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.'"

Comments

Feedback systems don't work that way...

[mangu]

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

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.