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SEC Blames Computer Algorithm For 'Flash Crash'

Soulskill posted about 4 years ago | from the steve-jobs-agrees dept.

The Almighty Buck 218

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."

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A time out is the right solution. (4, Informative)

LostCluster (625375) | about 4 years ago | (#33765524)

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.

Re:A time out is the right solution. (2, Interesting)

Maxo-Texas (864189) | about 4 years ago | (#33765596)

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.

It isn't based on the book value of the company.

If 99.9999% of the stockholders are not selling or buying- then the .00001% of remaining traders can walk the price wherever they want to walk it.

Re:A time out is the right solution. (5, Informative)

LostCluster (625375) | about 4 years ago | (#33765684)

Not quite. A stock's quote price is the last price at which a bidder's offer matched a seller's asking price. A "level 2" quote has two parts, the highest bid price that hasn't been matched up yet, and the lowest asking price that hasn't matched up yet. The true value is somewhere in between these two, but nobody knows where until somebody steps in between the high bid or low offer or somebody moves their price to get a deal. Any computer programmer should check that there's matching orders on the other side of their trade before placing a large order. A program that doesn't will execute just fine, but crash the economic system.

Re:A time out is the right solution. (1)

Obfuscant (592200) | about 4 years ago | (#33765794)

Any computer programmer should check that there's matching orders on the other side of their trade before placing a large order.

Umm, sounds like a chicken/egg problem. I can't put in a buy order unless there is a sell to cover it, and I can't put in a sell unless there is a matching buy?

Who's on first?

Re:A time out is the right solution. (3, Insightful)

LostCluster (625375) | about 4 years ago | (#33765864)

Put in a market buy order with no limit, and you open yourself to limitless losses if there's nobody willing to sell at the moment. You'll match the first offer to sell no matter how high it is.

Put in a market sell order with no limit, and if there's no covering buy order you just put in a request to give it away for a penny a share.

Limit orders rule.

Re:A time out is the right solution. (5, Interesting)

Maxo-Texas (864189) | about 4 years ago | (#33765926)

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.)

Re:A time out is the right solution. (3, Insightful)

LostCluster (625375) | about 4 years ago | (#33766000)

It's perfectly legal for a business to say "We think we're worth 5% more a share, and we're willing to pay that price to anybody willing to sell." It's called a buyback, and as Cramer calls the "Sir Mix A Lot Corollary" he says "I like big buybacks and I cannot lie."

Valuation is an art (4, Informative)

sjbe (173966) | about 4 years ago | (#33765952)

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.

Re:Valuation is an art (1)

LostCluster (625375) | about 4 years ago | (#33766418)

The last accepted bid is the historical price even if it was just a few seconds ago. Where it's going next is up for debate.

Re:Valuation is an art (1)

mseitz (582232) | about 4 years ago | (#33766780)

Right. The current price of anything is the lowest amount of money a seller is willing to accept in exchange for something. In stock terms, the seller's asking price is the current price.

Re:Valuation is an art (2, Interesting)

nelsonal (549144) | about 4 years ago | (#33766424)

The dot com bubble more or less correctly predicted the eventual value of ebay, amazon, and google. The problems were

a) no one had any idea who the winners would be

b) the game was sort of a tournment for firms so there were going to be many losers and only a few winners, and

c) most of the dot com companies issued very small portions of the company.

Re:A time out is the right solution. (1)

TheSunborn (68004) | about 4 years ago | (#33765604)

What malfunction?

Yes it was a single sell order which started it all, but what was the malfunction? The sell order did what the developers wanted it to do so there were no malfunction. There may have been an non-optimal sell order but that is all.

Re:A time out is the right solution. (1)

geekoid (135745) | about 4 years ago | (#33765710)

It sold the stocks too fast.

When moving that many stocks, you do it in bits. Otherwise people loose confidence.

Re:A time out is the right solution. (1)

SuricouRaven (1897204) | about 4 years ago | (#33765766)

So again, not a malfunction. The flaw was in design, not implimentation.

