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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."
Here's the way this went down. Because this malfunction dumped market (not limited) sell orders without matching buys, they quickly soaked up all of the buy bids that were on the market, leaving only outrageously low buy bids that usually don't see the light of day at the top of the pile. Those got filled too, and suddenly you've got everything trading at 90ish% off what it was a moment before. CNBC and other instant media realizes that something's amiss... Jim Cramer happened to be making his regular afternoon visit to the daytime programming and shouted out a pretend limit buy order for the stock he was scheduled to say was overvalued... he then "sold" that order a few moments later to show there was instant profits to be made by somebody. This selloff was nonsense, and the market quickly recovered to where it was before minus some losses for the fact that some of the investing public was losing faith in the system.
Now, since this was a malfunction, the people who lost 90% instantly and the people in the other side of those trades who made 80% did so by foul play. The flash crash trades were busted (market regulators ordered them undone) and the world went on like this never happened.
There used to be rules that if there was nonsense at the NYSE, the specialist on the floor would ask questions and stop processing trades. If there was no news to make a fundamental change in the stock and there were suddenly sellers but no legit-priced buyers... just shout out that this was going on and some buyers would be sure to show up.
But now, with many electronic places competing with the NYSE, an NYSE-only stop to computers damage that needs to be routed around, and the crash continued at these exchanges. So, the SEC at its level over all of these systems is establishing rules under which every exchange has to stop processing trades in the affected issues until there's enough time for the news of the event has spread and everybody's had a chance to react.
Market rules are based on trying to give everybody involved a fair chance to trade. Trading on information you have that isn't public yet is not allowed. Martha Stewart went to jail because she had money in IMClone, and was called before the news was out by somebody telling her an FDA trial had a failed result. She sold immediately, and then we she realized she had fouled, faked her phone records about the call. Gotta play fair... they are watching.
"Prevent" is such a strong word. They're good at keeping bad things from happening, just not perfect.
It had nothing to do with the operating system. The program gone amok was running in user space.
It's hard to believe there were not already rules in place about the automation of the market place.
iburnaga.blogspot.com
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."
It had nothing to do with the operating system. The program gone amok was running in user space.
However, the latter doesn't necessarily imply the former. An operating system includes a kernel, some user space libraries, and applications for configuring the system. For example, even if Linux itself were bug-free, a defect in glibc could affect an application that runs on Linux and uses glibc.
That's not defined in the report. It's not a technical report, it's a financial one. It's talking more about the market fluctuations.
Here's the beginning of the "what happened" section.
Serious? Seriousness is well above my pay grade.
It was a Solaris backend using a database on Linux that had a Java front end on a Windows PC. The trader monitoring the system was watching porn his Macbook Pro and didn't notice when things went kaflooey.
RIP America
July 4, 1776 - September 11, 2001
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.
a successful strategy to manipulate the entire stock market, then yes, I'm sure it was an "algorithm" that caused the problem. Now the algorithms can get down to business by creating several small unnoticeable dips during the day which can be exploited for a tidy, sustainable profit.
Cheers!
Please do not read this sig. Thank you.
It was based on actual value, once. When stocks were first invented, they were a way to raise initial capital for a risky venture and then repay it over time - something like a bond, but with the payout tied to the year-end profits. Stocks for highly profitable companies were obviously worth more, as they paid a higher dividend. Over time the stock trade grew increasingly distant from the actual productivity or valur of the company and more abstract, until today's situation.
Not directly.
But by holding airlines and aircraft manufacturers accountable to the standards for safety-critical systems engineering, they without question have reduced the number of aircraft accidents that would otherwise have occured.
Anyone who says regulation doesn't work deserves to have his brake lines slit.
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.
So; it would have been fine had they used *BSD ;^)
Great minds think alike; fools seldom differ.
The worst thing in the world for a share market is to eliminate the small investor leaving only the whales to thrash about.
Frankly, 99.9% of all people who "invest" in the markets do not have sufficient training in the ways they can be screwed by people who know what they're doing, and are therefore not the sort of reasonable actors that would tend to create rational markets, but are instead cattle to be slaughtered by manipulation. The prices are bogus, nothing more than bait to lure them into the pen where their trading accounts are drained and the bolt stamps a hunk of their skull into their brain.
The best thing for the markets would be to require investors to be certified to put their money there.
