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Bug Government Software The Almighty Buck United States Politics

House Calls For Hearing On Stock Market "Glitch" 180

Lucas123 writes "The House Financial Services securities subcommittee plans to hold a hearing next Tuesday to examine what caused the US stock market to plunge almost 1,000 points in a half hour Thursday, and it called on the SEC to investigate possible problems with computer algorithms that may have exacerbated a human order-entry error and led to the precipitous drop. 'Reports have surfaced that much of this movement was potentially as a result of a computer glitch,' Committee Chairman Kanjorski said. 'We cannot allow a technological error to spook the markets and cause panic. This is unacceptable. In this day and age and with the use of such complex technology, we should be able to make sure that our financial markets are effectively monitored and investors are protected.'"
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House Calls For Hearing On Stock Market "Glitch"

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  • Its strange. (Score:4, Insightful)

    by drolli ( 522659 ) on Saturday May 08, 2010 @08:19AM (#32137744) Journal

    I mean.. they *have* the logs, i hope. I mean they *have* some software anyway which does data-mining to analyze for unusual things....

  • Well... (Score:4, Insightful)

    by boliboboli ( 1447659 ) on Saturday May 08, 2010 @08:19AM (#32137746)
    It doesn't take a subcommittee hearing to figure out that people are finicky and the system is remarkably fragile.
    • Re: (Score:3, Interesting)

      by hemlock00 ( 1499033 )
      Are you suggesting we shouldn't have a hearing for it? Not really sure the benefit of *not* having a hearing would be. At the most, it draws more attention to the fragile system, and there would be a possibility of something being done about it. At the least, it would officially destroy the idiotic excuse that "someone hit b instead of m" story that some media has been circulating.
      • Re:Well... (Score:4, Insightful)

        by Agarax ( 864558 ) on Saturday May 08, 2010 @09:03AM (#32137936)

        Are you suggesting we shouldn't have a hearing for it?

        All hearings are these days is a convoluted way for politicos to take cheap shots at someone to boost their popularity at home.

        • And when weren't they?

          This is a job for the executive branch. Actually.. maybe it's a job for *nobody* since it's likely that it was just automated trading triggers all got..triggered.. for some reason.

          That suggests that the trading companies need to do failure analysis, not that the government needs to step in and do...something...

      • someone hit b instead of m

        I haven't followed the story that closely. Why is this an "idiotic excuse".

        So much of the trading is done automatically that seeing someone short a billion shares of a blue chip could make some big waves. But you'd think there'd be a prompt on the screen: "Are you sure? Y,N"

        • someone hit b instead of m

          I haven't followed the story that closely. Why is this an "idiotic excuse".

          So much of the trading is done automatically that seeing someone short a billion shares of a blue chip could make some big waves. But you'd think there'd be a prompt on the screen: "Are you sure? Y,N"

          Maybe a peer review process your help. Something like Trades over this value have to go to another trader in your team for approval.

      • The problem is that the hearing is addressing the wrong thing. The problem is that a large part of our economy is based around moving numbers from one column to another, rather than actually creating anything, and it exists in a feedback loop that makes creating things an increasingly bad return on investment. The fact that the system where you move numbers between columns is also a positive feedback system, and so is intrinsically unstable, is a tangential issue.
      • by KlomDark ( 6370 )

        Yes, I also think that the "someone hit B instead of M" story is in fact: BM

    • Re: (Score:3, Insightful)

      Exactly. Basically it seems to boil down to the fact that the traders don't actually have a clue how it all works. It's so computerised now with such complex algorithms, that if the market moves in anyway they all have to follow like sheep for fear of getting caught with their pants down. And things are getting worse.

      I see two solutions:-

      1) Go 100% computerised and just throw in the odd random factor to keep things moving. After all, it's all one big random gamble anyway, may as well just admit it.
      2
    • by mgpeter ( 132079 )

      However, they should have a "real investigation" to find out:

      Why on earth did it rebound the way it did and remain stable the rest of the day ?