Re:A time out is the right solution. (2, Insightful)

LostCluster (625375) | about 4 years ago | (#33766026)

Safety rules are there to prevent people from being stupid even if they want to be stupid.

Re:A time out is the right solution. (0)

Anonymous Coward | about 4 years ago | (#33765744)

Regular people just buy and sell stocks, normally after carefully researching companies. Some "hot shots" thought they could come up with some clever software to monitor the market and buy and sell based on some algorithms that would give them an edge over normal people. When it works, they keep the money. When it fails, ohh poor baby! That's OK! You don't have to take any losses! Let's just pretend this didn't happen!

Fucking crybabies. They gambled and they lost. Why can't they accept it like any normal person would if their carefully researched stock failed?

Re:A time out is the right solution. (1)

LostCluster (625375) | about 4 years ago | (#33765752)

The problem was in bad design... nobody bothered to check that there were enough offers to buy to satisfy the sale. If they wanted to offer it all at a reasonable price, all they had to do was specify a limit price and wait for the buyers to show up. If they wanted to sell quick, they should have known there weren't enough offers to buy to satisfy their sale, so you'd have a market order that would fall to zero on them and somebody should stop that from happening.

Re:A time out is the right solution. (1)

Anonymous Coward | about 4 years ago | (#33765920)

The sell order did what the developers wanted it to do so there were no malfunction.

So you're the guy that always marks bugs as "Works as Programmed."

Re:A time out is the right solution. (1)

TheSunborn (68004) | about 4 years ago | (#33766204)

I would make this one as "Work as described and designed" but the design might have some bad side effects, so I would contact the original designer and hear if he don't want some code to handle those better.

Re:A time out is the right solution. (1)

LostCluster (625375) | about 4 years ago | (#33766334)

Maybe I live in a over-ethical world, but as a programmer I feel a responsibility to tell my customers when they're risking a situation they might not like.

Re:A time out is the right solution. (1)

Ironsides (739422) | about 4 years ago | (#33766308)

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.

Er, no. Martha Stewart went to jail for Obstruction of Justice. She was never convicted of anything else, including insider trading.

Re:A time out is the right solution. (1)

LostCluster (625375) | about 4 years ago | (#33766384)

The obstruction of justice was the fact she faked the phone records, therefore destroying the evidence that would have led to a conviction on insider trading.

Re:A time out is the right solution. (0)

Anonymous Coward | about 4 years ago | (#33766376)

... 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. ...

How is this a malfunction? This sounds perfectly legit to me. If you don't want to "soak up" all the ridiculously low buy offers -- like the kind I routinely submit -- you should submit a limit order and not a market order. Maybe I'm missing something.

Also, does anyone know how advance the math is in HFT software?

Finally (0)

Anonymous Coward | about 4 years ago | (#33765526)

Another proof that Flash is bad for computers! HTML5 all the way!

Regulatory Agencies Don't... (0)

BoRegardless (721219) | about 4 years ago | (#33765540)

Prevent airplane crashes.

Re:Regulatory Agencies Don't... (3, Insightful)

LostCluster (625375) | about 4 years ago | (#33765578)

"Prevent" is such a strong word. They're good at keeping bad things from happening, just not perfect.

Re:Regulatory Agencies Don't... (0)

Anonymous Coward | about 4 years ago | (#33765688)

Communist.

Re:Regulatory Agencies Don't... (4, Interesting)

BoRegardless (721219) | about 4 years ago | (#33765760)

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.

Re:Regulatory Agencies Don't... (2, Interesting)

blair1q (305137) | about 4 years ago | (#33765838)

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.

Re:Regulatory Agencies Don't... (1)

ceoyoyo (59147) | about 4 years ago | (#33766624)

Yeah, because all the bad stuff that's happened over the last little while is due to the little guys screwing up....

Re:Regulatory Agencies Don't... (1)

blair1q (305137) | about 4 years ago | (#33766786)

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.

