting (yes, I mean that) small variations and inefficiencies in market representations. These points are being closed, but they still exist.
More than just recognize - the biggest players can manufacture short term patterns because they control large segments of the market. Oddly enough most of them seem to be located in that prime real estate mentioned earlier...
He shouldn't be investing in the market then. Limit orders are not that complicated. If you don't specify a limit, then you are essentially declaring a 'fire sale,' and you shouldn't be surprised if you don't get the price you expect.
Furthermore, one of the most important rules of investing is "Buy in over time." This means that you shouldn't buy or sell your entire position in one stock in a single trade. If you violate this rule, sooner or later you are going to get screwed. This rule is second only to Rule #1: Diversify.
The only way anyone got screwed by this is if they violated Rule #1 of investing, violated Rule #2 of investing (BUY IN OVER TIME), and then failed to use a limit order. That's three mistakes. If you make three mistakes, you shouldn't be surprised when you lose money. This is a trading market, not a 'free money for everyone!' market.
I'll also add that all trades that were over 60% away from the trading price were nullified... meaning your example could not have even happened.
Just tax the fuck out of those speculative scumbags, that should reduce "volatility" a lot.
THIS! A million times THIS! Why do you have to write something so sensible when you know it'll never be done? Are you trying to depress us to death =p
Of course it's gambling, plain and simple. Even worse, because these SOBs don't even have the decency of common gamblers to use their own money for the purpose. The whole profession is based upon extracting stuff out of that little space under your fingernails and calling it gold.
The worst part of it is that these hucksters can (and do) cause real harm to productive brick and mortar businesses for no earthly reason (but the whim of the big trader).
If you want to gamble, thats your business.
If you invest too much money in stocks, you don't diversify, and you loose your life savings on the stock market ... thats YOUR problem.
I have a really REALLY simple solution ... don't invest in the stock market if you can't deal with the consequences.
The stock market has no basis in reality. They like to pretend it does, but it doesn't. There are all sorts of excuses and 'reasons' why it does, but it has no more basis in reality than paper currency.
And yes, I think paper currency is retarded as well. When you're trading something that can be easily manufactured you are going to loose unless you're the guy who makes it.
Persistent Volume manager for Kubernetes - https://github.com/dwimsey/openshift-pvmanager
Explain to me just what a multi-billion company could do in under a second that would fundamentally change the value of their stock?
You are begging the question. It isn't what a single company could do in under a second, it is what external events might occur to change the perception of a company's prospects. Given the hundreds of millions of events that occur every second it is no stretch to believe a handful of them are relevant to a single company, even if only minutely so.
Sure you become more vulnerable to cascade effects, but you also get plenty of benefits like significantly increased liquidity.
When information is power, privacy is freedom.
When you trade short stocks you rarely care about the company you're investing in.
I couldn't care less about what "John Wilson & Co." do, i just know that they fit a pattern that i invest in, once that pattern appears and the market tells me its time to get out, i get out.
So you can see how the actions that companies take have little effect on how their stock fluctuates.
According to my link above he was financed by the big banks. Therefore he will fight for their interests and not ours. Why else would they lobby?
http://saveie6.com/
">>>Trades faster than a day should be simply outlawed
You just bought Ford stock an hour ago, and now you just learned that the company is declaring bankruptcy effective 5 o'clock today. Do you really want to be forced to keep that stock until 23 hours from now (when it will be worthless)?"
Didn't you read? On his account, there's no problem. You will need to wait for 23 hours... but everybody else will have to too!
Your stocks will be worthless (than any other's) in 23 hours if and only if those said others are allowed to sell sooner than you and *specially* sooner than the buyer's knowledge about the bankrupcy. If everybody *have* to wait for a sane amount of time, the same for everybody, you are just leveraging the field allowing for more competitors and better reasoned actions.
Now, what do you prefer? To compete with big traders on an equal foot or compete with your morning newspaper against their supercomputers under the trade ring?
