“Not so long ago, if our markets experienced severe stress, and certainly a “fat finger”, human wisdom would intervene. Reasons for the stress would be ascertained, trading in affected stocks would be slowed or halted, stabilizing bids would be initiated as needed, and severe volatility would be dealt with in a calm and reasoned manner.

Today, the human specialist model has been replaced by an automated market maker model. Our market structure has evolved. It has evolved, not by design,
or a well-thought and reasoned plan, but it has evolved to cater to masters of expensive technology, deployed unfettered by participants whose only concern is to squeeze out every last picosecond and fractional cent before they move on to other countries’ markets and asset classes. The for-profit exchange model at every chance sacrifices the protection of long term investor interests for the profitability of serving hyper-leveraged intraday speculators . . .

Today’s price swings in a great number of stocks highlight the inherent and systemic risk of our automated stock market, which has few checks and balances in place. Once the market sensed stress, the bids were cancelled and market sell orders chased prices down to the lowest possible point.”

-Sal Arnuk and Joe Saluzzi, Themis Trading

>

The quote above, from NJ traders Themis, squarely places the blame for Thursday’s one day crash on high-frequency trading. I have no idea if that was the sole cause of the crash; however, these criticisms of HFT are valid.

Alan Abelson described it thusly: “What helped turned a suddenly wobbly market into a ferociously vertiginous one was the astounding rapidity with which bids melted at the first real sign of selling.”

On Friday, I told a reporter that regardless of HFT’s role in the collapse, it is still a violent abrogation of the fiduciary duties owed to investors by stock exchanges. The NYSE has sold investors down the river in order to allow fee-paying, co-locating, black-box traders to profit unfairly at the expense of every other investor.

The capital destruction the exchanges are encouraging warrant capital punishment for exchange’s C level execs.

As Sal Arnuk and Joe Saluzzi of Themis Trading observed, the sudden liquidity departure was courtesy of “your friendly” high-frequency traders:

“To Sal and Joe, Thursday’s market — which was off at one time an awesome 9.2%, the biggest intraday plunge in all of recorded history (and probably unrecorded history as well) — demonstrated clearly “the inherent and systemic risk of our automated stock market, with few checks and balances in place.” And, they lament, “our market structure has evolved to cater to masters of expensive technology, deployed unfettered by participants whose only concern is to squeeze out every last picosecond and fractional cent.”

Its worth noting that HFT now accounts for between 50% and 70% of trading. The supposed liquidity it supplies to markets — a lame excuse of ever there was one for legalized theft to be tolerated — simply up and went away during the crash. Abelson smartly dismisses the HFT rationale by observing: “It sorrows us to report that the bare bones of what happened on Thursday is that when the going got rough, the high-frequency crowd stampeded for the exits and their vaunted pools of liquidity vanished with them.”

The Themis boys add that this event is not likely to be an isolated incident.

>

Sources:
The Emperor Has No Clothes; We Need A New Mousetrap
Themis Trading, 07 May, 2010  
http://blog.themistrading.com/?p=850

The Infants’ Intifada
ALAN ABELSON
Barron’s MAY 8, 2010  
http://online.barrons.com/article/SB127327085007088539.html

Previously:
Flash Trading’s Dark Volumes (July 22nd, 2009)
http://www.ritholtz.com/blog/2009/07/flash-tradings-dark-volumes/

King Report: HFT (July 10th, 2009)
http://www.ritholtz.com/blog/2009/07/king-report-hft/

So Much For High Frequency Trading (September 18th, 2009)
http://www.ritholtz.com/blog/2009/09/so-much-for-high-frequency-trading/

Cash Cow – High-Frequency Trading (October 1st, 2009)
http://www.ritholtz.com/blog/2009/10/cash-cow-high-frequency-trading/

Category: Regulation, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

86 Responses to “Blame High-Frequency Trading”

  1. rktbrkr says:

    We need some clarity from NYSE – a lot of clarity about how their trading “slowdowns” in particular stocks work. It’s well known & understood that there is a trading pause when the Dow index hits a particular number – 1050 but I saw no timely disclosure about slowdowns in particular plunging stocks.