Don't Get Out Much? (3, Insightful)

mpapet (761907) | about 4 years ago | (#33766098)

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.

Re:Regulatory Agencies Don't... (1)

LostCluster (625375) | about 4 years ago | (#33766538)

The SEC rules are about as open source as they get... file a comment with them if you want to propose improvements.

Re:Regulatory Agencies Don't... (1)

blair1q (305137) | about 4 years ago | (#33765790)

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.

Re:Regulatory Agencies Don't... (1)

BoRegardless (721219) | about 4 years ago | (#33765982)

"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".

Was Windows to blame? Was Unix? Was Java? (-1, Troll)

Anonymous Coward | about 4 years ago | (#33765552)

I can't read the actual PDF because I'm browsing from my phone, but what are the technical details about the software systems that failed here? Was Windows to blame? Was Linux? Was Solaris? Was Java?

Re:Was Windows to blame? Was Unix? Was Java? (1)

LostCluster (625375) | about 4 years ago | (#33765602)

It had nothing to do with the operating system. The program gone amok was running in user space.

OS = kernel + libs + apps (1)

tepples (727027) | about 4 years ago | (#33765704)

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.

Re:OS = kernel + libs + apps (2, Insightful)

LostCluster (625375) | about 4 years ago | (#33765808)

This wasn't a BSOD or General Protection Fault kind of crash, or even a DIV/0. It was an order that didn't have any of the safety measures that should have been there, any one of which could have prevented this from making news. So, there's a new rule... if somebody yells "SELL!" and no buyers show up... they don't fill orders for a penny, they stop, report there's a crazy man in the room, and then there's an auction held to determine who the lucky bidders are.

Re:Was Windows to blame? Was Unix? Was Java? (1)

JWSmythe (446288) | about 4 years ago | (#33765708)

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.

WHAT HAPPENED?
May 6 started as an unusually turbulent day for the markets. As discussed in more detail in the Preliminary Report, trading in the U.S opened to unsettling political and economic news from overseas concerning the European debt crisis. As a result, premiums rose for buying protection against default by the Greek government on their sovereign debt. At about 1 p.m., the Euro began a sharp decline against both the U.S Dollar and Japanese Yen.

Around 1:00 p.m., broadly negative market sentiment was already affecting an increase in the price volatility of some individual securities. At that time, the number of volatility pauses, also known as Liquidity Replenishment Points ("LRPs"), triggered on the New York Stock Exchange ("NYSE") in individual equities listed and traded on that exchange began to substantially increase above average levels.

By 2:30 p.m., the S&P 500 volatility index ("VIX") was up 22.5 percent from the opening level, yields of ten-year Treasuries fell as investors engaged in a "flight to quality," and selling pressure had pushed the Dow Jones Industrial Average ("DJIA") down about 2.5%.

Furthermore, buy-side liquidity3 in the E-Mini S&P 500 futures contracts (the "E-Mini"), as well as the S&P 500 SPDR exchange traded fund ("SPY"), the two most active stock index instruments traded in electronic futures and equity markets, had fallen from the early-morning level of nearly $6 billion dollars to $2.65 billion (representing a 55% decline) for the E-Mini

Why the fuck is it on /. if it's not technical? (-1, Troll)

Anonymous Coward | about 4 years ago | (#33765816)

If it's not technical, then why the fuck is it worth mentioning here? We don't give a damn about the bullshit financial analysis. We are interested in the technological failure that happened! That's what we need to know about! We need to know which operating systems may have failed, or which programming language implementations failed, or which libraries failed. WE NEED THE TECHNICAL DETAILS BECAUSE WE ARE A TECHNICAL CROWD!

Re:Was Windows to blame? Was Unix? Was Java? (1)

LostCluster (625375) | about 4 years ago | (#33766244)

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.

Re:Was Windows to blame? Was Unix? Was Java? (5, Funny)

AnonymousClown (1788472) | about 4 years ago | (#33765738)

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.

