High-Speed Trading Glitch Costs Investors Billions

NY Times:

High-Speed Trading Glitch Costs Investors Billions

The glitch that sent markets tumbling Thursday was years in the making, driven by the rise of computers that transformed stock trading more in the last 20 years than in the previous 200.
The old system of floor traders matching buyers and sellers has been replaced by machines that process trades automatically, speeding the flow of buy and sell orders but also sometimes facilitating the kind of unexplained volatility that roiled markets Thursday.

“We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime,” said James Angel, a professor of finance at the McDonough School of Business at Georgetown University.

In recent years, what is known as high-frequency trading — rapid automated buying and selling — has taken off and now accounts for 50 to 75 percent of daily trading volume. At the same time, new electronic exchanges have taken over much of the volume that used to be handled by the New York Stock Exchange.
In fact, more than 60 percent of trading in stocks listed on the New York Stock Exchange takes place on separate computerized exchanges.

Many questions were left unanswered even hours after the end of the trading day. Who or what was the culprit? Why did markets spin out of control so rapidly? What needs to be done to prevent this from happening again?

So it’s true; to err is human, to really screw things up you need a computer.

Farther down in the article it says the plunge may have been caused by a cascade effect from computer programmed trades which are set to sell when the market (or certain stocks) fall X%. Once they start dumping the ball is rolling.


As if human crooks weren’t enough to contend with.

Cost investors billions = somebody made billions?

Good question. I would guess a cascade of automated buy orders went into effect as well as the sell cascade.

Heard about this myself. But as a more business-minded individual I don’t see anything wrong with limit orders personally. If I’m investing in a firm and it’s stocks drop below my limit I want the computers to start selling my stock so I don’t lose my investment. It’s merely a matter of protecting one’s investment.

Dylan Ratigan of MSNBC has provided a worthwhile analysis of the short-term market crash on Thursday:

NASDAQ canceled the trades which occurred during that short period of time in which volatility spiked.

Still, I much prefer a market operated through floor traders and specialists, not computers.

Thanx for the link.
I’m semi-literate at best when it comes to financial matters but my biggest problem is that all the supposed explanations are, of course, hindsight.
But still, I’ve heard the same facts used to explain opposite effects:

Stocks rise as Fed shores up dollar/Stocks fall as Fed shores up dollar.

Stocks fell because new law will impact industry/Rose because now that law is passed they know what to expect.

Market fell due to “profit-taking” – how do you know it’s cashing-in and not dumping?

Market fell due to uncertainty – LOL!! this is my favorite. Does this mean their crystal balls have gone on the fritz?

XYZ Inc. met/failed to meet expectations – whose? Are there professional expecters?

The nice thing about the NYSE specialist system as it used to be, was that all orders in a particular stock had to be directed to that stock’s trading desk. The specialist was expected to be sufficiently well-funded that he could and was expected to, trade against the market to try to even out excess volatility.

At one time, I think that they NYSE had a rule that listed stocks could only trade on the floor of the NYSE. Now, as I understand it, trades can be directed to other computerized trading companies, where no human intervention is involved. With the trading thus split up, those offsite computers are not getting all the orders, particularly not all the buy orders.

So if a computer has a big volume of sell orders and no buy orders, the price drops dramatically. That wouldn’t happen so much, I think, if all trading was done on the NYSE, because first, the trading post for the stock would accumulate all orders on both sides, and second, the specialist could step in manually to slow down trading.

I hardly ever do stock trading, but a few years ago, I did an online stock trade and got back a confirmation within 6 seconds. That did not make me happy. It meant that there was certainly no floor trader who walked my order over to the trading post and executed it at the best price.

There is a lot of speculation and guessing in the stock market but that’s the nature of the beast. Not a big deal I say. But guessing and speculation is how it works. It’s literally impossible to be able to predict what will happen next…those brokers who manage to make numerous brilliant calls over the course of their careers are really just lucky and happened to guess which way the coin would fall.

XYZ Inc. met/failed to meet expectations – whose? Are there professional expecters?

People will look at various companies, examine their past quarterly performances, and then make predictions based on that to determine how they might perform in the future based on any trends they may see. I don’t know if this relates exactly but there are credit rating firms that analyse firms and then determine what credit rating different bonds get. So there are people to examine and study these things to determine how stocks will do and what will happen financially in the future.

Sure it’s not foolproof but if I was investing I’d wanna see if XYZ Corp. was going to turn a profit next quarter or if I just want to pull my stocks and cut my loses now.

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