    Is the NYSE slowdown for particular stocks dicretionary or automatic? Is it disclosed or secret? How long was it in effect? Do they maintain a history file of these individual slowdowns or was this the only implementation. How did NYSE arrive at 60% off rule, is it pre-established or ad hoc?

    The writeup I saw said trading in the affected stocks was stopped while they switched to slow mode, the high speed trades were then routed off exchange and blew thru bids and landed at a penny or less. During this NYSE slowdown the specialists are given time to evaluate and place buy orders so they looked at Accenture etc at 1 penny and started buying – did they know about the 60% off rule at that time? Since the NYSE 60% off rule only applies to exchange traded transactions then the off exchange deals will stand?

    Was it just serendipity that the plunge stopped a point and a half short of 1000 psychologically disturbing number and only 51.5 points away from a marketwide pause and everything that comes with it.

    It’s funny how fast the phat finger explanation was trotted out, I think someone had it prewritten like an obit. The more that surfaces about the event, the worse it looks from the investors perspective. It will be very interesting to see which bargain transactions stand.

    And stop loss orders shouldn’t been seen as risk management tools, just blank certificates of confiscation.

  2. I expect this to generate some discussion and pushback . . .

  3. tawm says:

    Remedial Question for us 101 Investors:
    Given the recent discussion about how useful Stop Loss orders are, did anyone’s stop loss orders get triggered in Thursday’s plunge? What I’m wondering is: is increased market volatility a reason for conservative, part-time investors (who are basically sticking with buy-and-hold equities) a reason to avoid stop loss orders?

  4. Marcus Aurelius says:

    With or without automated trading — and aside from technological issues and/or “new product” “innovations” — the markets are very risky right now. Fundamentally, the entire enterprise has become a scam in which the participants can’t be sure if they’re betting for or against the house (trust me on this: the house is betting against you, and the game is rigged in their favor). Even day-trader permabulls know that they are skating on thin ice, at the edge of a waterfall. Only the thick-headed, insane, suicidal, coke-addled, or thrill-seeker types will fail to heed the warning of last week’s “glitch” and its immediate aftermath.

  5. Pir2 says:

    if the first breaker is to stop at 10% loss, the HFT did a well organize stop at 9.2% to avaoid a closure and a ton of $ was made during the rebound. if we want to avoid this fear then let’s raise the breaker to 5%. But i will wait for their explanation to what trigger the dam to fail and as well as why did it close as fast?
    was the HFT involve when the market bounce back? do we blame them when market goes up?

  6. Nic says:

    Well it’s a cold hard world when you are an HF trading company isn’t it.
    Do you think the market would be anywhere near these lofty levels if it had not been for these black boxes constantly trading with themselves? Always on the bid, always stepping in when the market reached technical levels or looked like it might have a bad close, all night back and forward with each other in the futures market while we slept ensuring this market could get higher and higher on minimum volume.
    And then they take 10 minutes off and you all want to ban them. Jeez, where is the gratitude in the first?

  7. DeDude says:

    We need some kind of a combination of a ban on selling of any given share more than once in a trading day, and a tax on every trade. This madness must be stopped before free market capitalism destroy itself. Or should be just let it blow itself up ;-)

  8. Marcus Aurelius says:

    Nic Says:

    “Do you think the market would be anywhere near these lofty levels if it had not been for these black boxes constantly trading with themselves?”
    _______

    Lofty levels supported by toothpicks. The shit’s gotten rickety.

