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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.'"
What happened on May 6th was that sell orders were present without matching buy orders for an instant, and that allowed some really wacky trades to complete... nearly every Dow and S&P 500 component was affected, and some ETFs even traded for a penny a share for that brief instant. Then when news got out that there was bargains to be had, the buy orders started showing up and things returned to a run-of-the-mill down day.
Now, the NYSE and NASDAQ have always had this circuit breaker rule that allowed them to call a "time out" where they wouldn't process orders in order to draw attention to the wacky situation and give all involved time to react. The problem is that these new "market centers" allow trades to be completed rapidly, but also without the same oversight rules. While the big exchanges had the time out in effect, orders simply routed around them and the wacky drop continued. So, now the SEC is taking the NYSE/NASDAQ rules and making them their rules, so all the new players have to observe the timeouts. That should fix this problem.
I'm so saddened by these stories about stock traders getting electrocuted. It was about time they added circuit breakers.
There's no -1 for "I don't get it."
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.
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
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.
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.
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
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.
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.
The first part of statement was wrong. Then when you said your bit about paper currency you confirmed the fact that you simply don't understand economics. Instead, you're another gold standard guy enthusiast. I'm going to explain to you why that's not a good thing.
The price of gold is set by the quantity of gold available and the demand for it, as is everything else. Since the total quantity of available gold isn't related at all to the production in any other industry, that's a really poor measure of the economic status of any one nation.
Paper currency is easily manufactured, but the guy who makes it isn't guaranteed to win anymore than everybody else is guaranteed to lose. It's called supply and demand. If you print too much of it, you have inflation, and the paper will soon be worth nothing. If you take money out of circulation, you have deflation, and the paper is worth more. Consequently, that's exactly the same situation you have with gold. If we start mining a whole lot of gold, the price of gold comes down and you can exchange it for less things. If you start producing less gold, the price goes up, and you can exchange it for more valuable things. The value of everything in relation to everything else is constantly fluctuating, and you don't make it "stable" or more "real" by having a mineral or a very difficult to manufacture thing as your currency. It's all the same. If we suddenly print ten times more money than we currently have available, assuming everything else stays the same, the cost of everything product will go up because the people with that extra money in hand will be willing to spend more, people's salaries will go up, because employees will demand more money to compensate for the increased price of goods, and now everything you could buy with a $1 bill you buy with a $10 bill. But it's ok, because your salary will have gone from $70,000 / year to $700,000 / year. It's exactly equivalent and no actual value was lost anywhere.
You can't fix greed with a software patch.
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."
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? ...