"I agree with your idea of 1 second intervals, but not 24 hours. A lot can change during that time."
It is not what can change between intervals but how much time is allowed for you to digest it.
>>>Obama looks pretty powerless at this point too to do anything about it.
He could have ended the war and saved ~100 billion per year. He could have pushed through legislation to raise SS and Medicare minimum age from 68 to 78 (gradually over time), and then fixed it to the Life Expectancy. It's supposed to be a last-resort safety net, not an entitlement. ----- He also could have converted these programs to "needs based" systems where only people with life incomes below 10 million would be eligible to receive the checks (rich people can take care of themselves). These simple changes would have saved between 1 and 2 trillion per year.
If I were president I'd also direct my cabinet to lay-off half the staff in their respective areas of influence. Yeah it sucks, but we have a ~13 trillion dollar debt, the economy is shit, and now's the time to make the tough choices. Besides in my experience with government work, half the staff just surfs the net all day anyway. That's what I did when I worked for the FAA (and then eventually left because it was boring). Lay them off.
FOX NEWS.com should be BANNED from television and internet. Have the Congress take it over and give us Truespeak.
Buyer X wants to buy 10,000 shares of a stock at $20.10 per share. Seller Y is trying to sell, will accept $20 and has been waiting for an offer for half a second. Flash trader GS's supercomputer located at the market floor sees the offer and ask and sells 10,000 shares to X at $20.10, then buys Y's shares at $20, quickly pocketing $1000. Y never gets to see X's bid. X never gets the see Y's asking price. That $1000 came out of X and Y's pocket.
All that has happened is that money was sucked out of the market and into GS's pockets. Now multiply it by every freaking trade. There is no benefit to the market, or to anyone else. Markets work on knowledge and are only efficient if everyone has knowledge. Flash trading is using information before it can be generally made known. That alone makes it a force that doesn't belong in any market.
Support SETI@home
You can't fix greed with a software patch.
Sure you become more vulnerable to cascade effects, but you also get plenty of benefits like significantly increased liquidity.
Explain how stock trading liquidity is a benefit in and of itself - to human society and the Earth's biosphere - rather than as a benefit only to those wanting to extract wealth from the markets due to volatility.
Remember that extracting wealth from the markets and transferring it from one account to another is not the same thing as 'profit', because it reduces the wealth available to actual productive investment - the corporate processes which do not and cannot change any faster than the time it takes to gear-up a factory or harvest a crop.
Remember also that every trade on the market which is not directly linked to the true value of a stock actively destroys information because it introduces noise into the market, polluting the use of that stock's trading symbol as a measure of real wealth (rather than imaginary fantasy wealth).
Explain clearly how, despite the information-destroying nature of speculation, nevertheless 'providing liquidity' to enable this destruction of information is still a significant human benefit.
Show all your work.
You are not a brain: http://books.google.com/books?id=2oV61CeDx-YC
How does one go about "sucking profits"? What does that even mean? If you're going to advocate telling people how, with whom, and when they are allowed to buy or sell items with other willing individuals, you should at least have the common courtesy to clearly explain why such voluntary trades should not be permitted to occur.
I'm pretty libertarian, but I agree these should be stopped.
Me too (on both accounts)
As the other poster said, it gives real estate closer to the market servers an advantage, I'm not quite clear how it works, but it is evident that it does because people are doing it. I assume they can recognize short term patterns and jump in ahead of anyone else who might try to take advantage of them.
Trading is something where we want to have as level a playing field as possible. It's also something specifically designed to serve humans. The speed of your computer and connection shouldn't give you an advantage. It keeps our market freer.
This discussion is more accurate than most of you probably realize... I work for a router equipment vendor. Guess what the main market for ultra-low latency routers is? That's right - they have realized on Wall street that a router with lower latency means a higher chance of getting your trade in before your competitors. If your router has a latency of 500 nsec while your competitors all have 600 nsec routers, you have the advantage. At least until someone ponies up and buys one that is lower than yours.