But the people running the markets don't want the best thing for the markets, they want the best thing for themselves, and they can afford to buy enough votes in Congress to make sure it stays that way, at least until they make a mistake and show a little of what's behind the curtain, as they did here.
I used to be sure we lived in a capitalist democracy. Now I'm no longer sure. With the front-running and voting scandals, with enough "people being taking out of the loop", how do we know what's real anymore?
Oh, what's that you say, the corporate-controlled media will tell me all about it?
We're on the precipice of a potentially dark and troublesome time.
Make sure everyone's vote counts: Verified Voting
Remind me, why do we have such a fragile system at the very core of modern civilisation?
Define 'core of civilization.' I don't view stock markets as that kind of thing. Regardless, I believe the reasoning they allow it is that -- like everything else in that crazy place of Wall Street -- it can help you make or lose money. This wasn't the only investigation where an algorithm screwed up. I submitted a story that wasn't accepted about an algorithm that lost one company a million dollars in five seconds.
So, you know, before you sign up to let a high frequency trader manage your trades, take note of the risks you are accepting. In the story I reported, the company that lost the money just fired the guy who wrote the algorithm and keeps doing it.
If it's like margin trading where people were taking loans and lost it all and everything died because everyone was doing it, then it's bad. The question is whether or not these micro translations are going to suddenly force everyone all at once to realize their losses. I don't think that's the case but the 'flash crash' might be proof otherwise.
In defense of high frequency trading, I don't see it as anymore of a gamble than regular trading. You are shifting money around to make more money. So you shift tinier amounts faster and for shorter periods of time to get better returns. I'm not doing it so if it turns out to be bad for the people doing it then I'm going to benefit. If it turns out to be good for the people doing it then I bitch because I don't have that same benefit. If the HFTs are putting everyone at risk, I'd like to hear precisely how that logic follows because right now it's looking like it sporadically injects chance volatility that we've dealt with before.
My work here is dung.
High Frequency Trading algorithms are most likely written by a very small number of people, who probably even know each other. The approaches to creating these algorithms should be very similar.
So it should not come as a surprise that given the same set of market data (news/some stocks going up/some going down/interest rates velocity/housing data/confidence/M1/Mx/etc.) the algorithms used by different HFT houses would respond in a similar fashion.
Imagine HFT House 1, 2, 3.
Now if one of them (1) noticed the market data at the same time *(and they saw that Japan was doing something funky with currency at that time) it started calculating probability of stocks going up or down and decided to play it safe (which at that time meant moving out of equities and commodities into cash), so it started to sell.
Now the other one (2) noticed the same thing about the market and noticed that (1) is selling, so it (2) upped the probability that stocks will go down and also decided to 'play safe' and started moving into dollars.
Same with the last one (3).
Now everybody is trying to sell at increased velocities. First they do their normal 5000 transactions/second post and cancel routine, but eventually they would actually stop canceling, prompting the rest of the market to start selling, triggering the automatic retail stops etc.
The HFT algorithms are really synchronized when it comes to overall data and they magnify the resulting movement by each others' actions.
BTW., you'll soon notice that bad news will no longer cause stock markets to go down, but instead they'll go up and so will commodities, that's because it is now recognized that bad news = more quantitative easing = more inflation = weaker dollar. So who wants to buy dollar on bad news, if bad news really means that the Fed will print more dollars? Same with bonds, buying bonds is stupid, they'll eventually figure it out. Buying bonds is like buying dollars to be received a number of years into the future. BUT if you don't want dollars that are inflating NOW, why would you want the inflated dollars in the FUTURE? Makes no sense, so bonds will also go down upon bad news eventually.
You can see these mini flash events caused by HFT in different market segments through the day, if one bank goes down in a very short time frame, then you can be almost certain that most of them went down by the same amount, and then they'll all come back to almost the original levels minus the retail auto stops that'll be eaten. Don't be a sucker, move your money to commodities or foreign equities.
You can't handle the truth.
One of the thing that was made clear to me over the last few years was that the price of stock is whatever the last person bid for it.
The price of ANYTHING is the price of the last accepted bid. Always has been, always will be.
It isn't based on the book value of the company.
Not directly, no. Really stock prices are usually based on a collective opinion of the future profit making prospects of the company. Sometimes though they are based on things that have little or even nothing whatsoever to do with profits. (Exhibit A is the dot com bubble in the late 1990s) The stock market is really not much different than any other form of betting and it only secondarily has anything to do with the actual finances of the company.
