Everyone is gearing up for a huge debate about high frequency trading today.
The huge glitch that occurred yesterday when the DOW dropped faster and further than ever before has everyone worrying that it was a result of, or exposed, a glitch in the computer algorithms that often drive high frequency trading.
High speed trading glitch “costs investors billions!” says the New York Times.
The talk is that some unexplained huge surge in selling occured around 2:45 PM.
We still don’t know what caused it (the SEC is investigating) but the suspicion is that when the market jolted, it set off computer algos that respond to market movements. Then like a snowball those algos created movements that triggered other algos and soon the market spiraled out of control.
The fear is that when something happens in the market that hasn’t ever happened in the market before, the algos don’t know what to do and so they go insane. Then because humans aren’t in place to take control and put a stop to it, or say, “whoa, wait a minute, why the heck is Accenture selling at $.01? Something isn’t right,” the market goes haywire. It’s like Y2K all over again.
“We have a market that responds in milliseconds, but the humans monitoring respond in minutes,” James Angel, a professor of finance at Georgetown’s business school told the New York Times. “Unfortunately billions of dollars of damage can occur in the meantime.”
For example, if enough programs place sell orders when the overall market is down, say, 4 per cent in a single day, those orders could push the market down even more — and set off programs that do not kick in until the market is down 5 per cent, which in turn can have the effect of pushing stocks down even more.
The fact is high speed trading now accounts for around 60% of trading volume. It provides the market incredible liquidity (in a normal environment) and trading today relies heavily on it.
The US glitch is going to slow the rollout of high frequency trading in other countries, says the Wall Street Journal. It’s probably ideal that investor confidence in high speed trading be restored before other markets introduce high volumes of algo-trading to their markets.
Meanwhile, expect lots of hearings (apparently there will be some on Tuesday) to complement what the regulators are doing.
Our guess: there’s huge economic incentive to make sure computers don’t freak out and cause issues, so whatever happened yesterday should be solved.
But as we’re seeing, there’s huge tension between the NYSE and the electronic exchanges about the fundamental nature of trading
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