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Flash Crash Analysis of May 6 Stock Market Plunge
Jamie found an interesting site that has many charts and graphs about the strange May 6 stock market plunge and rebound. There's a lot of information to consume over there, but it does a pretty good job of showing high-frequency trading is getting to be a real problem.
and stay there because that's about what it's worth. The only reason it's up above 10,000 is because it's being propped up with funny money. Just a year ago it was at 6800...these are the same companies. Does anyone really believe that all of the companies listed are collectively worth 1.5 times more?
High Frequency Trading is _beneficial_ to the public markets at large, and why powerful interests keep blaming and attacking electronic trading as the root of all financial evils that befall us: http://www.tradersmagazine.com/news/high-frequency-trading-benefits-105365-1.html?zkPrintable=true
Unfortunately, the majority seem to be believing Rupert Murdock's Wall Street Journal and similar mouthpieces spouting all the "Electronic Trading must be taxed/stopped/restricted, it is destabilizing markets" rhetoric.
As mentioned in above link and In case you did not hear about the New York Stock Exchange specialists charged with fraud, an event referenced in the above link - it's pretty amazing: Richard Ney wrote a best selling book in 1970 ("The Wall St Jungle", interview NY Magazine 1970) with a few follow up books that all called out the NYSE Specialist families for fraud, explaining exactly how they defraud the public. At the time The Wall Street Journal boycotted anyone selling the best seller and Ney was not permitted as a guest on The Tonight Show - very unusual at the time for someone with such a long run best seller/controversial book - his message had touched a raw nerve. In response, the establishment had Ney widely counter-attacked, labeled a conspiracy theorist nut at every opportunity - comments like "what would an actor know of the stock market" were common and can be heard even today.
To prove Ney's wild eyed grand conspiracy theory right - The Department of Justice finally got around to charging the NYSE specialists for the exact fraud that Ney described - 33 year's after he wrote about the crime! In 2003 the Specialist firms quickly got their get out of jail free cards for a tiny fraction of what they had actually defrauded over the years. The story does not end there however... news came out shortly after that the NYSE was at long last going to move to an all-electronic exchange - and that the Specialists firms charged with defrauding the public were the very same that had been blocking the move due to their 30% NYSE stake. Everyone in the know + those that read Ney's book knew all too well of the massive fraud going on in full public view for at least 33 years (more like 212+ years), but it was not until these Specialist criminals blocked other powerful interests that the illegal behavior was actually pursued by the DOJ.
If ever there was an example of the lack of credibility for the DOJ, this is it. 33+ years of massive fraud in full public view, but the DOJ did not get around to prosecuting until it was ordered to - until it was necessary to coerce the Specialist family firms into letting the NYSE go electronic. Nothing to do with justice, or protecting the innocent being defrauded to the tune of billions of dollars over the decades. As an added insult, the DOJ let the criminals off the hook with a paltry fine. But then there is no surprise there, as Richard Ney said it best: "Regrettably, the arrangements that exist to preserve the traditions and legalize the frauds of the security industry are inseparable from the general organization of a society controlled by the financial establishment, a society whose laws and principal customs have been contrived to serve the special interests of the financial community,"
Voting Red or Blue will not change this arrangement of US society and it's laws - merely reinforce it.
Old way: 10,000 trades a day, every few months or years the market dips for a few months and rebounds, every several years the market enters a deep recession for years.
Yet it doesn't have to be that way. the problem is people put money in the stock market because they want to make money, not because they give a sh*t about the companies they're investing in or their products/services. the result is everything becomes about making profit now instead of building long-term stability.
Fluctuations are one thing, but those "deep recessions" are all the result of a small group of people doing incredibly stupid things in the name of short-term profitability.
These high frequency tradings should be banned. They contribute absolutely nothing to the market, the companies or the shareholders at large. All they do is extract money at the expense of the market's overall health.
=Smidge=
The real problem is the reliance on the stock market as a measure of the economy in the first place. The stock market is a completely artificial construct that has nothing to do with anything. It would be best if people just ignored it.
Look at this recession for instance. If you look at the stock market you'd think that the recession is over. Fat lot of good that does for all the people who are still out of work. And no, unemployment is not a "lagging indicator", it's the only thing that matters.
