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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."
I agree that "prevent" could be considered wrong.
What I detect is that the smartest & most motivated people do NOT inhabit the regulatory agencies and indeed probably do not inhabit the exchanges themselves.
The various brokers hire people at much higher salaries &/or bonuses and pay them VERY well to find the tactics, some would say loopholes, to allow quick profits each day. That in itself is not what the original intent of share ownership markets were about.
I wonder when the word "Day Trader" was invented, but it certainly was quite awhile back but it didn't include the ability to do tens of thousands of trades out of one broker in a matter of seconds, and it certainly wasn't considered why we needed a share exchange in the first place. Exchanges were to allow companies to raise funds and to promote their value based on earnings and assets over time and allow a company to achieve an immortal status that an individual person could not achieve.
I think governments as the regulatory overseer are flawed, but then recognize the brokers are also very self-interested, so the whole mess needs more transparency.
That sort of transparency has been achieved with the likes of Linux.
I wonder if open sourcing the rules of the share markets could achieve the results where everyone knows the rules of the game & small individual investors have the same info that the large brokers do?
The worst thing in the world for a share market is to eliminate the small investor leaving only the whales to thrash about.
It is a big problem to solve and the self-interest of the big brokers cause all sorts of broken arms in WDC, if I guess right (meaning $s passed behind between arms).
Transparency is the only solution I see.
But if a large organization wanted to sell stock to itself at increasingly higher or lower prices there isn't anything you can do to stop it. It's illegal as hell but hard to prove.
the only thing that makes prices rational is a fluid market.
A low volume market produces irrational prices and makes it easy to move prices around inside the limits of rational prices.
Put it this way...
Millions of baby boomers are locked in on a large chunk of their retirement money at 14,000 dow.
As they get older that price they are willing to accept to cash out is degrading (a lot of boomers would cash out immediately if the market got above 13,000 now).
As long as the price doesn't get too high or too low, the boomers are paralyzed and the market is not fluid.
In 2012 to 2016, that price will degrade more. I think we have a decade of overhead pressure from boomers cashing out. At some point, the price won't matter- they'll *have* to cash out to pay bills or go back to work (oh yea, you can't really find work if you are in your 60's these days- I mean 50's.)
She was like chocolate when she drank... semi-sweet at first and then increasingly bitter.
I'm not sure that the proposed solutions will fix the problem. I'd much rather a degradation in response times as a function of orders (so the more orders there are, the slower the system gets) rather than a temporary hold on that stock. Temporary holds assume that software won't do what it has always done in the past - try again until it gets through. If you flood the system with retries from enough computers, the results won't change. It will merely have short gaps in it. If you have gradual degradation, then flooding will slow things way down until the flood stops. The negative feedback loop will guarantee that a crash becomes impossible.
In fact, that is something the market could do with more of - negative feedback loops. It should be possible to prevent market bubbles as well as market bursts, as a bubble is just a positive feedback loop in the opposite direction.
It's a small world and it smells funny; I'd buy another if it wasn't for the money; Take back what I paid (SoM)