Successful trades shouldn't have to be measured in nanoseconds.
Marc
-- PGP keyID: 0x4C95994D
Explain how stock trading liquidity is a benefit in and of itself -
Because the alternative is market makers who really rape anyone trying to buy or sell a stock that does not have good liquidity.
Those thieves are the ones who massively "extract wealth from the markets." Good riddance to those bastards.
When information is power, privacy is freedom.
What the original poster means is that the brokers are, against fiduciary duty, siphoning money from their customers. Consider the following, very rough, case:
I'm Mr. Megabroker. A new multibillion dollar marketing campaign hits, and suddenly I have a ton of BUY orders for SLUSHO stock. I hold those orders for a split second and buy up SLUSHO, knowing that the ton of orders I hold will drive up the price. Once I secure my stocks, I submit my ton of buy orders after my own.
Suddenly, I'm sitting on a bunch of SLUSHO stock that's had a guaranteed jump in price. If I had executed my customer's orders immediately, that increase in price would have been theirs, not mine.
Baby Cloverfield hits Manhattan, and suddenly SLUSHO is radioactive waste. I get a ton of SELL orders. I dump my SLUSHO holdings before the ton of SELL orders hit, having perfect knowledge this is about to occur because I'm the one who's about to do it. I sell my SLUSHO when prices are still high. My customers bleed out.
I've made money coming and going for no other reason than I hold the orders in my pocket and therefore have perfect knowledge of the future. The money I make is not reflective of any real productivity, but is instead theft I can get away with by ignoring my fiduciary duties for a brief while.
He put his boots up on the table and made a face. "The sig," he smirked. "You can waste your life in search of the sig."
So you propose a permanent end to day trading. Okay, but keep in mind that day trading isn't just some speculating little wonk sitting in his apartment all day poring over charts and trends. Many major financial companies have automated and manual day trading operations. And if you piss them off, all you're going to do is drive them into building some kind of new over-the-counter network that's loose enough to avoid the most onerous exchange restrictions.
Short-term volatility doesn't affect long-term investors much, yet they're always the ones complaining the loudest about it. Day traders aren't taking money from long-term investors, they're taking money from other (less skilled) day traders. The only people who should be pissed off about market volatility are the day traders because it makes their job so much riskier. (Although potentially more profitable as well.) A smart mid- to long-term investor with investments in solid companies sees a market crash and says, "Cool! A Sale!" right before calling his broker and ordering as much as he can afford.
But they're not decisions, it's just luck. Whoever happens to hear that a meltdown is happening screws over someone who's taking a nap.
The point of the stock market is to invest in the success of a company, not to compete with other investors. If the company flops, all of its investors should lose. It shouldn't be about which investor gets to their laptop first to dump the stock on some poor unwitting buyer.
Do you realize how wide the swings would be in your once-a-day scenario?
What you are trying to do is add punctuation to the system. Please explain why punctuation is good, and then explain why a 24 hour punctuation is better than 1 hour, or 1 minute.
The traders skimming the sub-second trading are angling for very small margins... fractions of a percentage point. So if you sell your $100 worth of AT&T, and these guys might be taking a few pennies of it.. and I say might because if they werent doing what they are doing, you have no idea what the price would be. The price would certainly be more volatile, because instead of Mr Sub-Second jumping in when the price moves a penny, its Mr Sub-Week jumping in when the price moves a dollar. Either way, you are selling to people jumping in. These middle-men are buffers that make the system work.
"His name was James Damore."
Hi,
Normally I would be content to sit by the sidelines but I'm jumping in just to clarify, there is a lot of misinformation swirling around this discussion, a lot of conjecture by smart people who really have little to no experience in high frequency trading which is rapidly becoming the new wall street boogeyman. HFT dramatically improves liquidity and price discovery. It has helped lead the way to more efficient markets, and for the most part helps stocks and various other instruments reach their "true" value faster than ever before.
