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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.'"
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.
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.
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.
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).
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.
">>>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.
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
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? ...
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.