Re:Was Windows to blame? Was Unix? Was Java? (3, Funny)

Mikkeles (698461) | about 4 years ago | (#33765830)

So; it would have been fine had they used *BSD ;^)

Ponzi scheme (0, Troll)

pinkishpunk (1461107) | about 4 years ago | (#33765592)

stock markets has never been anything but a glorified Ponzi scheme, not based on the actual value, skilled works or goods of the companies involved. The more they try to fix they little scheme with rules, the more it should be obvious to even the most diehard liberalist.

Re:Ponzi scheme (0)

Anonymous Coward | about 4 years ago | (#33765756)

Stocks represent fractional ownership in a business. Business (including ones that sell on the stock market) provide products and services that people pay for, thus providing compensation for the actual value, skill and workmanship of the goods involved. In short and medium time periods traders and speculators can bid up and down the prices of stocks to unrealistically high or low values. In the long run however stocks will reflect the real value of the business. If stocks stayed unrealistically low, a well funded buyer could do a leveraged buyout to take the company private and make a quick profit. If stocks stay unrealistically high, they might keep getting bid up, with the hopes that a 'greater fool' will come along and buy it off of you for more than you pay for it...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.

With the exception of people like Madoff, there is no Ponzi scheme, only investors, and speculators.

Re:Ponzi scheme (1)

SuricouRaven (1897204) | about 4 years ago | (#33765788)

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.

What? (1)

Iburnaga (1089755) | about 4 years ago | (#33765610)

It's hard to believe there were not already rules in place about the automation of the market place.

Re:What? (2, Interesting)

AnonymousClown (1788472) | about 4 years ago | (#33765698)

There were rules [wikipedia.org] as a result of the Crash of '87 [wikipedia.org] . But in this case, the market didn't hit the 10% decline to trigger the breaker.

This was one of those things that happened outside of the rules.

Re:What? (2, Funny)

LostCluster (625375) | about 4 years ago | (#33766476)

The problem was there's similar rules for crashes of individual stocks, but those rules were only at the NYSE and not everywhere. Now they're everywhere. Problem solved.

So... (4, Insightful)

rantomaniac (1876228) | about 4 years ago | (#33765612)

Remind me, why do we have such a fragile system at the very core of modern civilisation?

Re:So... (2, Insightful)

Anonymous Coward | about 4 years ago | (#33765720)

Because the stock market is not civilized place, it's rigged by supercomputers. The idea that mankind is civilized is the falsehood. A civilized species would not engage in what mankind today engages in.

Re:So... (1)

noidentity (188756) | about 4 years ago | (#33765742)

Maybe civilization isn't exactly the right word for it then.

Re:So... (1)

bender183 (447302) | about 4 years ago | (#33765778)

because people like you and I havent cared enough to fix it yet.

Because it works? (4, Insightful)

Sycraft-fu (314770) | about 4 years ago | (#33765796)

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.

Re:Because it works? (4, Interesting)

jd (1658) | about 4 years ago | (#33765928)

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.

Insightful my ass (5, Insightful)

SmallFurryCreature (593017) | about 4 years ago | (#33765984)

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.

Re:Because it works? (4, Insightful)

houghi (78078) | about 4 years ago | (#33766162)

Just because something works does not mean it is a good idea. Ponzi schemes work.

Re:Because it works? (3, Insightful)

Sycraft-fu (314770) | about 4 years ago | (#33766492)

I mean it works in terms of making an economy work better. It provides a good way for people to invest and borrow money, which is important. A fundamental principle of money is that it has to move around to do anyone any good. It is just a construct to facilitate trade. Trading goods and services is what actually makes an economy worthwhile. Money is just a construct to facilitate that. Well that means money is only good if people spend it, if it moves around. The stock market is something that helps that happen.

If you've a better idea, then it would be great to hear it. All I'd caution you on is to do some research, because as with many things in life there are economic solutions that are clear, simple, and dead wrong. A command economy would be one of those. People say "Why not just have the government control it all? It is resilient but can change quickly." Ya well, command economies have been tried numerous times and failed miserably because they don't deal with human nature well.