Value is a subjective thing. I'm an accountant in my day job and I'll be the first to tell you that valuation is probably more of an art than a science. Opinion plays a huge role because the same thing can be worth very different amounts to different people.
"Anyone who says regulation doesn't work deserves to have his brake lines slit."
Regulation by a single entity is a despotic solution or an authoritarian solution if I were to be kinder. Kings and Monarchs have never been known to be able to regulate things well for their whole populace.
My point made later indeed, was to have regulation be open sourced so all the tricks and code whacks are out in the open for analysis by the programmers who understand and take the time to analyze and report and argue about what is right and wrong.
One entity or two doing the "regulation" can leave just enough of a sliver to allow "back doors", "exploits", etc. and that is just what we do NOT want.
Having just the government do regulation means those with the most $s to hand under the table or thru the PAC gets more attention.
I doubt seriously that any of the top or upper level "regulators" and certainly not Congress have one whit of understanding of programming or "Code".
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.
According to the CME Group:
"The 75,000 contracts represented 1.3% of the total E-Mini volume of 5.7 million contracts on May 6 and less than 9% of the volume during the time period in which the orders were executed. The prevailing market sentiment was evident well before these orders were placed, and the orders, as well as the manner in which they were entered, were both legitimate and consistent with market practices. These hedging orders were entered in relatively small quantities and in a manner designed to dynamically adapt to market liquidity by participating in a target percentage of 9% of the volume executed in the market. As a result of the significant volumes traded in the market, the hedge was completed in approximately twenty minutes, with more than half of the participant's volume executed as the market rallied – not as the market declined. Additionally, the aggregate size of this participant's orders was not known to other market participants.
Additionally, the most precipitous period of market decline in the E-Mini S&P 500 futures on May 6 occurred during the 3½ minute period immediately preceding the market bottom that was established at 13:45:28. During that period, the participant hedging its portfolio represented less than 5% of the total volume of sales in the market."
http://cmegroup.mediaroom.com/index.php?s=43&item=3068&pagetemplate=article
The SEC/CFTC report is typical of something that we tend to see come out of government agencies (low quality analysis). Also, they didn't make any meaningful recommendations. It seems like that just tried to rush something out as quickly as possible to say, "Everyting is fine. Retail investors can hazard their capital again. We caught the evil, responsible financial firm and will sort them properly."
Automated trading in a proper use is to things like... "Check list of bankruptcy filings. If I own something on that list, get rid of it NOW!" CNBC covered Worldcomm and Enron in a way it doesn't usually cover penny stocks because they wanted to hammer home the point to people who still had it that there was still time to get a few cents per share and that's better than riding it to zero.
As a buy-and-hold investor, why do you care whether high-frequency trading exists at all? The flash crash was largely erased shortly thereafter, so it wasn't like it artificially destroyed your wealth. As a person who believes that a core value of our moral system should be those things that do not impinge on the rights of others should be allowed (with notable and obvious exception), I find banning high value trading simply because we are afraid the market will do strange things is silly.
When it comes down to it, the flash crash was a boon for the buy and hold investor, since you got an opportunity to buy things at great prices. And, when it comes times to sell, having a bazillion automated trades in the system ensures your trade will get lost in the liquidity, practically guaranteeing a fair price. Wipe out market liquidity and you are suddenly at the mercy of whoever happens to want to buy that day.
-Ryan
AUWYHSTOT (Acronyms are Useless When You Have to Spell Them Out Too)
"said they expect the results of the investigation to prompt additional rules limiting the functions of automated computer trading systems"
And why not START here?
As if we need or can benefit from automated trading, on the scale both in time and money that these systems did. It's both thievery and fraud: Thievery by deriving profit from a system by manipulating the market in a way that should be offensive to real people, and fraudulent because it operates in a way that deprives an actual person from either competing or even reacting.
Completely pus. Slow them down to full seconds at least, ok?
And the primary response is to watch and stop trading if the stock changes value 10% in 5 minutes. Ha! these programs have already made their nut by then. Way too late. How about volume and timing triggers also, and punish runaway platform owners with some fines to at least cover the cost of investigation...
I'm no longer sure I want mutual funds. But I know I'm not involved with NASDAQ for sure.
deleting the extra space after periods so i can stay relevant, yeah.