      Why are their reports that traders were locked out their systems during the entire 10-15 minutes of the drop ?

      What effects the "Working Group on Financial Markets" aka Plunge Protection Team have on the markets. This entity has absolutely no oversight and can pretty much manipulate the markets how it wishes. The "conspiracy theorist" in me think that they might hav

    • by ericlondaits ( 32714 ) on Saturday May 08, 2010 @10:58AM (#32138652) Homepage

      Perhaps someone who knows more about stock trading can help me understand:

      1) TFA states that someone made an input mistake and sold 16 billon Fortune 500 stocks instead of 16 millon. Did he have that many to sell? How big a player do you have to be to be able to make these type of mistakes.

      2) TFA states that at one point shares for some companies dropped to a mere penny and then rebounded. Were people able to take advantage of the sudden drop to sweep and get a fast couple of millons due to the glitch?

      And in conclusion: Does the system's inherent frailty allow this type of event to be orchestrated in order to make a big profit, or a new type of terror attack?

      • by russotto ( 537200 ) on Saturday May 08, 2010 @11:09AM (#32138738) Journal

        1) TFA states that someone made an input mistake and sold 16 billon Fortune 500 stocks instead of 16 millon. Did he have that many to sell? How big a player do you have to be to be able to make these type of mistakes.

        This sounds like the sort of apocryphal story someone made up meaning it sarcastically. ("WTF happened? Probably some moron hit 16 billion instead of 16 million!"). If there was a 16 billion dollar sell order, there's a record of it and it wouldn't still be speculation now.

        2) TFA states that at one point shares for some companies dropped to a mere penny and then rebounded. Were people able to take advantage of the sudden drop to sweep and get a fast couple of millons due to the glitch?

        Some of the exchanges reversed those transactions on some of the stocks, but not all of them. Some people with existing limit orders probably did pretty darned good.

    • to figure out that ... the system is remarkably fragile.

      Except that it isn't. The system recovered within five minutes because the glitch presented such ridiculous buying opportunities that any sensible person would buy. The macroeconomic system is inherently self-righting; it's just a matter of time-scale. For stocks, the time scale is minutes for bargain hunters. But I can agree that people are indeed "finicky". I look forward to the market declining in the next few weeks as people panic over Europe

    • It'll take a serious investigation to discover the people who are really behind this orchestrated crash.

  • Politicians grandstand.

    Wall Street sits there.

    Nothing gets done.

    And in this case, I don't there's really anything to be done. It was a mistake that was corrected and if anyone was hurt, it was Wall Street traders and the only thing I have for them is this nano-tech violin.

    If you had your mutual fund or individual stocks, it really didn't affect you.

  • by Anonymous Coward on Saturday May 08, 2010 @08:24AM (#32137766)

    Cancel or Allow?

    • Re: (Score:3, Insightful)

      by nycguy ( 892403 )
      You've apparently never written a trading system. Any such mechanism that is sufficiently stringent to catch the majority of such errors is by definition going to generate a number false positives--legitimately oversized trades that do need to be executed. Pretty soon the traders start clicking "allow" by reflex, and then the check becomes useless. Humans being visual creatures, the one mechanism I've seen work is to show the trader a graph of the stock price with the estimated market impact of the trade th
    • *clicks on [x] to close window*
      .
      .
      .
      (*program transfers money*)

  • "we should be able to make sure that our financial markets are effectively monitored and investors are protected".

    New York, concrete jungle where dreams are Madoff.

  • What glitch? (Score:4, Interesting)

    by AHuxley ( 892839 ) on Saturday May 08, 2010 @08:33AM (#32137798) Journal
    The world got to see the reality for a short time and then went back to sleep
    http://www.zerohedge.com/article/day-market-almost-died-courtesy-high-frequency-trading [zerohedge.com]
    http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=C%3AUS&sid=agW5_B0D1z9M [bloomberg.com]
    "CME Group Statement on Today's Market Activity:"
    "does not appear to be irregular or unusual in light of market activity today"
    • Re:What glitch? (Score:5, Interesting)

      by AnonymousClown ( 1788472 ) on Saturday May 08, 2010 @08:42AM (#32137828)
      From top liink:

      After today investors will have little if any faith left in the US stocks, assuming they had any to begin with.