As it stands, an open investment market is one of those things that helps economic efficiency. You will notice the US is not unique in it.

Re:Because it works? (0)

Anonymous Coward | about 4 years ago | (#33766270)

“For centuries England has relied on protection, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength. After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, gentlemen, my knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.”

Maybe right now, in the worst crisis since the great depression, it's worth having another look at Ulysses Grant's views. When there's a problem, command economies work. When there isn't, free trade works. The smart move is to notice which position you're in.

Re:Because it works? (4, Insightful)

gethoht (757871) | about 4 years ago | (#33766304)

Exchanges make boatloads of money off of High Frequency Traders(HFT). While their algorithm mows through a ton of investors stops, causing thousands of people to lose money, their algorithm gets the benefit of the doubt as any trade after a certain percentage swing gets nullified by the exchanges. In short, they get play by different rules then other investors. The easiest way to stop all this HFT flash crash shenanigans is to declare all trades of a freaked out algo valid. Then the people responsible for that algo lose tons of cash, as they rightfully should. That loss should incentivize banks and their programmers from writing shitty programs that freak out the markets. As it stands right now the banks and their algos have a win win situation. They get to make millions when their algos work but when their algo's freak out, the exchange gets to declare the trades invalid. Make the trades the algo makes completely valid and I guarantee you won't see algos freaking out as often.

Re:So... (1, Insightful)

copponex (13876) | about 4 years ago | (#33765862)

Because no one hates an honestly earned dollar more than the wealthy, greedy aristocrats that run Wall St. That's why they hate unions. That's why they hate regulations. That's why they hate the minimum wage. They sincerely believe that they are entitled to million dollar bonuses, and everyone else is meaningless.

Their worst nightmare is having to go out and earn their keep. They want to continue gaming the financial casino, and having the middle class cover their bets when they lose. But since they've already gotten away with it and have the money, in the eyes of many Americans they're not crooks, but just good at business.

The reality is that they're just a crime family with better lobbyists that deal in bullshit ponzi schemes instead of drugs.

The Infinium Case Study (2, Interesting)

eldavojohn (898314) | about 4 years ago | (#33765896)

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 [slashdot.org] 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 [businessinsider.com] . 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.

Re:So... (4, Insightful)

mrlibertarian (1150979) | about 4 years ago | (#33765980)

Fragile? The system may have "broke" in a flash, but it also fixed itself in a flash. The only people who were hurt were those who sold because everyone else was selling (stop loss orders).

This entire issue boils down to a particular group of people whining about a single firm's stupid computer algorithm, because that algorithm broke the stupid computer algorithms that group relies on (i.e. stop loss orders). For value investors, this whole thing is just a bunch of noise. Civilization rolls on.

Re:So... (1)

ceoyoyo (59147) | about 4 years ago | (#33766640)

Too bad it didn't take a little longer to fix. By the time anyone who deserved to make money on it heard, it was too late.

Re:So... (1)

benjamindees (441808) | about 4 years ago | (#33766032)

why do we have such a fragile system at the very core of modern civilisation?

The same reason any dysfunctional system continues to exist: by force. Wall street currently happens to be subsidized by government force, by tax breaks and bail-outs and the Fed's redistributive credit policies. But even if it weren't, it would still thrive on the force of capital hoarding and the profit motive and the endless stream of wage-slaves and suckers that lack of functional government tends to encourage.

It is arguable that American civilization itself is little more than a fragile and dysfunctional system propped up by force. Why would you be surprised that it relies, at it's core, on a dysfunctional finance system?

Re:So... (0)

Anonymous Coward | about 4 years ago | (#33766586)

In one word Man.

Ouch (3, Insightful)

citking (551907) | about 4 years ago | (#33765624)

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.

Re:Ouch (4, Funny)

geekoid (135745) | about 4 years ago | (#33765662)

You didn't have to tell us you where a bad programmer, the VB code was a big enough clue~

Re:Ouch (0, Troll)

GPLDAN (732269) | about 4 years ago | (#33765976)

You didn't have to tell us you were bad at grammar. The 'where' was enough.

