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SEC Blames Computer Algorithm For 'Flash Crash'
Lucas123 writes "The US Securities and Exchange Commission and the Commodity Futures Trading Commission today issued an 87-page report (PDF) on the results of a months-long investigation into the May 6 'flash crash' that sent the Dow tumbling almost 1,000 points in a half hour. The Commissions are holding a single trading firm's automated trade execution platform responsible for the crash, saying it dumped 75,000 sell orders into the Chicago Mercantile Exchange over a period of minutes causing an already volatile market to come crashing down. The SEC has already enacted some quick rules to pause trading if a stock price should rise or fall by 10% in a five minute period, but the regulators said they expect the results of the investigation to prompt additional rules limiting the functions of automated computer trading systems."
"Prevent" is such a strong word. They're good at keeping bad things from happening, just not perfect.
Remind me, why do we have such a fragile system at the very core of modern civilisation?
Hope the person(s) who wrote that algorithm aren't writing nuclear reactor code. I'll admit though that I'm a bad programmer too. Back when I did write code I used such gems as DIM TotalSales AS INTEGER. That didn't work so well.
"This food is problematic."
Seriously. I think most people will admit it isn't perfect, and it looks like they are trying to improve the system as a result of this. However fundamentally, it works. It helps money move around more, so that businesses can get financing, individuals can invest and so on.
The reason why you find that prosperous nations have things like a stock market and other capitalist features is because they work. Doesn't mean you ignore them or let them run totally wild, but fundamentally they get the job done, where as a command and control economy does not. While it may add instability it also adds flexibility and that is important.
This wasn't a BSOD or General Protection Fault kind of crash, or even a DIV/0. It was an order that didn't have any of the safety measures that should have been there, any one of which could have prevented this from making news. So, there's a new rule... if somebody yells "SELL!" and no buyers show up... they don't fill orders for a penny, they stop, report there's a crazy man in the room, and then there's an auction held to determine who the lucky bidders are.
Put in a market buy order with no limit, and you open yourself to limitless losses if there's nobody willing to sell at the moment. You'll match the first offer to sell no matter how high it is.
Put in a market sell order with no limit, and if there's no covering buy order you just put in a request to give it away for a penny a share.
Limit orders rule.
Except that stock speculation has NOTHING to do with investment anymore. Wall street does NOT invest, it speculates. It is gambling on the minute by minute perceived loss and gains in the world with a hefty amount of making events happen.
Take the recent event of a speculator simply buying up chocolate to drive up the price. What has that got to do with investment or making money go around? Nothing at all.
You have the idea that the stock market is still the old idea of buying a share in a ships voyage when this was first made official in Holland centuries ago.
Yes, if you buy shares in a company hoping to get dividend from it in the future, then you are investing. When you are shorting stocks on the difference in value over a period of minutes, that is NOT investment.
Stop pretending that it is.
MMO Quests are like orgasms:
You may solo them, I prefer them in a group.
It's perfectly legal for a business to say "We think we're worth 5% more a share, and we're willing to pay that price to anybody willing to sell." It's called a buyback, and as Cramer calls the "Sir Mix A Lot Corollary" he says "I like big buybacks and I cannot lie."
Safety rules are there to prevent people from being stupid even if they want to be stupid.
What I detect is that the smartest & most motivated people do NOT inhabit the regulatory agencies
That is by design. The agency wasn't ever going to go away, but their efficacy sure did in the holy pursuit of unfettered Capitalism. What has that gotten the majority of Americans who believed in the wisdom and efficacy of deregulation?
-Banking system on national life support.
-Consumers with no confidence in many forms of economic activity.
-A series of economic bubbles
It never works out and yet voters are more than willing to get screwed again under the new mantra of "fiscal austerity." That's more pocket picking for the recovering Capitalists living in your parent's basement.
http://www.maxineudall.com/2010/02/should-economists-be-sued-for-malpractice.html
First, none of this involved a "bug" . All systems involved functioned as designed.
A program that runs as designed but produces a undesirable result has a "design flaw" which is a class of "bug". Such things need to be "fixed".
The algorithm didn't fail, Wall Street as an institution has failed. The simplistic view of why capitalism works is that individuals and institutions making informed decisions results in good allocation of resources. The profitable thrive and the unprofitable die, and on the whole society benefits.
