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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."
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.
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?