Re: Ouch (2, Insightful)

Black Parrot (19622) | about 4 years ago | (#33766166)

You didn't have to tell us you where a bad programmer, the VB code was a big enough clue~

I'm proud to confess that I didn't have the faintest idea what he was talking about.

Re:Ouch (1)

FrootLoops (1817694) | about 4 years ago | (#33766138)

"Integer" back in VB6 had a max value of ~32k, so it's even worse than just forgetting cents. Also, it had a lot of automatic type conversions. For instance,

Dim TotalSales As Integer
TotalSales = 15.45

is quite legal, and automatically rounds the cents off. How convenient! (In MS's favor, they've done a better job with the .NET family, at least VC#.)

Here Is The Story +1, Incendiary (0)

Anonymous Coward | about 4 years ago | (#33765680)

      from Zerohedge [zerohedge.com] .

Yours At Liberty 33,

ES6753

If by algorithm, you mean... (1)

gestalt_n_pepper (991155) | about 4 years ago | (#33765786)

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!

Re:If by algorithm, you mean... (1)

JWSmythe (446288) | about 4 years ago | (#33765914)

    That's pretty much the whole stock market game. Take advantage of market fluctuations before someone else does. It doesn't matter if you create those fluctuations yourself or not.

Re: If by algorithm, you mean... (1)

Black Parrot (19622) | about 4 years ago | (#33766094)

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.

Dumping shares below their market value isn't a very good way to pump the market.

Why not just simply ban the practice? (0)

Svartalf (2997) | about 4 years ago | (#33765820)

How about just simply banning "automated trading" altogether. You shouldn't NEED to buy and sell within seconds like they're doing. The bulk of the high-frequency people (the ones doing the 'automated' trading...) are largely doing Arbitrage plays in the first place because they're buying for all of a couple of minutes and reselling higher typically by small amounts- which is why you need the high trading frequency. They're trying to mine the market's volatility for money.

It's part of what's broken with the whole system in the first place- the flash crash we saw is just another symptom thereof and placing trading halts, etc. as "fixes" is like slapping a band-aid on a problem that needs a tourniquet immediately and major surgery afterwards.

Re:Why not just simply ban the practice? (1)

LostCluster (625375) | about 4 years ago | (#33766050)

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.

Re:Why not just simply ban the practice? (4, Informative)

rritterson (588983) | about 4 years ago | (#33766082)

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.

Re:Why not just simply ban the practice? (0)

Anonymous Coward | about 4 years ago | (#33766284)

They are not talking about high frequency trading. They are talking about algorithmic trading, designed to fill orders with the least market impact. For example, one way in which algo trading is done is based on Implementation Shortfall strategy (http://en.wikipedia.org/wiki/Implementation_shortfall). There are many others.

Also, I posted in this topic somewhere--the CME Group is issued a statement rebutting the findings that this trade caused the "flash crash." The CME group is much more convincing in many fewer words.

The government will, simply put, be completely ineffective as a financial regulator if they can't come up with anything better than this low quality analysis. They need to poach some talent from the private sector. Unfortunately, the big "banks" pay so much that they can continue to operate iniquitously with impunity, generating large enough profits to pay massive bonuses (and thus further preventing talent from moving to public sector). It's a vicious cycle.

Re:Why not just simply ban the practice? (1)

Ironsides (739422) | about 4 years ago | (#33766340)

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.

Automated trading ~ Electronic voting machines (1, Troll)

rsborg (111459) | about 4 years ago | (#33765850)

They're both scams. Scams by the rich and established powers to prevent their apple-cart from ever getting upset. They are both extremely vulnerable and the respective lynchpins of critical parts of a developed country: the marketplace is the lifeblood of the capitalism, and voting is the core of democracy.

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.