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
Numbers below are courtesy Peter Schiff:
October 1 2010
Gold: new high
Silver: new 30 year high
Gold stocks hit 52 week high
Oil: strong day and strong week
Dollar: dropped 13 percent from peak 3 months ago
September is done, media says: this is best September in 71 years. Dow gained 7.7%, SMP gained 8.8%.
However this month of September.
CRB Index (commodities): gained 8.7% - beat DOW and just under SMP
Soy beans: up 9.5% - beat SMP
Copper: up 10% - beat SMP
Rice: up 10% - beat SMP
Oil: up 11% - beat SMP
Corn: up 12% - beat SMP
Silver: up 13% - beat SMP
Frozen concentrated orange juice: up 13% - beat SMP
Cotton: up 17.5% - beat SMP
Sugar: up 19.3% - beat SMP
Currencies:
Swiss Frank: up 4.6%
Euro: up 7%
Australian Dollar: up 9% - beat SMP
--
Realize that this so called 'best September' is no such thing, what you are observing is huge, very fast inflation.
Beware of USD and US bonds.
Fed says that this inflation is still too low, to slow, prices are not rising fast enough for the Fed. Fed wants your prices to go up up up up up up up.
Buy sugar and get out of the dollar.
You can't handle the truth.
I just finished reading through the whole report. It's fascinating, if you're into this.
First, none of this involved a "bug" . All systems involved functioned as designed.
What's going on here is a logical consequence of the way the markets are set up. The Chicago Mercantile Exchange ("CME", the futures market, which started by trading grain) has a tradeable commodity called the "E-mini", which is a derivative security based on the S&P 500 stocks. Anyone can buy or sell contracts in E-minis, and can also buy or sell the underlying stocks. This generates a frantic amount of short-term trading from market players trying to profit from the differences between the two, which keeps the price of the E-mini close to the prices of the S&P 500 stocks.
None of this is productive activity, of course.
There's a consolidated feed from all markets that everybody gets. It has a few seconds of lag. To obtain an advantage in fast trading, some of the players buy direct exchange feeds with an average of 8ms (yes, 8 milliseconds) of lag.
What started the crash was that a fundamentals trader (one who actually pays attention to the companies involved) was selling $4 billion in stocks. Ordinarily, this isn't a big deal. They had a program throttling their rate of sale to 9% of market volume in the last minute, to avoid depressing the market. That's normal. So far, so good.
However, in response to this sale, the "high-frequency traders" started frantically trading back and forth to balance their portfolios. Their net effect didn't move prices much, but it pushed volume up. So the big seller started selling faster.
This generated enough volatility that some market players started dropping out, decreasing liquidity. That generated market imbalances which other traders started to exploit. Then, because of all this frantic trading, the consolidated market feed and the millisecond feed differed enough that some trading firms had data quality alarms and dropped out of trading. Since traders who are "market makers" are required to maintain buy and sell bids in the market, they defaulted to their default bids - buy at $0.01, sell at $100,000. Some trades actually took place at those prices. 895 shares of Apple stock were sold at $100,000. The price of Accenture fell from $30 to $0.01 in seven seconds, then recovered within the next minute.
Then "At 2:45:48, trading on E-Mini was paused for five seconds when the CME Stop Logic Functionality was triggered in order to prevent a cascade of further price declines". Yes, a 5-second automatic trading halt. That was enough to start to stabilize the E-mini contract trading on the CME. But by then, the E-mini was enough out of sync with the underlying stocks (mostly on the NYSE) that trading on the NYSE started to move stocks there to resync with the E-mini.
The NYSE still has a trading floor, which slows it down. This didn't help. But that's another story.
Nothing failed. Nobody did anything wrong. The original seller's strategy for unloading $4 billion in stock was reasonable. This is all a consequence of normal market operation. The report concludes that speeding up the consolidated market feed to get the 5-second lag (which was more than fast enough before program trading) down should be done. That's it.
Whether or not society should support an "efficient market" system to this extent is an question one is not supposed to ask.
A LRP is a technical name for "time out" and is effectively saying "STOP TRADING! We, as market makers in this issue see that something crazy is happening here. It's changing value far too fast, either up or down, and either somebody's sending orders that don't match the rest of the world, or there's breaking news about this stock and it's only fair to wait for that news to spread. Everybody, let's come to an agreement on the value of this thing... take a look at what just happened and let's get some more orders in here. This thing is not liquid enough... and we don't want it going to infinite heights or zero unless it really deserves it."