Give me Classic Slashdot or give me death!
those with the screamiest servers the shortest fibre optic hop away from wall street get to play this game, no one else. it dedemocratizes the market. the ideal of a marketplace is that it is a meeting place of equals. if the guy with the most expensive servers and programmers money can buy is the only one who can profit though, the marketplace is now simply an oligopoly of the rich, not a place where the common investor can make his or her mark
of course, the market has never been a meeting place of equals, it has always been abused by the largest players in the marketplace. however the idea is to minimize this abuse, not excuse or accept it
what the market needs is a "tick", a "heartbeat": all trades, no matter from whom, must be made in the same 1 second or three second batch cycle. no one should be allowed to exceed this frequency. problem solved
intellectual property law is philosophically incoherent. it is your moral duty to ignore it or sabotage it
Because it's no longer investing.
It's gambling.
In gambling, the only winner is the house. In this case it's the brokerages.
I hope this helps.
--
BMO
Old way: You give your cow to a servant to take it down to the market to sell it, and there's a bunch of people there who are willing to give him a fair price. Flash crash way: You tell the servant to take your cow down to to the market and sell it, but everyone's really busy and a little skittish, and since you told him to sell it now he sells it to a bum on the street corner for a nickel, then everyone panics: "the price of cows has fallen to a nickel! woe and ruin!" until some people wise up and realize they can buy cows on the cheap, and do so.
Market orders. Go figure.
The World Wide Web is dying. Soon, we shall have only the Internet.
High frequency trading adds a lot to the market. Just not the way you think it should. I for one like the fact that there is ALWAYS someone buying or selling EVERYTHING. That makes it easier for me to buy and sell. Liquidity is not something that should be overlooked as a great thing to have.
Why is it so hard to only have politicians for a few years, then have them go away?
I mean really, what could happen in 24 hours that would honestly affect the value of a publicly traded company?
Exploding factories. 9/11. FDA investigations. FBI raids on corporate HQ. CEO arrested for fraud. CIO arrested for selling customer CC info to Russian hackers. CFO arrested for securities fraud. Announcing a new product. Announcement of a massive merger.
Lots of things can affect the value of a company over a short period of time.
If you want to change the system I am cool with that. I do not though think there is any need to outright deceive people with a stupid question like that to "prove" your point. All you do is prove that you need to not be trusted.
Why is it so hard to only have politicians for a few years, then have them go away?
From a few pages into the write-up (http://www.nanex.net/20100506/FlashCrashAnalysis_Part4-1.html):
Definition of a DDOS (from http://searchsecurity.techtarget.com/sDefinition/0,,sid14_gci557336,00.html):
Quote stuffing looks like a DDOS to me, and should automatically be illegal. Of course, there are several technical differences that any lawyer could point out,thus making quote stuffing legal, so I'd recommend outlawing it just to be sure. Not often I get to say, in all seriousness, "There ought to be a law." {Most situations do not require new laws, only the proper application of existing laws.}
I hope this comment is well received... I could have moderated instead!
Persecutors will be violated!
The bigger problem is using GDP as a measure of the economy.
Instead of putting in fixes at the exchange level, put something in at the SEC regulation level so it applies to all US exchanges. And yes that'll stabilize foreign exchanges too. Think about supply and demand and what sellers do when prices drop in market A and don't drop (or don't drop as far) in market B.
First option: bunch trades by time. Define a market tick, say 2 seconds. All trades that come in in a given tick get bundled together and executed as if they'd arrived in a random order at the end of the tick. The exchange is allowed to use any method to randomize and order the trades, the only rules are that the method can't be based directly or indirectly on the original arrival sequence or the original arrival time and the method can't give preference to any particular trader or type of trader. The bunching should have no effect on people who trade on timescales more than about 2x the tick, but makes trading on timescales less than the tick infeasible because the market simply won't execute your trade any faster than the tick.
Second option: random delays. Define a market tick, say 2 seconds. All trades, as they arrive, have a random delay between 0 and the tick length calculated (same rules as option 1) and have their execution delayed by that much. You're guaranteed to have your trade executed within 1 tick of it's arrival, but you can't know when within that 1 tick it'll actually be executed. Again the delay should have no effect on people trading on timescales larger than about 2x the tick, but trading on timescales less than the tick becomes infeasible.
That should smooth out the noise caused by high-frequency trading without seriously impacting things for anybody who's not trading on sub-second intervals. And it avoids the whole quagmire of trying to ban every different way of doing high-frequency trading and seeing the HFTs try to find loopholes and methods you haven't banned yet by simply setting a time resolution for the exchanges below which everything's just random noise.