Not again (0)

Anonymous Coward | about 4 years ago | (#33765856)

Where are the parents?

algorithms synchronized (2, Interesting)

roman_mir (125474) | about 4 years ago | (#33765934)

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.

courtesy Peter Schiff (2, Informative)

roman_mir (125474) | about 4 years ago | (#33766222)

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.

Algor[e]ithm (1)

xactuary (746078) | about 4 years ago | (#33766004)

It Al Gore's fault?

The CME Group has issued somewhat of a rebuttal. (3, Informative)

Anonymous Coward | about 4 years ago | (#33766034)

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."

Um, (1)

rickb928 (945187) | about 4 years ago | (#33766096)

"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.

Re:Um, (1)

Z34107 (925136) | about 4 years ago | (#33766272)

Why are you "no longer sure" you want mutual funds? If your complaint is the Common Man(tm) doesn't have low-latency supercomputers, you better give your money to someone who does. Or find a mattress with good yield.

Live audio feed/transcript of the Flash Crash (0)

Anonymous Coward | about 4 years ago | (#33766144)

Here is a live audio feed/transcripts of the trading floor during the 9 minute Flash Crash -- http://www.protranscript.com/Flash_Crash

It sounds like the guy is going to have a heart attack around the 3:00

No bugs, Nothing went wrong (5, Informative)

Animats (122034) | about 4 years ago | (#33766228)

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.

Re:No bugs, Nothing went wrong (2, Insightful)

LostCluster (625375) | about 4 years ago | (#33766282)

First, none of this involved a "bug" . All systems involved functioned as designed.

A program that runs as designed but produces a undesirable result has a "design flaw" which is a class of "bug". Such things need to be "fixed".

Re:No bugs, Nothing went wrong (1, Informative)

Anonymous Coward | about 4 years ago | (#33766696)

First off, HFT does not increase "liquidity" as proponents claim. What it does is it makes sure those doing HFT always get the optimal buy and sell prices, while everyone else pays a higher price. It's quote stuffing pure and simple. The problem with existing HFT systems is they are dumb, meaning they are used purely for trade execution, not for pattern detection. They can't detect if the market is shifting in a meaningful way. If a stock is actively being trade and the volume changes, it checks to see if the security is one the system should trade. If it is, it tries to make money by buying/selling rapidly. One solution is to change it so that bid/ask costs them money. The other is to enforce a x second delay for all trades.

Audio stream/transcript from the trading floor (1)

syke1911 (1760892) | about 4 years ago | (#33766256)

Here is the audio/transcript from the trading floor during the 9 minute Flash Crash -- http://www.protranscript.com/Flash_Crash [protranscript.com] It gets interesting around 2:30

Let's get few facts straight (5, Informative)

alexmin (938677) | about 4 years ago | (#33766266)

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 [bloomberg.com]

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.

Prevent and Detect (1)

Anomalyx (1731404) | about 4 years ago | (#33766324)

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.

Quote stuffing (1)

bgspence (155914) | about 4 years ago | (#33766446)

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/ [nytimes.com]

http://www.nanex.net/FlashCrashFinal/FlashCrashSummary.html [nanex.net]

http://www.thestreet.com/story/10876642/4/the-5-dumbest-things-on-wall-street-oct-1.html [thestreet.com]

The REAL CRIME (1)

S-100 (1295224) | about 4 years ago | (#33766530)

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.

Flash Crash (0)

Anonymous Coward | about 4 years ago | (#33766544)

Looking at the title, I thought the SEC had sided with Steve.

"algo" - what the heck? (0)

Anonymous Coward | about 4 years ago | (#33766742)

before reading the Atlantic article, I had never seen/heard the term "algo" used as a substitute for algorithm. Did this come from the wall st. types? Perhaps the "quants" who claimed to be able to predict the future?

the only use on Wikipedia is unrelated -- http://en.wikipedia.org/wiki/ALGO [wikipedia.org] , "ALGO is an algebraic programming language developed between 1959 and 1961 for the Bendix G-15 computer." Google results show the mainstream press using it, but the ComputerWorld article doesn't.

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