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Tweet From Hacked AP Account Causes High Freq. Traders To Drop DOW 150 Points
New submitter Mike Lape writes "Stocks plunged and recovered within minutes after the hacked AP Twitter account sent out a tweet that indicated that the White House had been the victim of an explosion and that President Obama had been injured. '...the Dow Jones Industrial Average took a quick 143-point plunge, before recovering most of its losses within minutes. The three-minute plunge triggered by the tweet briefly wiped out $136.5 billion of the S&P 500 index's value, according to Reuters data. Interestingly, Tuesday has been the best day of the week for the blue-chip this year with an average return of 0.46 percent. If the index closes in the black today, it will have been up for the 15th consecutive Tuesday. The last time the Dow rose for 15 straight Tuesdays was in 1927.' An analyst said, 'That goes to show you how algorithms read headlines and create these automatic orders – you don't even have time to react as a human being.'"
Maybe you should know that the big banks who do HFT also co-locate inside the exchanges and front run orders making hundreds of billions per year.
Also, you might want to know that if the market crashes and restarts like today the big banks can get their losing trades reversed and you can't.
All the profit they're making has to come from somewhere. Are you so certain it doesn't come out of your pocket?
Liberty.
I will point out something to buy and hold investors
The Bid / Ask spread has dropped by 90% in the past 30 years. You used to pay .5% to 2% for each trade – not it basically nothing. Moving to decimalization helped, but it is the HFT that really collapsed the spread. This is even truer for ETFs then for normal stock.
The fees that mutual funds and ETFs (which a lot of buy and hold investors hold) have also collapsed the past 30 years. Specifically for index funds, they have fallen by 90%. There are a lot of reasons for this, but about a quarter to a third is lower trading costs, which can be traced backed to HFT.
So, you save about 1% to get into a investment, and about .25% each year if that investment is a mutual fund.
What happened is that actual people reacted to the news and the trading algorithms (not necessarily HFT, but trading bots) thought they hit a pattern and amplified the movement. Nobody lost anything except the bot herders that sold at -150 because they trusted their bots. I really can't see how that "hurts productive industries and threatens the stability of the economy" as you say.
I'll just leave this here. http://247wallst.com/2012/12/04/high-frequency-trading-a-grave-threat-to-the-markets-and-the-economy/
"What the American public doesn't know is what makes them the American public." -Ray Zalinsky (Tommy Boy)
You probably know that mutual fund movements happen at the end of trading.
Someone who saw the precipitous drop and hit the panic button on their mutual fund (say, a retiree or soon-to-be retiree) would have lost, but good.
A lot is made of the notion that mom and pop should be in the market. It's been a hallmark of the past decades that the market is where retirees should put their money, and current Fed policy almost forces it. Fact is, small investors are shark food in today's environment. The days of being able to see who's doing the buying and selling are over.
I wonder if we'll ever find out what kind of trades were made by whomever manipulated the market today. The person who hacked the account and tweeted out that story could easily have netted 7-8 figures, unless it was not an individual, but a larger entity, in which case it could have easily been ten figures- on the dip and again on the rip.
It doesn't help that while the Boston Marathon bombings were dominating the news, congress saw fit to gut that bill they passed around the election that outlawed congressional insider trading. Suddenly, on "security grounds" lawmakers and their staff can again trade on the knowledge of bills that are about to be passed (or not).
I'm old enough to have heard Milton Friedman speak in person, on the campus where I used to teach (not business or economics, don't worry). I remember him saying that insider trading should be completely allowed, but only because back then you could actually see who was on both ends of a trade. Today, it is no longer possible to know who's trading what. All transparency is out of the market. That one fact does more damage to the so-called "free market" than any "socialist" policies coming from the administration.
You are welcome on my lawn.
1. Government spending as a percentage of GDP has been dropping since 2009. Some would say this is why the current recovery is so anemic. This issue is being addressed.
2. Arbitrage does not suck money from slower traders. It sucks money out of price differences across exchanges thereby reducing spreads. For an average Joe trader it's much more likely that having good arbitrage is going to be a benefit. Strong markets must have efficient price discovery and arbitrage.
3. The bulk of the people in the current system who do not pay income taxes are either retired or have incomes in the lower quintile. If you want to get people to have more skin in the game the way to do it is by having a broader income distribution; not by making the tax system more regressive. The US has a horrible income distribution pattern, one of the worst in the world, and it is getting worse. To get an idea of how severe this problem is, in 1980 the top 1% in the US collected 10% of the income. In 2010 the top 1% collected 24% of the income. The general population cannot possibly have skin in the game with this atrocious economic structure.