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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?
I knew the Flash plugin was unreliable, but I had no idea it was so bad that it was affecting the stock market.
.. about Flash crashing, I mean ...
Not to be a conspiracy theorist, but I work with a bunch of math PhDs who specialize in stochastic processes. Two of them used to work in the financial sector before the crash. Everyone around here including me has come to the conclusion that someone planned a really big "oops" to make his friends very rich and get a few kickbacks. Sell it short, baby!
The problem with this is that since it has happened once, it *is* going to happen again in a slightly different way. Software glitches, fat fingering the keyboard, etc. are convenient excuses.
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=
...right here. One commenter had some interesting things to say about "quote stuffing":
So it might not be the big advantage that Nanex sees it as.
The Army reading list
The real problem isn't trading frequency. It's the basis for the market. Since most stocks have stopped paying significant dividends, there's very little basis for any one stock's value. The stock market today is solely based on betting whether an individual can accurately predict what the rest of the market will do in the future. Stock prices don't have anything to do, whatsoever, with the inherent financial value of the underlying company.
If I'm going to gamble, I'm going to Vegas. At least there, you get free drinks as you piss your money away.
I don't respond to AC's.
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.
The problem wasn't the NYSE. The problem was that when the NYSE decided to execute trading delays, the other markets replied "the computer sez no" and kept on trading at high speed. Because there weren't enough buyers at the time to satisfy all the selling, all the market sellers saw their prices plummet because the computers were programmed to find a buyer no matter what the price, as long as the transaction would clear.
So... what's the problem? If you picked up Accenture at a penny a share you should be fuckin' lucky. I wouldn't shiv that stock off to a homeless man for a nickel.
This is the actual analysis:
May 6
John (one of the wall street support technicians) was playin flash games on his workstation.
The stock market is stored under "market2010.swf"
He forgot to move it into the right folder N:\smarkets\closed\market2010q2.swf usually when this happens it's not so bad because
Unfortunately, the network admin did a flash game sweep and deleted *.swf as a routine cleanup
What happened was, the market2010.swf was deleted by the routine scan, so now they having to recreate all the data from memory. Stockmen are now trying to guesstimate how many shares they own.
When they say fat fingered, they aren't joking. N:\smarket has TONS of files and it takes AGES to load a 1000 files in icon view on Windows 98!
Slashdot needs Geekcode | Can anyone recommend any good SCIFI? My tastes: Foundation, Startide Rising, CITY, Ringworld,
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.
All this HFT stuff is zero-sum, if someone makes $10 on HFT, someone else loses $10.
HFT is a market parasite at this point and, IMO, ALL quotes should have a randomly induced delay between 0 and 1 second (with the delay being DIFFERENT to different participants), to eliminate the advantage of high frequency trading.
Test your net with Netalyzr
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.
You seem to have bought into the commonly repeated lie about High-Frequency Trading. It's existense is not there to "help you" via providing liquidity to the market. In fact, HFT requires a pretty high level of existing liquidity to work in the first place! If little to no people are trading a specific stock, there is little liquidity and there is no viable way to make money from it via HFT. If a given stock is being traded by institutions utilizing HFT, it means there were no liquidity issues to begin with. If there were, these institutions wouldn't have been able to make money using HFT in the first place!
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.
Wow, I know this is asking a lot, especially given the length and depth of the article, but seriously, go read it. They've clearly put a lot of effort into analyzing the situation immediately before and during the crash and that is not what the evidence says. For one thing, only a single affected stock was in 'Slow trade mode' at the beginning of the crash, and only 3 were by the time the crash was at its worst. Furthermore, the stocks in slow trade mode trailed behind the stocks that actually caused the problem.
Basically, the first thing that went wrong is that the NYSE received too many quotes too fast, faster than they could process them. So their systems put them into a queue and processed them as quickly as possible. The next step where things went wrong was that these quotes were timestamped when they left the queue, instead of when they entered. This means that the apparent price on the NYSE was lagging a little bit behind reality. Problem number three occurred when the high frequency trading systems detected this apparent price difference and attempted to capitalize on it, driving the cost for the affected stocks even low and generating more quotes on those stocks as well, causing a feedback loop that bottomed out the market.
Now the question is, why were there so many quotes for these stocks, up to 5000 a second from a single source in some cases. I'm hardly an expert, so I'll just quote the conclusion the report comes to:
What benefit could there be to whomever is generating these extremely high quote rates? After thoughtful analysis, we can only think of one. Competition between HFT systems today has reached the point where microseconds matter. Any edge one has to process information faster than a competitor makes all the difference in this game. If you could generate a large number of quotes that your competitors have to process, but you can ignore since you generated them, you gain valuable processing time. This is an extremely disturbing development, because as more HFT systems start doing this, it is only a matter of time before quote-stuffing shuts down the entire market from congestion. We think it played an active role in the final drop on 5/6/2010, and urge everyone involved to take a look at what is going on. Our recommendation for a simple 50ms quote expiration rule would eliminate quote-stuffing and level the playing field without impacting legitimate trading.
HFT 99% of the time is actually a healthy process - it allows relative mispricing to be quickly corrected and gives investors a chance to trade at prices which are fair whenever they come in to buy or sell.
HFT firms don't care if the P&G share is fundamentally worth 60, 5 or 100$: they are only concerned about the relative value of the stock versus other financial instruments. If for example you know that product X has a robust 1:1 correlation with product Y (for example cash vs. future), and one goes up while the other goes down for no apparent reason, the HFT guys step in and immediately buy X and sell Y until they are realigned. This will usually be for small volumes because such discrepancies don't last for long and are due to people who just aggressively buy or sell one of the products.
Simply put, HF trading firms inject liquidity into the market, they allow thousands of investors to be able to buy and sell literally any financial instrument with a relatively predictable cost (the bid/ask spread).
The real danger IMHO are the "high volume" traders, whether they are hedge funds who take directional bets or some large bank with dubious moral values. These guys will look for markets where they can push the prices up or down using sheer volume. I see this quite often on stocks which are prone to takeover rumours, "large buyers" or "large sellers" suddenly step in and start buying or selling anything they can get their hands on - all market makers panic and think that there is either something they don't know or someone who has insider knowledge. Once things settle, they calmly sell away their new position to other investors (the trend following sheep) who step in to trade on the unknown rumour.