May 07 2010

Wall Street’s Ten-Minute Trillion-Dollar Computer Freak-Out

The Dow Jones Industrial Average fell almost 1000 points in ten minutes today, wiping out $1 trillion in equity values as algorithmic trading by high-speed computers spun out of control.

What passes for sanity on Wall Street was eventually restored, and after falling 998.5 points or 9.2% in only a few minutes, stocks ended the day with a relatively benign loss of 3.2%, 347 points off the Dow, in what was still its biggest one-day tumble since February, 2009. Luckily, investors didn’t see that much of an impact during this loss. Stock markets do tend to fluctuate from time to time, so investors should expect this. Hopefully, the stock market will increase again after this, encouraging more people to try and invest their money. For those who do want to do this, it might be worth reading about welche Aktien kaufen (what stocks to buy) online to make sure the investment will be a good one. No one can predict the stock market, but choosing a safe option is always a good idea.

The more or less rational fraction of this mini-panic was apparently fear that the Spanish economy would collapse along with Greece, and then…

Robot-traders ran wild!

And it wasn’t the first time.

The 1987 crash, when the Dow lost 20% in a matter of hours, was blamed squarely on program trading, in which computers are set to sell (or buy) when stocks hit a certain threshold.

But at the end of the day, nobody knows exactly what happened, or why, and our economy continues to be ruled by a tunnel-vision coalition of half-bright wonks and predatory hustlers.

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  1. The Wall Street Journal also mentioned a few especially crazy micro-crashes:

    Boston Beer Company, which produces the line-up of Sam Adams beers, went from $59.44 to… Zero!

    Exelon, one of the largest utilities in the world, with a market cap of about $30 billion, declined to… Zero!

    Both those stocks eventually recovered, and meanwhile the giant auction-house Sotheby’s was riding the whilwind in the opposite direction, and exploded to the absolutely senseless stock-price of $100,000 per share, before eventually returning to its typical value of $33.

  2. Does anybody understand this shit?

    Is the apparently unregulated multi-trillion-dollar hocus-pocus of algorithmic trading transparent to anybody?

    “The potential for giant high-speed computers to generate false trades and create market chaos reared its head again today,” Senator Edward Kaufman said in a statement.

    “The battle of the algorithms — not understood by nor even remotely transparent to the Securities and Exchange Commission — simply must be carefully reviewed and placed within a meaningful regulatory framework soon.”

  3. Although it’s now (and probably forever) impossible for any human being to comprehend exactly how the avalanche of high-speed computer-trading began to roll down the Dow, last year Seeking Alpha ran an unusually transparent description of how so-called High-Frequency Trading can be manipulated, and even though it doesn’t specifically apply to today’s ten-minute panic, it still supplies some relevant context IMHO…

    Let’s say that there is a buyer willing to buy 100,000 shares of BRCM (or any other stock) with a limit price of $26.40. That is, the buyer will pay any price up to $26.40.

    But the market at this particular moment in time is at $26.10, or thirty cents lower.

    So the computers, having detected via their “flash orders” (which ought to be illegal) that there is a desire for Broadcom shares, start to issue tiny (typically 100 share lots) “immediate or cancel” orders – IOCs – to sell at $26.20. If that order is “eaten” the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no bite and the order is immediately canceled.

    Now the flush of supply comes at, big coincidence, $26.39, and the claim is made that the market has become “more efficient.”

    Nonsense; there was no “real seller” at any of these prices! This pattern of offering was intended to do one and only one thing – manipulate the market by discovering what is supposed to be a hidden piece of information – the other side’s limit price!

    With normal order queues and flows the person with the limit order would see the offer at $26.20 and might drop his limit. But the computers are so fast that unless you own one of the same speed you have no chance to do this – your order is immediately “raped” at the full limit price! You got screwed, as the fill price is in fact 30 cents a share away from where the market actually is.

    In a nutshell, Speedy Traders INC “probes” your computer algorithm with tiny offers, and in a time-frame of 3 milliseconds they uncover your high bid, like a kid luring ET out of his hiding-place with a trail of M&M’s.

  4. Oh yeah we are such masters of our own universe here.

    How do you regulate, legislate against a species in perpetual error.

  5. Be calm. Everything is under control. Please continue to send your 401k money to Wall Street so the bankers can continue to steal it.

  6. Fat finger my ass.

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