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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.
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.
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.