None of the preconditions for capitalism exist in the current setup. The big entrenched special interests change the nature of the system so that they take profit and are shielded from risk. The technical term for this is "moral hazard". The TARP bailout is the perfect example of this. All the big Wall St. firms made huge amounts of money by playing insider games with mortgage back securities (MBS) and collateralized debt obligations (CDO), and then when their gambling resulted in failure, the were bailed out to the tune of ONE HALF TRILLION DOLLARS, and the government is left with the bad assets. And the people who caused the mess are still in charge and got to keep all the money they stole during the bubble, as well as the money they got from the Treasury. Does the phrase "moral hazard" seem sufficient to describe this behavior, or would "rape, pillage and burn" seem more appropriate?
Programmed high frequency trading (along with hedge funds) are another mechanism for taking wealth from the system that breaks the capitalistic model. The claim is the it "increases fluidity" and therefore make the market "more efficient". The plain English translation of "more efficient" is theft, and "increases fluidity" is like saying "magic pixie dust".
The real world value of a company cannot change at millisecond resolution. The only things of economic value that change that fast are electronic abstractions of money. Therefore, high frequency trading is completely disconnected from real world value, so no capitalism is involved. The system is built so that insiders can become personally wealthy because they are the insiders, not because they do an efficient (good) job of allocating resources and benefiting society.
This is identical to the MBS/CDO monstrosity, in that there is no clear real world description of how value is created. For MBS/CDOs there was a lot of math that no one making decisions really understood, but somehow mortgages from buyers who were previously unqualified could become AAA securities. For flash trading there is "fluidity" and algorithms that traders don't understand. It is the same kind of scam.
As long as the stock market allows high frequency trading it will be intrinsically unstable, because this kind of trading is about manipulating the abstract system, not about real world issues. No set of rules will change things, because computationally based trading is about taking advantage of rules to get advantage via manipulation.
The only kind of rule changes that will help are things like increasing the cost of individual trades or keeping electronic traders from placing trades that they cannot or do not intend to make. (Trading algorithm determine price points by placing lots of orders and seeing which ones get responses.) Or electronic traders must be forced to honor trades or hold assets that they are trading, so they are exposed to the market risks of the underlying securities. Right now there is no cost for these traders for any manipulative practices, which effectively decouples risk from reward. All these kinds proposals move this kind of trading back towards actual capitalism.
It will be very hard to get meaningful changes to high frequency trading because the powerful and personally corrupt Wall St. insiders don't want a capitalistic system, they want their guaranteed profits. It is much closer to a Mafia style protection racket then a system that enables real business activity.
Why is Snark Required?
Sellers can also throw out non-nonsensical prices just like bidders can offer nonsensical asks.
That's the trouble with some of the algorithms that HFT shops are allowed to run in their boiler room datacenters. Some of these guys can only afford 80ms-400ms of time to create a decision, and that doesn't leave them much room to insert code that takes a 25,000-foot-view of their total order volume and determine if their order flow is making sense or not, dealing with 50,000 one-off situations (such as somebody dumping huge amounts of paper on the futures markets by accident)..
and so the quants who came up with the automation trading algorithms and the programmers who put their drawing-board ideas into software code can only put circuit breakers in their own code that are self-serving, but have no interest to put in any collars that stop the trades if it's clear that the trading is damaging the market.
It's really too late now. Retail investors have been bailing out and moving over to safe-havens and leaving the exchanges to hedgies and HFT shops to mutually-masturbate with each other trying to steal each others' money.
Introduce a damping factor. Tax the earnnings by a small amount (say between 1 and 2 percent).
Every physicist, every engineer knows that dynamic systems without a damping factor tend to instability
Use this tax revenue to get the poorest economies out of their misery.
Sometimees those economist remind me of early proto-engineers (say Western Europe, Middle Ages). Quite capable, but blind-sided by ideology.
A program that runs as designed but produces a undesirable result has a "design flaw" which is a class of "bug". Such things need to be "fixed".
What program are you talking about? If you read the parent post you will notice that no single program had an undesirable effect. The market as a whole entity was what failed, the failure was not in any individual program.
If you want to know what I think, the market didn't fail. What was a failure was the response of freezing markets and reversing trades.
Those trades were made by consenting adults in good faith or the trading systems that they entered into willingly. Money was lost and money was made. Fuck anyone who got burned, that's a normal day in trading. Or it should be, but unfortunately if a enough big players lose enough money they reverse the trades for them.
Liberty.
Why is this moderated Funny?
Wouldn't Interesting be a better fit?