      During the GM bankruptcy, I saw their common stock was still being traded on the pink sheets. That's when I realized that many traders have shit for brains.

      When a company goes bankrupt, their equity gets wiped out. In other words, the traders were trading worthless pieces of paper. My father in law almost bought some thinking it was a great deal. I clued him into the idiocy.

      • Re:What glitch? (Score:4, Informative)

        by khallow ( 566160 ) on Saturday May 08, 2010 @09:32AM (#32138112)

        During the GM bankruptcy, I saw their common stock was still being traded on the pink sheets. That's when I realized that many traders have shit for brains.

        Bankruptcy does not always wipe out equity in Chapter 11 cases. Some people bet that the bad news isn't as bad as thought. Having said that, I went through a phase where I bet on bankrupt and near bankrupt companies with rather poor success. The thing I figured out later is that at very low share prices, a little too much optimism can pump up a stock quite a bit. So I was almost always paying a hidden premium on these companies even though they were near bankruptcy.

        • Not to mention, try to find a broker that will let you sell short on the pink sheets...
        • There was another factor at play with GM, and it was stupidity. When GM was restructured and GM NEW STOCK came out, the price of GM OLD STOCK (which was now worth nothing) spiked upwards. Apparently, idiots wanted to buy GM on news that it came out of bankruptcy but bought shares in the bankruptcy vehicle.

      • Re:What glitch? (Score:5, Interesting)

        by ph1ll ( 587130 ) <.ph1ll1phenry. .at. .yahoo.com.> on Saturday May 08, 2010 @10:44AM (#32138576)

        Agreed. A friend of mine who is a lawyer for a well-known investment management firm was amazed when their traders were doing business with Lehman the day after it filed for bankruptcy.

        When he asked them what the hell they were doing trading with a bankrupt, they told him "but the prices on the screen are amazing!"

        He had to explain to them that the prices were amazing because they were unlikely to see the transaction completed by their counterparty. "Have you not been reading the papers?" he asked, exasperated. But all they could do was stare at the trading screen.

        They just didn't get it. That's the thing about these so-called Masters of the Universe - they're not the best and the brightest despite what they think.

        My friend then had to spend the next 36 hours working non-stop to close the positions his traders had taken as best he could. The really astonishing thing was that his boss reprimanded him for not explicitly telling the traders earlier not to trade with Lehman.

      • You have to note that General Motors entered Chapter 11 bankruptcy protection, rather than Chapter 7 bankruptcy liquidation. In Chapter 11, the company gets a court supervised reprieve from debt payments in order to renegotiate those payments with its suppliers and bondholders. Whether the shareholders get wiped out or not depends on whether the bondholders insist that they be wiped out.

        If in another five years, GM is trading a lot higher than it did during Chapter 11, you should be ready to explain to yo

      • To echo that top link:
        "After today investors will have little if any faith left in the US stocks, assuming they had any to begin with."

        That describes me. I've got some respectable money in my 401k, but I'm early in my career (early 30s). I don't believe Social Security will still be around when I retire, and with these idiots on Wall Street, I don't think any of my 401k will be either. I predict a lot of people shifting their 401k investments towards bond funds shortly.