The single port theory from zerohedge assumes a firm uses only one port; they can have more than one. If one provider fails, they have an alternate venue for trades. Quote stuffing could happen through one venue while major plays happen on another. It *could* happen that way.
Even professional math/finance PhD folks can make disastrous mistakes. Long Term Capital Management was founded with two Nobel Prize winners in Finance... didn't stop them from blowing up and needing a bailout.
Doing the Right Thing should not be preempted by making a buck.
What makes you think HFT are buying everything and selling everything. They get in only when they notice a large enough gap between buyers and sellers. Then they jump in and take advantage of that gap to make a profit. That is plain government sanctioned stealing. In fact, because the take out profits from the deal, they are actually reducing liquidity.
Either you trust them and you play their game, or you don't and you find some other way to invest your money. It would seem that generally the clientele are pretty pleased with their results.
The reason the stock market goes up is because more and more money goes into it. The reason more and more money goes into it is because governments around the world give preferential tax treatment to 'investments' in pension plans and the like, so people keep putting money in there in the hope that they'll get more back that way.
So, as usual, the root cause of the problem is the government funneling money into the markets through artificial incentives. Eventually people will start to realise it's a scam and stop throwing money away so that bankers can buy their third Porsche.
True. People find exploits in systems as trivial as video games, operating systems, etc. If you toss in the potential for large financial gain, then it's almost a given that someone will maliciously exploit a financial system.
It's a bit unnerving that no one caught the potential for this considering what's at stake (and at the same time you have people overly concerned with things as comparatively mundane as the security of operating systems). Well, someone did find the exploit, but it was found by the wrong party.
FTFA:
"Add a simple 50 millisecond quote expiration rule: a quote must remain active until it is executed or 50ms elapses. If the quote is part of the NBBO, it may be improved (higher bid or lower offer price) at any time without waiting for the expiration period. "
Um, 50ms is not a humanly realistic decision span. It takes longer than that to recognize the color of the arrow pointing in the direction your stock price is going.
HFT is the epitome of arbitrage, and competed directly with human (or flesh-and-bones) trading. They should play by common rules that are at least realistic for both. This means that quote expirations should be measured in full SECONDS, not milliseconds.
This will, of course, destroy the obvious and worst advantage HFT has, that is the millisecond response to arbitrage opportunities. But it will allow at least the dedicated human trader an opportunity to participate in a market they are now just being beaten to by a machine.
We wouldn't allow a professional baseball team to use a mechanical pitching machine instead of a real-life pitcher. Dialing the speed up to 150MPH wouldn't enhance the game, and would instead overwhelm human batters with little hope of success no matter their skills. the game is INTENDED to be played between humans, as a test of skill and determination.
Stock trading should, in my humble and entirely uneducated opinion, be a game played among relative equals. HFT is breaking this in a way that is not useful to the market, does not add value to the capital stocks being traded nor the companies and shareholders represented, and defeats even the most concerted efforts by human traders to participate on even a marginally equal footing. No amount of analysis or even reaction by a real life trader can survive head-to-head with an HFT system.
If the purpose of the Stock Market is to offer opportunities to profit from purely technical conditions, even to allow profit from malfunctions, then HFT fits right in. But if the Stock Market is intended to provide opportunity to raise capital, develop value, and gain profit for those with good decision-making skills and insight, then HFT is an 'unfair' advantage to machines at the expense of all other players.
It is also, clearly, dangerous, and can cause significant disruption as well as loss to other players, in circumstances that are not related to actual market or economic conditions. A 'simple' delay of a few milliseconds in system response can result in the feedback loop observed in this case, and that is not useful to the markets. Quote stuffing is pure fraud. In fact, much HFT activity borders on fraud, as it is intended to deceive other players. Yes, it is. Looking for the arbitrage opportunity on a millisecond scale is nothing but machines battling machines. The only realist hope is to catch one in a moment (a definitely short moment) when something is not working right, and score.
Yes, HFT programs work to catch opportunities, and generally do with no great risk to the overall market. But in my naive opinion, this is not really useful to the market, nor the national economy as a whole.
Perhaps I should be asking the other question - does the Stock Market now serve the economy in a beneficial way, or is it now the province of software and arbitrage, primarily serving those who seek to take advantage of even momentary mismatches of pricing? And should it be permitted to continue down this road to the point where it is no longer feasible for a human trader to participate in short-term trading?