  9. Tarkus says:

    The myth of for-profit “liquidity providers” is flushed (wasn’t that an oxymoron to begin with?). Will Goldman include this unethical practice in its “introspective review”? Will any other TBTF bank? IMO, no – and the answer is probably because as a psychologically profiled group, there is likely a larger number of sociopathic personalities collected in those types of organizations (from mild to severe.) Smart, but sociopathic. The types that would be amused at “stealing money from grandma” (Enron), “shorting your house” (Deutsche Bank), or selling “CDO2′s to widows and orphans” and “shitty deals” to clients (Goldman) exhibit a psychology that in those firms actually propels them higher and compensates them more. While true investing is a derivative of entrepreneurship (seeking opportunity among different productive aspects of the economy, a la Buffett), TBTF banks are principally predatory in their practices since the growth model of a Buffett is insufficient to sustain their reward structure. So while the PR and and attempts at soothing the peasants will proceed, changing it would require changing a foundational pillar by which such companies prosper – so it will not happen despite lip-service to the contrary. A stern hand dispensing real regulation is not a bad thing in dealing with such mentalities. It is controlling groups whose purpose is to transfer chunks of the economic pie (mostly to themselves, as the bonus practice indisputably shows), not grow the pie as a truly productive company does. No matter how one may think of Bill Gates’ business practices, Microsoft did help grow the economic pie. Contrast the outcome of that with the “production” of CDOs and CDO2s from financial companies.

  10. DeDude says:

    The HFs are not driving the market up, they are driving investors out of the market, and that will only keep prices down. Everybody is wondering how we can have a top if price earning ratios historically are at mid range. Well history is history when the game changes such that you cannot make rational investment choices and profit. Everybody but the gamblers are heading for the exits when rational choices cannot be used as a basis for return on capital.

  11. R. Cain says:

    HFT
    for anyone who missed it, the 11 minute audio of Ben Lichtenstein’s breathless order-taking in the S&P 500 pit in Chicago during the meltdown:

    http://www.archive.org/details/MarketCrash-06May2010-SpPit
    (LHS – ‘Stream’)

    + Ben on BNN TV (Canada) yesterday afternoon:
    http://watch.bnn.ca/#clip299427

    ~~~

    BR: That great stuff. I’ll repost on the main page

  12. insaneclownposse says:

    What is strange to me is the desperation of the authorities with MSM cooperation to somehow find a reason for what happened Thursday. Guess what? Stocks are dangerous or “risky.” That is why they traditionally generate outsized returns.
    If you don’t want exposure to a potential market crash, don’t invest in the stock market. Market crashes happen continually throughout history. It doesn’t matter if humans are involved or machines are involved. The stock market CANNOT be tamed. If it could, it wouldn’t be the stock market.
    I think what’s best is an educational program targeting retirees that plainly spells out the hazards of investing in equities – you can lose your ass in a heartbeat, so don’t put all your eggs in one basket. Pretty simple philosophy, but many people never seem to learn this.

  13. rktbrkr says:

    IMO the phat finger explanation was a big lie kept behind glass like a fire extinguisher, “In case of panic, break glass”. Keep the markets calm until they come up with a better explanation.

    Also IMO the Dow index was manipulated to keep it from breaking -1000 and then -1050 to avoid a formal circuit break pause, either the companies with the aberrant prices were pulled from the index or some nominal trades were made during the chaos to fend off -1000 and -1050. PPT or equivalent in action!

    Just wondering if NYSE has had other individual stock “slowdowns”, are these stock slowdowns disclosed at the time of the slowdown or afterward? Are the stock slowdowns automatic or discretionary? Was the 60% off rule already established, was it known by some traders? Does it only apply to transactions on the exchange, not the off exchange penny trades?

    In this environment a stop loss order has to be viewed as a certificate of confiscation, you either have to place it so low that it’s meaningless or if it’s in the 60% zone it can be glitched away in a heartbeat.

  14. Mike S says:

    You act as though traders in the S&P pit didn’t put their hands down during prior market disruptions, or try to slam the price farther down. I was there in 1998, during a few big down days. Let me assure you that it happened all the time.

    BR, you’re the last guy in the world that I would think just fell off the turnip truck, but in this case, you look like a guy from Oklahoma looking at the skyscrapers in NY.

    Please, Themis trading, get a bit of perspective.

  15. Robespierre says:

    BR

    The question I want to ask you is with “Its worth noting that HFT now accounts for between 50% and 70% of trading.” made by a few number of players are you still dead set on saying that markets can not be manipulated (and are not being manipulated) on a daily basis?