The problem was, while orders at the NYSE were safe, there's far too many other places you can trade stocks, and they didn't stop at all. As I said before, a limitless sell order with no matching buy is an offer to give the stock away for pennies. That's an LRP situation at the NYSE, but other places just match it up with buy orders and made some people extremely lucky. That was a foul play, and the SEC busted such trades. New rule: When the NYSE rules say stop, now an SEC rule says you stop too.
Here is the audio/transcript from the trading floor during the 9 minute Flash Crash -- http://www.protranscript.com/Flash_Crash It gets interesting around 2:30
Here are few important facts:
1. Waddell & Reed is the company whose aggressive selling triggered drop in S&P 500 futures price. The company is not HFT shop but rather long-term investment hedge fund. More here: http://www.bloomberg.com/news/2010-09-30/waddell-reed-e-mini-trades-are-said-to-have-helped-trigger-may-6-crash.html
2. According to SEC report, HFT traders played their intended role: smooth out short-term price volatility. However, due to enormous size of Waddell & Reed selloff (about $4 billion dollars in 75000 futures contracts during 20min.) they can do only that much. W&R just cut right through the order book on CME.
3. Slowing down the trading on NYSE did not help but rather hurt by locking up liquidity. Shitty NYSE Arca systems that handle ETFs overloaded and further exacerbated the problems.
4. At the end of day market returned to pre-crash levels. Long term investors were not hurt, W&R payed between 100 and 200 millions for their mistake.
5. Overall, market worked as expected.
The two ways to avert disaster in general are Prevent and Detect. Since in this case the prevention algorithm should NOT be overzealous, they should be focused on the "detect" side of things. Prevent that which is known to be wrong in every case, and detect anything that MIGHT be wrong, and notify someone for a quick review of the situation so they can decide if immediate action is needed. Prevent & Detect is a very basic concept... you'd think they'd have some form of it in place at the stock exchange. Granted, it still won't be perfect, but it could get a lot closer to it than what they've been doing.
No, there is no "-1 I'LL NEVER ADMIT BEING WRONG!!!" mod.
They're trying to mine the market's volatility for money.
You mean like Day Traders were doing 10 years ago? You don't need to be an HFT to make money from volatility.
Fly me to the moon Let me sing among those stars Let me see what spring is like On jupiter and mars
There's lots of gaming going on with high frequency trading, or really high frequency price pinging, bids and asks which are tossed out and canceled to simply mess with the quote queues. High frequency algorithms can flood the queues to get artificial imbalances and quote delays. There might even be some arbitrage possibilities based on differences between different quote systems time stamp transactions. Some timestamps are the time of the quote when queued, and others are the time the quote leaves a queue. This can lead to price inversions or other information queuing distortions.
According to Eric Scott Hunsader, the founder of Nanex the Chicago data firm that first identified strange patterns, "This surge in orders may not have been intended to cause the general market rout. Instead, it may have been intended simply to slow down some markets so that traders could profit by arbitrage with other exchanges."
There's way too much potential for gaming the queues if there is no cost to fake a bid or ask. When the cost is zero you get the same thing we have with spam email. If email cost a fraction of a penny to send, spam would drop drastically. If bids cost a tiny amount and were forced to remain open for the time a bid could electronically circle the globe, then that small bit of friction would eliminate many of the system's instabilities. And, all price queues should use the same time-stamping method.
Here are a few good links to more information:
http://dealbook.blogs.nytimes.com/2010/09/27/troubling-trades-found-ahead-of-flash-crash/
http://www.nanex.net/FlashCrashFinal/FlashCrashSummary.html
http://www.thestreet.com/story/10876642/4/the-5-dumbest-things-on-wall-street-oct-1.html
The real crime here was not the market orders that were improperly executed. The real crime were all the subsequent day or GTC limit orders that were triggered by the plunge that were executed at the artificially low prices. Remember that many brokerages can fill customer orders without going to the market - they can use the current market price tick, but execute the trade from their own inventory. Thus, the price does not change due to the trade, bypassing market buy/sell corrections. This was another attack against the sucker individual stock trader. And what was the eTrade "talking baby" commercial that was running incessantly? The "smart" baby on the plane who had GTC limit orders in place, so he could "rest easy" when he was on the road. And what happened to the smart baby? His $50 stock, with a $45 GTC limit order was triggered and his $50 stock sold for $35 by the time the "market" order was placed. And by the time the smart baby got off his plane, the stock that he sold at $35 was now selling at $45. Untold $billions were lost that way.