    • Thank you for that link. This being a side effect of rampant high frequency trading is the first explanation I've read that actually made any sense.
    • The problem I have with the "blame high frequency trading" narrative is that it doesn't explain all the other times when high frequency trading could have done even more damage, but didn't. If these algorithms are so sensitive that a tiny fluctuation can set them off, then why didn't markets tank even harder in response to truly monumental events, like Lehman going bankrupt, or the House of Representatives' initial rejection of the TARP? I mean, you would have figured that the same algorithms would have k

  • Protection... (Score:3, Insightful)

    by noodler ( 724788 ) on Saturday May 08, 2010 @08:36AM (#32137806)

    "This is unacceptable. In this day and age and with the use of such complex technology, we should be able to make sure that our financial markets are effectively monitored and investors are protected." ... because protectig investors is more important than protecting the economy.

    • Re:Protection... (Score:4, Insightful)

      by Richard_at_work ( 517087 ) on Saturday May 08, 2010 @10:41AM (#32138548)
      What do you think the economy is made up of? Investors aren't just the evil 'banker' - anyone holding a pension or a savings account is also an investor.
    • Re: (Score:3, Informative)

      by quanticle ( 843097 )

      Hint: investors are the economy. Without investment and trade, there is no economy to speak of.

      • Re: (Score:2, Interesting)

        by noodler ( 724788 )

        And without resources, workers, producers, consumers, etc. there would be no economy to speak of too.

        If there is a lesson to be learend from the recent civil uprising in Greece then it's that there is more to economics than investors.

        • Re: (Score:3, Interesting)

          by quanticle ( 843097 )

          I agree 100%. However, one must acknowledge that Greece would not be in the pickle that it is today if it were not for multiple Grecian governments borrowing and spending money that they could not effectively repay. In other words, there wouldn't be any civil unrest if Greece had taken into account the long term consequences of the contracts it was entering into with investors.

      • So ... if a non-traded company has a large number of employees, large revenue, makes semi-products and reinvests most of its surplus into expanding its production lines ... it has no impact on the economy?

        Or let's look at it another way - how many companies in the US are traded companies? How many people do they employ? I don't know the numbers, but I'm fairly certain you'll find that it's about 50% or so.

        And while these companies may not have much if any impact on what goes on in the stock market, I'm pret

    • On the contrary, I'm all for protecting investors who keep money in companies for years. I just hope that traders get beaten down.
  • by dollarwizard ( 1806856 ) on Saturday May 08, 2010 @08:41AM (#32137826)
    WSJ is reporting [wsj.com] that the trigger was a very large sell order for P&G coupled with unchecked computer trading and some inherent flaws in the current system of fragmented exchanges.

    Felix Salmon also did a good explanatory post [reuters.com] that pulled in work from other writers about what might have happened and why.

    Mr. Salmon's post links to a thought provoking post by a blogger named Kid Dynamite [blogspot.com], who posits that it's a really bad precedent to cancel the erroneous trades because it lets the program traders off the hook for the consequences of their computer mess-up.
  • *Much* easier to buy on those dips when you can induce the dips with software. Shares dropped to a penny? I'll take a million please!

  • by joostje ( 126457 ) on Saturday May 08, 2010 @08:47AM (#32137858)
    So NASDAQ cancelled all trades the more 60% off of the stock's price [cnn.com].

    Who decides that? And what happens to a smart invester that buys stock at $0.01 that usually trades at $40, to quickly later sell it at $30? Will the $0.01 buys be cancelled, but the $30 sells not be cancelled? But that would leave you with a short position, having to buy them back at $40. May be very expensive.

    • The board of NASDAQ decided to do that, most likley after consultation with the SEC. If a transaction was rolled back then all subsequent transactions of those shares would also have to be rolled back since the original sale "never happened". Presumably this is why they had to coordinate the action with other exchanges.
    • by jbengt ( 874751 )

      And what happens to a smart invester[sic] that buys stock at $0.01 that usually trades at $40, to quickly later sell it at $30? Will the $0.01 buys be cancelled, but the $30 sells not be cancelled? But that would leave you with a short position, having to buy them back at $40.

      I agree that that would be unfair.
      Perhaps, though not ideal, they could address that issue by forcing the original $0.01 trade at the $30 price.