  16. Pir2 says:

    always blame the technology:

    On Black Tuesday, the Dow Jones Industrial Average fell 38 points to 260, a drop of 12.8%. The deluge of selling overwhelmed the ticker tape system that normally gave investors the current prices of their shares. Telephone lines and telegraphs were clogged and were unable to cope. This information vacuum only led to more fear and panic. The technology of the New Era, much celebrated by investors previously, now served to deepen their suffering. (http://en.wikipedia.org/wiki/Stock_market_crash)

    in 10 years GS will use the collider to make Dark Matter Trade.

  17. VennData says:

    These guys say “…Today’s price swings in a great number of stocks highlight the inherent and systemic risk of our automated stock market, which has few checks and balances in place…”

    Few? Really? Our markets are full of checks and balances, but the main one is the participants themselves.

    The reality is that the market participants will seek out the solution to the 1,000 point drop. It may find it. If it doesn’t, right away, it will find it eventually as people are highly incentivized to not have an open stop-loss that goes to market which and can be picked off in a low liquidity time.

    All this talking about “bringing specialists’ back,” “returning to nickle spreads,” etc is nonsense. Technology is like democracy, if your technology stopped you out at 30% below the last trade, you need more technology.

  18. franklin411 says:

    Barry,
    I refuse to accept your rational explanation, and I substitute my own narrative that suites my particular political ideology.

    It seems clear to me that the same Obama/Greenpeace SWAT team that blew up the Deepwater Horizon (in order to discredit drilling) sabotaged the stock market (in order to discredit markets).

    My theory hasn’t been embraced by Fox News just yet, but I have faith that they’ll see the light soon!

  19. Daffyorbugs says:

    A lotta people didn’t answer phones in ’87. Same deal, different technology.

  20. Patrick Neid says:

    R. Cain, I can’t listen to that audio clip enough. LOL !!!!

    I was a commodity broker in the 80′s. It’s too wonderful. What a nostalgia BUZZZZZZZZ.

  21. inthewoods says:

    “You act as though traders in the S&P pit didn’t put their hands down during prior market disruptions, or try to slam the price farther down. I was there in 1998, during a few big down days. Let me assure you that it happened all the time.”

    Correct me if I’m wrong, but I don’t believe traders in the S&P pit received rebates for providing liquidity. Honestly I don’t know if I’m right on this one. If I am right, then the situation is different in that the exchanges are essentially paying the HF traders for liquidity – and they are clearly not getting their money’s worth.

  22. rktbrkr says:

    If the Plunge Protection Team wouldn’t act on Thurs afternoon, when would they act?

    stopping 1.5 points short of 1000 point plunge and 51 points of stopping the market was just serendipity? Thats less believable than the phat finger story

  23. jjay says:

    That’s right Mike S, that’s what sharks do when they spot a whale in trouble.
    On one nature show, I saw sharks gang up on a sick whale, and pull his jaw open so they could eat his tongue.
    But on another show, I saw a killer whale bite a great white shark in half to drive off the competition for the seal feast.
    The other sharks got the message and left the area.
    It’s all relative.

  24. Owen Money says:

    We’ve seen this movie before. This is a rerun of the ARS market on that day that the PDs decided not buy. The Auction Rate Securities market crashed. Thursday was Just a dress rehearsal for the stock market. Bad things can happen when you mess with the Gold Men. Some people knew well enough about what caused this dump, or they wouldn’t have been able to engineer a rapid U-turn. Ironically, no one is talking about the commensurate crashes of the TSX and the Mexican stock market. This crash affected international markets across North, and probably South and Central America.

  25. KidDynamite says:

    barry,

    first, it’s important to notice that technology in trading (such as HFT and advanced algos) makes guys like Themis obsolete – so everyone should understand their motivations.

    it would be difficult to argue that our technological advancement in terms of market structure and market speed didn’t play a role in the rapid decline and subsequent rebound on Thursday – that’s a given. Barry – you’re a car guy – it’s like saying that driving a BMW M5 180 mph on the Audobahn will be more devastating when you crash than if you’re driving a horse & buggy.