The SEC rules are about as open source as they get... file a comment with them if you want to propose improvements.
Yeah, because all the bad stuff that's happened over the last little while is due to the little guys screwing up....
No, it's what happened to the little guys. The big guys who got caught in it used their clout in Washington to get paid out of an insurance policy that didn't exist until they realized they needed it.
The little guys paid for that, too.
http://www.zerohedge.com/article/sec-releases-final-flash-crash-report-waddell-and-reed-blamed-selling-catalyst
has a good easy to understand news on this.
then news like this http://arstechnica.com/tech-policy/news/2010/09/first-nyclondon-cable-in-a-decade-promises-sub-60ms-latency.ars
hints at "just to give its high-frequency trading customers a few milliseconds of advantage over the competition."
Domestic spying is now "Benign Information Gathering"
Risk-taking strategies like the Martingale betting system, wherein you are very likely to make a profit but you risk a small chance of making a very big loss, is (due to the decreasing marginal utility of money) not a good idea.
The "too big to fail" regulatory system, wherein if you see someone making a very big loss you use a more prudent person's money to try to stop it, is an even worse idea, because it encourages Martingale betting on a grand scale, and because it makes it impossible for anyone to escape the consequences of the risk-takers.
"Buy low, sell high" is how prudent investment works, in stocks, or houses, or just about anything. The investor makes a profit of "high minus low", and the economy as a whole benefits from additional demand buoying depressed prices and additional supply damping inflated prices. The prudent investor sees that real estate prices have bubbled and sells, or sees that a stock price has unnaturally nose dived and buys.
"Buy rising, sell falling" is how a speculative bubble works. The speculator makes or loses money based on whether they managed to randomly guess when the bubble ends, and the economy wastes misallocated resources during the booms and suffers for it during the busts. That applies when "buy rising, sell falling" is coming from stupid human psychology, and it especially applies when it's coming from a stupider automatic algorithm.
In other words, if you want to regulate a market, and you see one group of people making that market more unstable and another making it more stable, then you don't "cancel trades", you don't "buy troubled assets", you don't "bail out failing banks", you don't hand any more of the economy back to the people who are ruining it, not just for the practical reason that you want to stop the economy from being ruined, but also for the moral reason that it's not their damn money anymore.
How much more transparent does it get then "buy [x]" and "sell [x]" - what more would you like access to? And before anyone spouts off I trade options and currency.
Seems to me the solution then would be to exclude the big guys (or at least their dangerous methods) from the market. Not the little ones, who don't do any harm.
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?
As I said, the market is the big guys.
There isn't enough money in the little guys to even make a market, nor so much that if the little guys were removed from direct contact from it they'd make a difference.
Seriously. The little guys don't even know that they're buying nothing when they enter the market. They get a meaningless portion of the votes of a corporation. They might get a meager dividend, but that's one of the carrots used to lure them in; it's certainly no significant piece of the profits. They get no access to the company. They won't be let into the building. They can't see any proprietary information. They don't get a discount. They don't even get the CEO's phone number. Some "owner" that makes them.
The stock market isn't investing. It's gambling. It's an ornate casino run by people who know full well that there are a million suckers born every day, and each one of them has a lifetime of earning power to be squeezed into the funnel.
no that was running the firewall, gateway, caching proxy, IDS, print server, and just about everything else.
All of the above was encrypted with a Quad ROT-13 method. Unauthorized decryption is in violation of the DMCA.
Why not also tack on anti-fat-fingered traders legislation and anti-"oops, missed a decimal point" trading too while they're at it lol. Remember, that was the original hypothesis about the cause. Who says the fatty fingered and careless or borderline legally blind aren't lurking out there, waiting to strike?
Google's Super Secret Search Algorithm: SELECT @search_results FROM internet WHERE @search_results = 'good'
The big guys mostly play with the little guys' money. There are a few people who are genuinely rich enough to be big players in the market themselves, but the big investment firms just invest money that's been entrusted to them by others.
Your view of the stock market is extremely skewed, probably by editorials written by pundits discussing the way it is USED by a lot of big companies. Most individuals investing in the stock market invest money in companies or industries they believe in, mid to long term.