    • Who decides that? And what happens to a smart invester that buys stock at $0.01 that usually trades at $40, to quickly later sell it at $30? Will the $0.01 buys be cancelled, but the $30 sells not be cancelled? But that would leave you with a short position, having to buy them back at $40. May be very expensive.

      My heart bleeds, maybe he could just get a job instead of trying to make money out of nothing.

    • Are they going to start Invalidating trades that are "Too good" too?

      Or is this more of Privatize Profit, socialize losses.

      I would love the see people lose their shorts, so maybe they would be a bit more careful next time

  • Who made the money? (Score:5, Interesting)

    by hairytomato ( 1807198 ) on Saturday May 08, 2010 @08:51AM (#32137876)
    Follow the money. SOMEONE made money, it sure as hell wasn't me.....
  • Let's be sensible here. Stock should (big should) represent the value of a company based on its market value. If a company's doing good, its stock should be valuable because it's backed by the market strength of the company represented.

    Thus such a "glitch" should have little effect. But it has incredible effect. Why? Because stock values are horribly inflated. Still, even after the bubble allegedly popped. We're still heaps over value. Have been for quite a while now.

  • by ibsteve2u ( 1184603 ) on Saturday May 08, 2010 @09:52AM (#32138214)
    The assumption of an "honest" error, that is; who is to say that the market isn't being routinely manipulated, and somebody goofed the size of the planned "bump"?
  • I suspect this is another one of those cases where the customer (government) wanted all kinds of features and monitoring but started to cut corners when it came with a price tag. It's amazing how little gets accomplished when the customer wants the pie in the sky features and doesn't realize it costs money.

    Yes, I realize this works both ways. It could be that the requested monitoring and features were priced outlandishly by the contractor. In the end, everybody loses. All in all, I'm not going to hold m

  • Is there a single member of Congress with a Finance degree? Do any of them have a clue how the market is supposed to work? Are they going to do something that will have a positive influence?
    Of course not!

    Just a way to look like they are doing something in an election year.
    If they were serious about the real problem they would balance the budget.
  • Oh wait, there already doing that with humans ready to sell and buy ...... but who wants you to know that?

    http://www.spiegel.de/international/europe/0,1518,676634,00.html [spiegel.de]

    http://www.pbs.org/wgbh/nova/transcripts/2704stockmarket.html [pbs.org]

    Officer B. Madoff will show up if you call 911 about it.

  • Just put in XX hours of lag on the trading on stocks. The daytrading bring nothing positive to the companies.

  • This is just a diversion so that those with money invested have time to get that money out before the majority of investors wake up and realize there are huge real problems. The Greek economic crisis is just a taste of the problems to come as developed economies have taken dangerously high proportions of debt to bail out their banks.

    The bankers run everything. /paranoid rant

  • As someone once said, "If you look around the table and you don't spot the mark, it's you."

  • by Richard_J_N ( 631241 ) on Saturday May 08, 2010 @01:00PM (#32139636)

    I wonder whether the synchronous-counter approach would help reduce glitches here. In other words:

      - at HH:MM:00 update the prices (and allow the change to propagate; everyone can put in their next trade order)
      - at HH:MM:30 execute the trades (and then there are 30 seconds to decide on the new price before a value is propagated)

    This is the way that synchronous logic works. The current model is more like hundreds of ripple-counters.

    (It would also ensure slightly greater fairness by not giving an advantage to the person with the absolutely fastest network connection, and would slow down the cycles so that a market collapse took many minutes.)

  • In this day and age because of the use of such complex technology,

    There, fixed that for ya.

  • Why so serious?

  • It's getting closer to a time when the entire world economy collapses due to a chained event in the stock markets that wipes out all this virtual equity and maybe then people will start considering a ban on this legalized form of gambling that is today's stock market. Stocks change positions these days based on rumors and lose equity due to glitches and nobody really understands what real equity exists in these companies that are being traded because it so convoluted and vaporous.

    We need a Butlerian Jihad

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