    Yet, as astute readers will notice, crashes happen regardless of technology – especially in times of global instability such as today, when markets have rallied on pipe dreams already! add to it the fact that a well respected financial mouthpiece trumpeted the fact that he was in 100% cash (yeah BR! i’m talking about you!) and you have the tipping point for a panic. You know what happened? MORE SELLERS THAN BUYERS!

    hilariously, the Themis guys have been railing against the high frequency liquidity providers for a while, and now they are complaining that the high frequency guys stepped away! yes – most of the HFT models were turned OFF to avoid unpredictable results as the market crapped out. This should have left ample room for Themis’s heroes, the old school liquidity providers to do whatever they pleased. It should be no surprise, however, that they didn’t want to get run over either.

    the problem is more of fragmented market structure than of high frequency trading.

  26. farmera1 says:

    The Zero Hedge guys have been ranting about HFT for over a year. Here’s their take on the great Stock Market Meltdown. By the way they predicted exactly what happened last week.

    http://www.zerohedge.com/article/dissecting-crash

  27. Dennis the menance says:

    Zero Hedge has also missed the entire rally — they disbelieve any aspect of the recovery story, credit only the Fed for the move up, ignore all positive data, and practically claim Bernanke is the devil.

  28. I like ZH — except when they go tinfoil hat loco. I recall they bought into the Charles Biderman bullshit regarding the Fed buying emini futures to goose markets.

    Always beware of anyone (including me) who is rationalizing why they missed a major market move . . .

  29. KidDynamite says:

    everyone on this thread should click on the S&P Futures Pit audio that R.Cain posted above. that’s an old school, non electronic, auction market, with no high frequency traders. Of course, it’s related to other electronic markets, but SPU futures traders had ample opportunity to step in and provide “liquidity,” yet you can hear that they were at least a dollar wide the whole, and up to TEN dollars wide at one point!

  30. inthewoods says:

    “everyone on this thread should click on the S&P Futures Pit audio that R.Cain posted above. that’s an old school, non electronic, auction market, with no high frequency traders. Of course, it’s related to other electronic markets, but SPU futures traders had ample opportunity to step in and provide “liquidity,” yet you can hear that they were at least a dollar wide the whole, and up to TEN dollars wide at one point!”

    But Kid, in reference to my prior comment, are these guys paid to provide liquidity like the HF traders? I’m not be snarky – I don’t know the answer. Comments welcome.

  31. Rightline says:

    about stop loss orders…more education to the retail investor is needed. many are unaware that their stop loss order at $10 can be executed at $3 (or any lower number)…. a simple solution could be an arbitrary percentage margin of error, say if the best price is 10% below stop loss, then confirmation from seller is needed to execute…

  32. constantnormal says:

    … but but but … with HFT supporting a large chunk of the daily trading these days, what happens if we turn it off?

    Do the stock markets come back to align with the economy? That might be painful …

  33. wally says:

    Alan Abelson described it thusly: “What helped turned a suddenly wobbly market into a ferociously vertiginous one was the astounding rapidity with which bids melted at the first real sign of selling.”

    Maybe. But the counter-argument is pretty blunt and not at all trivial: when prices began to fall there were no buyers. End of story.

  34. buckykatt says:

    As I posted on Silicon Investor>

    “The market flop was the work a group of evil Chinese & Russian hackers, bent on world domination, the offspring of the old THRUSH gang.

    THRUSH = Technological Hierarchy for the Removal
    of Undesirables and the Subjugation of Humanity…

    THRUSH believes in the two-party system:
    the masters and the slaves”

    Ok, I had my fun, check here for more THRUSH info>
    http://www.manfromuncle.org/series.htm

    Still, it might be partly true?

  35. constantnormal says:

    @Dennis 10:46 am

    “… and practically claim Bernanke is the devil.”

    WHAT!!! Bernanke is NOT the Devil ??!!??

    Oh, yeah … I guess I got carried away there for a minute … Greenspan is Satan, Bernanke is only Leviathan.

  36. constantnormal says:

    Maybe there were no buyers because there have been no buyers for many months now, only traders. Turn off the traders and there is only the roaring of the vacuum.

    Perhaps there will be no lasting stability in the markets until we bring back that extinct thing, the buy-and-hold “investor”.

    just a thought.

  37. Patrick Neid says:

    Oh god everyone playing the blame game. No it was this, no it was that. Yikes.