My investments are in mutual funds that exercise restraint and hold stocks for longer periods. If I were buying single issues, I would be planning on holding them for years in most cases. And I would feel genuinely cheated if I happened to choose to sell a stock at the same time as the market suffered a purely technological dip, and I was faced with a 30% drop in value for no reason other than the NYSE was queueing quotes for 20ms longer than normal.
Clearly, I have a naive view of the market. I think it should serve some purpose other than it seems to now. I know.
deleting the extra space after periods so i can stay relevant, yeah.
Since nothing is actually produced - the ground starts out flat and it ends up flat - there's no difference between that and simply giving them the money for sitting on their butts. And yet, I remind you, the claim was that employment per se was what mattered. Actually what matters is useful employment.
And the increased demand will drive up prices for them - and for everyone else. Might as well have told those who were already working to give away some of the bread they buy. Where some = the difference between what they could afford before and what they can afford now.
Nothing extra has been produced, it's just redistributed.
P.S. I'm no fan of the bankers, but that's completely irrelevant to the point at hand.
Confucius say, "Find worm in apple - bad. Find half a worm - worse."
Indeed, as the 1930s humorist Will Rogers said, "A recession is when your neighbor is out of work. A depression is when you're out of work!
"Jobless recovery" is an insult to every working person everywhere.
Free Martian Whores!
I'm not so sure they're actually taking any risk, to be honest with you. I think that's really at the heart of this all.
Let's say you stuck 2002's Michael Vick (you know, when he was an NFL cheat code) into a Midget league. Technically he'd be taking a risk every time he took a snap and ran with it, but realistically the outcome would be exactly what any and every reasonable, non-insane person would predict.
Or maybe you're playing poker and all your opponents have wire hats, and you're a computer. You can read the impulses coming through those wires and through that determine what they're about to do just after they decide that's what they're going to do but before they're actually able to do it. If you're fast enough, you can slide in between the decision being made and the action being done. That's not gambling, that's fucking CHEATING!
I don't care for or know much of economics and the stock market, but I do know about exploiting loopholes in games and HFT looks to be drool-worthy when it comes to gaming the system.
I'll stop short of calling it evil and saying it must stop, but at the very, very least it's something that ought to be very fucking closely looked into. Just because it's capable of making itself money doesn't mean it's good for the market, and not everything that's good for the market is good for us (and, of course, we're not REALLY talking about "the market" but rather "the stock exchange, which we say is representative of the market", which is a DIFFERENT beast).
... still waiting for this free-as-in-beer free beer I keep hearing about.
The HFT guys build a position, thereby taking on risk.
Show me five HFT guys who have gone broke in the past year.
The operational meaning of "take on risk" is "sometimes goes broke." If you can't show me the bankruptcies, your claim of risk is just false.
Blasphemy is a human right. Blasphemophobia kills.
"Investing is gambling."
Only if you have a broad enough definition as to make the word "investing" useless.
Buying a company because you've done research and think it makes a worthwhile product (widget, service, whatever) is far different than buying/selling on "spread" and wild, factless speculation that is little more than throwing darts at the financial page tacked to a wall.
Berkshire Hathaway isn't gambling. Spinning a roulette wheel is.
To insist that buying and selling stocks is (or should be) a game of chance is a dangerous mindset.
Indeed, it's beginning to become obvious that the "game" of this "gambling house" is rigged by the High Frequency Traders. Reputable casinos make sure that games are at least consistent and the rules understood because bettors would simply leave. What we have now is potentially worse. What happens when there are *no* reliable house rules at all, like we saw with this nearly instantaneous crash? You want to see a stock market crash that makes 1929 look like a dip in the road? Remove all faith in the system like this has the potential to do.
Writing this off as "just one of those things" is myopic and dangerous. Do you really want to see what happens when most people are at a disadvantage because they are not 10 or 5 milli-light-seconds away from the trading computers? Do you really want to give the advantage to those who are physically situated close enough or do you want a level playing field for everyone?
Because that's what's happening with HFT. It's all about a game about who can take advantage of the speed of light instead of investment.
--
BMO
The idea is that the shareholders of a growing company are better off if the profit is reinvested into the company, such that the company can grow and pay a much larger dividend in the future once it has become large. Moreover, if the profit is paid out as a dividend, the shareholder has to pay taxes over this income, whereas a growth in the value of the company is often tax free (depending on the local tax regulations).
Of course, this only works if the profit is reinvested in a meaningful way. During the internet bubble, companies were more or less burning cash as a substitute for solid investments.