The problems are being caused by professional investment firms that play the market like a game. I'm not suggesting they be banned, but that it might be a good idea to ban some of their more problematic practices. That seems like a MUCH better idea than kicking out all the good investors and letting the ones that cause all the problems go to town.
There are traders that I know who use stop loss orders reflexively. I never used them because they only purport to limit losses; they are really market orders triggered by price action, and they will chase bids down and leave you out of the game before you are even done with your coffee at the market open. I never imagined them chasing bids all the way down to zero until recently! Since the PTB don't seem intent on fixing anything, just affixing blame, I would strongly discourage stop-loss orders. They are not a substitute for being both present and disciplined while you are trading anyway!
but eventually they will crash back down to reasonable levels when everyone realizes it is a sham. Take for example Cisco systems which made it up to a P/E of around 435 in 2000 but now sells for a P/E of 16.5.
IMO assets trading way above their real value on the basis that some sucker will pay even more for them later are little different to a pyramid scheme.
note: i'm known as plugwash most places but i screwd up registering that here somehow in the past and now can't register
Heh, when described like that, it sounds suspiciously like they are successfully extracting zero-point money from the quantum foam. No wonder physicists and engineers have such a hate on for finance people :-)
Caveat Emptor is not a business model.
Obligatory Soviet Russia: "It's 10 o'clock. Do you know where your parents are?"
Caveat Emptor is not a business model.
If someone wants to program their computer to sell us four billion dollars worth of their stock for pennies on the dollar, do we need to send them to jail for it? It seems like the problem kind of punishes itself! At least it would if the trades weren't subject to a "rich people who lose all their money get three do-overs" rule.
Trading strategies ought to be opt-in for brokers' clients, and there ought to be server-side sanity-checking in place to make sure someone can't place an order that they can't fulfill, but that's all true regardless of how high-frequency or how automated the strategies are.
A buy-and-hold investor has to buy or sell at some point. I'm not sure what you mean by the flash crash was "largely erased"; there were plenty of obscene trades that were not broken. If you happened to selling your position in SPY to rebalance your portfolio you could have lost a great deal of capital.
You imply that HFT adds liquidity. You should note in the report that over half of the trades the HFT firms did the week prior to the crash were removing liquidity, not adding.
General practice is to define all acronyms (even common ones) the first time you use them*. From then on, if the reader forgets, they just have to look back for where you defined it.
I sense that your sig refers to the IANA*/IAA* acronyms used on slashdot, where * equals an acronym for whatever professional or other expert one ideally would be in order to be a reliable source of information about whatever the topic is. Of course, this declaration is normally only used once, and it must be defined, so you get situations like in your sig where realistically it makes more sense not to use the acronym.
However, the thing is - it's a joke, laugh :)
* IANAEM (I am not an English major)
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.
And honestly, if you're a trader, a stop-loss is always a bad idea. Buy put options instead, 100% resistant against flash crashes and vicious market makers.
Er, most Ponzi schemes eventually collapse too. Doesn't mean they didn't fit the definition, or that the people near the top who knew what they were doing didn't skip out with most of the money before the collapse.
Investment capital has a purpose, but much of the financial system as it exists doesn't do anything except play complex games to funnel money to people who provide no actual use to society. The fact that it's got so many of our best mathematicians and physicists tied up doing pointless money manipulation because it pays so much better than more useful forms of research is kind of a shame as well. Short-term speculative thinking is potentially the death of everything capitalism's supposed to be good for.
Now, since this was a malfunction, the people who lost 90% instantly and the people in the other side of those trades who made 80% did so by foul play. The flash crash trades were busted (market regulators ordered them undone) and the world went on like this never happened.
So when their programs work and they make a profit they get to keep it, and when their program doesn't work and they make a big loss they don't get to keep their losses?
That's nice. I'd love to have the regulators step in for me when I lose big on the stock market too.
The fact is many firms are already cheating in so many ways: http://www.nytimes.com/2009/07/24/business/24trading.html (basically front running and other cheating techniques by other names).
So it's even more unfair that when they lose big because of THEIR bug, the regulators roll back their mistakes. That's what I call foul play.
Now if it was a bug in the stock exchange software or system itself, then sure you have to roll things back. But a bug in your fancy trading programs? Too fucking bad, eat your losses and die - don't all these free market capitalists always say let the companies that screw up die?
Agreed. Resetting the game anytime a bank messes up is what causes them to be so brazen in the first place.