    The market did what it was supposed to do. It hit an air pocket for whatever reason, you can provide it at your leisure, realized it as such and recovered within 15 minutes. But yes, do pull out your hair while pointing fingers. Oh, I forgot, call in the politicians.

    Trades were busted, stops will probably be ignored as the lawsuits pile up and the exchange realizing its own financial risk will make the appropriate changes, just not on your schedule.

    Now if you don’t like wall street types running things you should not have supported the bailouts starting two years ago. Everytime there is systemic risk revealed in the system most folks, politicians especially, panic and bail things out instead of letting the systemic risk purge the system.

    Oh, I forgot the mantra, ” if we didn’t intervene the system would have collapsed.” LOL.

  38. Robespierre says:

    If you assume that markets are made by the opinions of market participants then it is obvious that HFT will cause what we saw last week. What no one has discussed so far is how these algos are developed and how they work. So consider this. People who develop this algos (SW engineers, math majors etc) tend to move from firm to firm a lot (high turnover). The result is that in my opinion most of the programs trading have very similar algorithms and very similar behavior therefore most of them will reflect the same “opinions” most of the time. No what would happen if %50 to %70 of all trades were made based on the same “opinion” or on the same “mechanics”? What I’m saying is that there are no longer multiple “opinions” being traded. That I think explains parabolic ups and cliff-diving downs.

  39. KidDynamite says:

    @InTheWoods – they aren’t paid TO provide liquidity, they are paid IF and WHEN they provide liquidity. there’s a distinct difference.

  40. constantnormal says:

    @KD … then perhaps they should be instead paid TO provide liquidity. I’ll have to give that one some thought though …

  41. inthewoods says:

    @KidDynamite – that shows the flaw in the incentives associated with these guys. My point is that they are given a very exclusive deal in exchange for supposedly providing liquidity. If they are not providing that liquidity, then they shouldn’t have the deal. In contrast with that, the S&P floor traders, as far as I can tell, don’t ever get paid for their participation, so comparing HFTs to floor traders isn’t fair.

  42. Mr.E. says:

    The issue was simply the disappearance of rational bids. With only media reports to go on, it seems that when the NYSE curbed trading activity in the afternoon, posted bids went to zero or 0.01. At the same time, smart routing algorithms routed orders to other exchanges (NASDAQ) and ECN’s, where, in turn, bids collapsed because of the posted NYSE/ARCA bids.. If those reports are accurate in their assignment of cause then several questions emerge. First, why does trading continue on remote exchanges and ECN’s when trading has been curbed for liquidity reasons on the parent listing exchange ? Second, did bids during the imposed curbs collapse to zero or near zero, and if so why? Third, where were the market makers and specialists?

    If the reports of bid collapse during an imposed curb are accurate, and I have no idea if they are, then the NYSE needs to re-assess their procedures during such events and address bid/offer posting norms during such curbs. Further, the SEC needs to review trading procedures on secondary exchanges and ECN’s when the primary listing exchange imposes curbs or halts.

    It’s a good a valuable opportunity to assess operations and functioning of our current market structure. As stunning as the drop Thursday afternoon was, the return to normal functioning and rational pricing was equally impressive.

  43. constantnormal says:

    What happens to market makers and specialist firms that walk away from providing liquidity during a downturn?
    I would guess that they run the risk of losing their privileged status … at a minimum.

    Seems to me that they get special access in exchange for accepting certain responsibilities … perhaps HFTers should be treated similarly …

  44. KidDynamite says:

    @inthewoods – i think you may be confusing the NYSE’s SLP program with other rebate-arbitrage HFT strategies. anyone can get rebates by adding liquidity to order books. ANYONE.

    so, how about the NYSE’s SLP participants then? these trades didn’t take place on the NYSE! that’s part of the problem! i just wrote a blog post about it, but i don’t want to publish the link here, lest Barry think i’m trying to hijack his thread. Read my post about the NYSE’s LRP program.

  45. dwkunkel says:

    Blowing through stops happens all the time in thinly traded futures markets. It’s now become a reality in the stock market.

