Earlier today we had the chance to speak with Ben Bittrolff of Cyborg Trading and had the opportunity to discuss the world of high-frequency algorithmic trading at length.
Eventually we came across the topic of the Rambus (RMBS) “fat finger” incident in which RMBS stock fell nearly 35% in a matter of minutes, only to later rebound.
Traders called the incident a “fat finger” or human error. According to Ben, such is not the case.
As Ben argues, human interaction is largely gone from major trades involving large blocks of stock. An algorithm will not allow a huge order to go out all at once. If anything, it’ll slowly begin to breakup the block into smaller orders, whether you like it or not. The algorithms have fail-safes of sorts built into them, so when a large calibre order comes through, it’s immediately checked and processed into smaller orders.
A better theory for Rambus is that incorrect data was fed to an algo, setting off a chain reaction across the market. All an algo needs to go haywire is a false tip or data point and everything goes off. After all, it’s just a computer model and can’t play a market like the human mind can.