There are a lot of whiners out there complaining about how HFT is somehow "not fair", while they continue to get taken to the cleaners by their brokers, the banks, and hundreds of other middle men. Why do you think the spreads are so tight on a lot of these markets? HFT. Believe me, the institutional brokers would like nothing better than to make very wide markets and charge you for the privilege. The vast majority of investors who are taking long term positions in the markets are not effected by intraday moves. If you got burned because you were trying to make a profit intraday then you got what was coming to you, because not only are you not as fast as most of the firms out there, but also not as smart. (sorry) Frankly if NYSE's attempt to "restore order" wasn't so entirely broken the price discrepency would have been even shorter lived. However, because of the steps their market took to restore order most savvy shops immediately routed around them in order to complete and start new transactions (as they should). Attempts to regulate the markets in this way will not work as expected, because they are introducing arbitrary rules which will largely be ignored by the really big players (dark pools anyone?). So far there has been no indication that the recent price drop was the result of an HFT strategy gone awry, but rather a temporary blip made worse because of an outdated mode of operation. I think an interesting experiment would be if all of the HFT shops pulled their liquidity (this would never happen), the results would be fairly disastrous for short term investors, unless you like getting worse prices.
Anyway, I don't want to rant any more. It is unfortunate that people aren't really looking at this from all angles. Competition is a good thing for everyone. It applies to Microsoft and Linux, but not the markets right? ...
collect all of those fractions of a cent where the numbers are rounded into other currencies.
What you're joking about already exists in the form of Forex trading..
What exactly is the "true value of the stock"? If your answer has anything to do with the future (future revenue, future earnings, etc.), please explain how you're able to know the "true value" of anything which has yet to happen.
This is an excellent point. No healthy public companies are trading wholly on their intrinsic value.
The intrinsic value (this is hardly the proper GAAP term, so I'm defining it briefly here) would be taking all of XYZ Company's assets and receivables and summing them. Then dividing amongst the "float" (number of shares issued).
So if XYZ has $1M in the bank, and is owed $500k (and we assume it's all collectable debt), then their value would be $1.5M. If they have one million shares issued, those shares are worth $1.50?
That's hardly how it works.
Why? The shares don't disappear into thin air at the end of their fiscal year. They'll make more money next year, and the year after that. But they might go bankrupt, or become obsolete in the market. We can't know these things with certainty, so we price the stocks accordingly ("risk"). But wait, what if they sign a big deal and suddenly their receivables go way up for this year? Well that's called speculation.
So now you have the way modern fixed equities (stocks in companies) are priced on our markets. Actual monetary value if the company was sold, plus or minus speculation/risk on perceived future monetary value. Oh, plus dividends, but those aren't nearly as important as they used to be.
TL;DR- It's not simple like you want it to be, and it shouldn't be. Speculation drives access to capital.
Further up somebody gave an example of an event occurring which bankrupts a company, and everyone appears to have latched onto this as being a description of the typical scenario.
Much more likely is some news that damages a company. If you think the market has overreacted it would make sense to invest in the company and wait for the bounce.
Confucius say, "Find worm in apple - bad. Find half a worm - worse."
In 24 hours everybody's Bankrupt Ford stock will be worth $0.00 (or mere pennies).
No. The stocks will be worthless immediately as soon as Ford announces the bankruptcy.
when he has advanced knowledge of Ford's bankruptcy,
The whole point of 1-day trading is to prevent people from exploiting information asymmetry, and your only excuse is that you want to continue to exploit it? It looks like you kind of didn't get the point of the grandparent at all.
Connecting buyers and sellers is what the exchange is for. In your example the buyer was raped off of 1 dolar, he should get the stock for $49, but someone stepped in front of him and masked out the real ask price.