  46. izimbra says:

    I find a lot of the commentary about HFT to be much ado about nothing. Consider all of these points:

    1) We don’t yet know what caused the brief V-shaped fall

    2) Nothing especially bad happened to “ordinary investors”; something bad only happened to principals, human or electronic, who engaged in the behavior that is being explicitly criticized – namely, selling at silling prices just because other people were selling.

    3) HFT algorithms don’t all do the same type of thing and if they did there would be no profit in it – that would be a recipe for losing money.

  47. As some others have said stop losses become market orders when your price has been reached. If your stock gaps down (it happens a lot on openings) you can get a horrible bid and thus get scalped pretty good. That is why as an active trader you should always be checking your stocks if you have stop losses riding with them. Especially before market open. That is also why it is important to check the news on your individual stocks if you have stops. That is sometimes the most active trade of the day. Big news days like earnings are important too. Gaps should be considered in your stop loss calculation and you should look into stop limit orders if you can’t risk the wild swing

    Fraction of a penny trades? Where can I buy a tenth of a cent of Apple? Why are these things even allowed? What liquidity does a fraction of a penny trade provide to anything? It doesn’t even provide liquidity to a penny stock!

    The way ‘fat finger trade’ is being thrown around I’m beginning to wonder if the fat finger trades that we heard about in the past were a test run?

  48. izimbra,

    People with stop losses took 60% haircuts in some cases. Those trades won’t be revoked. That means the average guy who put a stop loss on to protect himself in his brokerage account when he went to work came home to a 60% haircut on the price of his stock

  49. izimbra says:

    How the Common Man, which is it: okay to sell just because the price dropped or not okay or not my concern? Okay to contribute to a mindless market plunge or not okay or not my concern?

    I would always advise people against entering stop losses that become market orders. Perhaps it’s those type of orders that should be banned. Should I call my Congressional representative to try and enact a law to stop those people who use them from hurting themselves? Do you advocate that?

    Some complainers seem to have a hidden premise like this: stock market prices should and do mostly reflect fundamental information except there are some inefficiencies like trends that I should be able to exploit to my advantage with simplistic technical analysis. So please stop the use of computer programs that may or may not be trading using fundamentals because here is an example where they messed up my simplistic technical analysis. Sorry, but that’s not the type of complaint that should cause regulatory action. Maybe there is a problem with too much reliance on technical analysis in the markets (by human’s or machines) but the remedy for that is to do a better job of writing and enforcing the existing disclosure rules like “Reg FD”.

  50. KidDynamite says:

    “I would always advise people against entering stop losses that become market orders. Perhaps it’s those type of orders that should be banned. Should I call my Congressional representative to try and enact a law to stop those people who use them from hurting themselves? Do you advocate that?”

    bingo… we could just ban all market orders. seriously. there’s no reason we couldn’t…

    in my opinion, no one should EVER use a market order, unless they are willing to accept a crazy fill.

  51. Did Shutdowns Make Plunge Worse?

    High frequency trading could have exacerbated Thursday’s slide – High Frequency trading firms stopped trading during Thurs’ plunge, which may have exacerbated the downdraft; the Journal says the a bunch of firms simply shut their computers off as markets became too volatile. This lack of liquidity could have added to the sharp declines. WSJ

  52. April 27th, 2010 at 8:17 pm

    “Up, Down, Sideways–maybe, we can remember that We Know this:…”
    ….
    “… One day, just like Goldman’s mortgage follies, all this will be the subject of epic lawsuits. But not yet. There is some more money to be stolen from the middle class first, by these very firms…”
    http://www.economicnoise.com/2010/04/22/government-and-banks-complicit-in-fraud/

    Bear, Bulls, and PIIGS–against this backdrop, players, still on the stage, are asking to get lit up..”
    http://www.ritholtz.com/blog/2010/04/greece-gs-dow-off-200/#comment-285753

    “Bear, Bulls, and PIIGS–against this backdrop, players, still on the stage, are asking to get lit up..”

  53. May 2nd, 2010 at 4:54 pm
    “Stops can get ‘blown through’, no?

    Whatever happened to simple Put Buying?

    though, this: “Always use tools to preserve capital, and never allow any position to be come a giant money losing debacle…”, as BR reiterates, above..

    has to be The Takeaway.

    simply, “Ya gotta be around, to be around..”
    ~~
    and, contrary to ‘Conventional Wisdom’, if peep don’t bother to understand this: http://www.riskglossary.com/link/greeks.htm for starters..They shouldn’t play in Traffic.