To sell a stock you should be required to own it. To place an order to buy a stock you should be required to put money in escrow. If you place an order, whether via API or voice or whatever, your money or stocks in escrow get traded if the order finds a match - period. If the exchange messes up, sure, go ahead and reset the game (not the trader's fault). If the trader messes up, well, maybe think twice before giving a computer the password to your account.
If you did these simple things, half of the market games would just disappear overnight, and with it most of the systematic risks that do nothing for the economy but which keep people nearing retirement up late at night.
No, it's more logical to ban market orders and go limit orders only.
The root cause wasn't stop losses being triggered, it was a crazy player willing to sell something tied to the S&P 500 at near-zero prices. Had these market orders been timed further apart, this would have had the desired effect. Had these had been limit orders, a sensible limit would have stopped the order until reasonable buyers showed up.
And this is why we give the SEC the power to bust trades. Nobody was hurt, we just have an incident on the record to discuss how to keep from happening again.
Why is this moderated Funny?
Wouldn't Interesting be a better fit?
I work in a brokerage house in brazil, and the (sole) brazilian exchange has a lot of procedures regarding this fact of large orders, being thinked throughly, accidental, or manipulative (one can't rapdily jugde anyway).
The real problem is: If the volume of a stock raises a lot rapidily (even it is a single order) there is reason to believe a significant piece of news came regarding that company, and that the current stated price is not valid. So the stock enters in a state of Eletronic Auction, where orders can be inserted, but not closed. The brazilian market reacted very diffently to the flash crash, in a way that most of our stocks entered Auction state for about 10 minutes, because all HFT who wanted to arbitrage the spread between Brazil and US. In this ten minutes, everyone saw that nothing bad had really happend, and purchased the stocks from the HFTs, gaining a profit. Other exchanges in the U.S. were much more affected by this happening because of not having this kind of safety projected.
All the regulation (english): http://www.bmfbovespa.com.br/en-us/regulation/equities/operational-procedures-manual/operational-procedures-manual.aspx?Idioma=en-us
Just the auction procedures(english): http://www.bmfbovespa.com.br/en-us/regulation/download/Operational-Procedures-Manual-Chapter4.pdf
In stock terms, the seller's asking price is the current price.
Not until it is matched with a buyer. I could ask a billion dollars for for a share of Microsoft but that doesn't make it worth that amount. Since we are so fond of car analogies here, just because Ford asks $30,000 for a car doesn't make that the actual price until I as the buyer accept that price.
Current price is something a bit like quantum mechanics. It's somewhat vague until you make an "observation" (or in this case a deal) and then it coalesces to a specific value for an instant but no longer. Until the seller accepts a buyers bid, the actual price is somewhere in the spread between the bid and the ask. The price that gets displayed is the last matched bid/ask but that isn't necessarily the price for the next buyer/seller pair.
My view of the stock market is dead-on, informed by a couple of decades of using it and studying its internals carefully.
Yes, in "big guys" I include banks that are using depositors' money, and mutual funds, though those are themselves not even close to free of grifting.
Your concept of "individuals investing in the stock market invest money in companies or industries they believe in, mid to long term" is just another carrot. They're still buying nothing but a hand in a card game, hoping someone will pay them more for it later. I believe in 4 hearts to a flush when I have the ace wired, and I put my money in it, but I don't pretend it means I own a cardiac care center.
The real investing happened when the shares were created in the IPO that infused money from a syndicate -- a real investor -- into a company to buy equipment and hire employees. When the syndicate turns around and fans the shares out for you to drool over, it's no longer investing. It is speculating. And because the trade in secondary-market shares is not tied in any concrete way to the inflows and outflows to the company, their value is free to fluctuate with any whim of the public, whims that can be controlled by any psychological effect. Many of them believe it has something to do with the value of the company, but that only means anything when it becomes known that someone capable of taking a controlling interest in the company has actually begun to attempt to do so. At that point, the price generally pins to a few nickels short of their bid, and doesn't move until the deal closes, despite all of the information that formerly was whipping the price around like a plastic bag in a swirling wind (if you'll pardon the borrowed imagery).
If you're a gambler and think you can out-guess the psychology of the masses, then play on. If you think you're "investing in America", you're a sucker. If you are a huge investment banker capable of front-running the market by acting as a syndicate to underwrite investments and sell the shares to the secondary market, you're going to beat both the gamblers and the suckers every time.