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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.'"
It's allowed because the current theory is that anybody who wants to do it, can. I think the best argument against that is it takes real estate close to the market computers in order to have a fast enough ping time to trade by the millisecond.
My fix for that situation would be to dumb down the market clocks to only timestamp to the second, and anything received in the same second gets the same priority, with randomness as the tiebreaker when needed. That should suck the life out of these vultures.
It's allowed because the current theory is that anybody who wants to do it, can. I think the best argument against that is it takes real estate close to the market computers in order to have a fast enough ping time to trade by the millisecond.
My fix for that situation would be to dumb down the market clocks to only timestamp to the second, and anything received in the same second gets the same priority, with randomness as the tiebreaker when needed. That should suck the life out of these vultures.
A second? How about once a day!
Explain to me just what a multi-billion company could do in under a second that would fundamentally change the value of their stock?
Think about it this way: there is no way for traders to gain information on the underlying asset of a stock second-to-second. There is no public source of information that fast! No corporation gets updates internally that quickly. Most of them only roll up their accounts for reporting daily, and some only get an internal update of their financial status monthly or even slower. Even if some huge announcement was made that suddenly changes the value of a corporation, what difference does it make if people get to sell their stock a second or a day later?
The whole concept of the stock market is to create a central point for people to invest in a corporation. How is buying and selling a stock in under a second anything at all like "investing"? It's pure gambling, milking the real investors of cents on every dollar, putting it into the pockets of traders that provide zero value to society. They produce nothing except market crashes.
Trades faster than a day should be simply outlawed, and it should not be possible to own a stock for a period of less than one day either. Real investors should investigate a company's fundamental value and invest for years, not sit there all day and shuffle money around like it's a game in a casino.
Consider this: if millisecond trades are possible, and make sense, then why not microsecond trades? Nanoseconds? Why should we stop there? Lets puts the exchange and the trader's computers on the same piece of silicon, and have them buy and sell stocks at gigahertz!
I have a degree in Electronics Engineering and had to go through three courses on feedback systems and servomechanisms. What you are proposing may seem sensible, but that's not how nature works.
Feedback control systems can become unstable, but inserting delays into the feedback loop is about the *worst* thing you can do to destabilize them. If you want to stabilize a feedback system you should insert a "low pass" filter in the loop, not a delay.
A delay means that a lot of change will accumulate and suddenly be released. Putting a one day delay would mean that all the buy or sell orders would be stored hidden somewhere and then, all of a sudden, the market would become aware of that trend.
A low pass filter is, more or less, like a moving average. With a low pass filter, the market would get information on the average of the last X hours or days of transactions. That way everybody would be allowed to update instantly, to a microsecond precision if they wanted to, their estimates of the market trends, but those would not be instantaneous trends, they would be longer range.
Instead of limiting how fast market transactions can be done, it would be much better to limit the speed of the information on the system. Do not divulge *every* price for every transaction, but only the average of some period. This average can be updated every nanosecond if people want so, it will make no difference.
Um, the whole event that we are discussing happened because liquidity (buyers at a market price) disappeared for a few seconds. That sounds like liquidity might be pretty important.
To see this, consider for a second how you'd feel about your bank account, if you didn't know from day to day how much your $5000 was really worth. That is what liquidity is, and I'll bet your daily behavior suggests you value it highly.
It's not as liquid as you think!
My bank account only allows a maximum of AUD 20K electronic transfers per day, for anything else I'd have to got into a branch,
which would take me over an hour, and even then, transfers between banks are batch processed once a day, during the night. Some transfers take several days to process.
Do you see the pattern emerging here?
Why is it that everybody is perfectly happy doing their banking, the most liquid of the ordinary assets most citizens have, on a daily basis, but for some reason corporations require their investment liquidity to be on a millisecond timescale?
No business model needs that, except for the day traders that want to generate profits at the expense of ordinary investors that aren't physically housed across the street from the Exchange data centre!