    Options, far from being ‘too Risky’, are the pre-eminent Risk Management Modality..
    http://www.ritholtz.com/blog/2010/05/volatile-markets-call-for-stop-loss-orders/#comment-289897

    “and, contrary to ‘Conventional Wisdom’, if peep don’t bother to understand this: http://www.riskglossary.com/link/greeks.htm for starters..They shouldn’t play in Traffic.”
    ~~

    some really Basic S*** gets, quite, old, after a while..

  54. insaneclownposse says:

    Ditto on market orders. I’ll never understand the motivation behind obviously screwing a customer over? That doesn’t really help anyone. When times are good, integrity might hold you back a little bit, but when times are bad, integrity is all you’ve got. It seems like things are about to very bad in the equity markets.

    Everyone is kind of scratching their heads over the market action this past Thursday. Don’t forget that the Fed has embarked on an unprecedented monetary experiment on a truly massive scale. Weird shit is likely to keep happening for quite some time……

  55. DC says:

    Even if it was only for a picosecond (though reportedly it lasted two minutes), to price a profitable going concern such as Accenture at one cent per share is insanity.

    I’m not a technician. Just a simple caveman. But I was taught that equities at some level reflected the value of a company. P/E multiples. Cash flow. Growth rate.

    The more esoteric, algorithmic and detached from these fundamentals that Wall Street gets, the further away rational investors (at least us simple cavemen) will flee.

  56. daveirl says:

    Firstly, everyone moved away from the market makers on the NYSE floor because they were making a blind fortune by controlling their markets. Don’t listen to them trying to get it back to their side and away from electronic venues. The simple solution is to do what most European electronic markets do and that’s to have volatility auctions a.k.a. circuit breakers. The US markets have them but on a per market basis and at silly levels, the fact that the DOW/S&P circuit breakers weren’t triggered on Thursday just shows they are too big swings before they are triggered. Put circuit breakers on a stock by stock basis depending on the move. Simple solution.

  57. “But I was taught that equities at some level reflected the value of a company. P/E multiples. Cash flow. Growth rate.”

    DC,

    ‘Equities’ are, merely, Derivatives. Claims that, at the EOD, are only worth as much as someone will pay for them..

    Why do you think that ‘Dividends’ were so important?

    remember, our Ignorance knows no bounds, and, with that, We have to, always, Learn more than we’re Taught..

  58. DC says:

    @Hoffer

    Not buying your “if only the world were as smart as me” comma-spliced prose today.

    Equities represent a fractional ownership position in a business entity. There’s nothing “derived” when you and your partner own equal shares of a boat. You own 50% each. Stocks are intended to be such instruments. Dividends are beside the point, of course, in the discussion of the flash crash.

    Don’t get lost in the math and the smoke. Because electronics were capable of matching a buy and sell order and executing that order in no way makes that trade an accurate reflection of the fractional value of a firm that is under no threat of bankruptcy, criminal prosecution, etc.

    At 2:30pm, Accenture was not a “worthless” firm. This statement is factual in every rational mind. Your mileage may vary.

  59. Joey says:

    KidDynamite

    You clearly know your sh_t. Awesome man~

    The only thing you’ve said that I don’t agree with is:
    “first, it’s important to notice that technology in trading (such as HFT and advanced algos) makes guys like Themis obsolete –”

    While I certainly understand your premise, I wouldn’t go so far as to say they’re obsolete. Thurs. market not withstanding, its been my experience one can work WITH the HFT and algos and do pretty darn well. Yes, it requires a nuanced ‘dance’ but it still can be done.

    Regardless, your point(s) are well received.

  60. DeDude says:

    “In this environment a stop loss order has to be viewed as a certificate of confiscation”

    Yes another defensive tool for the retail investor with a day job, has been turned around and used to rob him. Who will they rob when he pick up his marbles and leave?

  61. DC,

    feel free to ‘buy’ what you’d like, just, don’t be sold on the Price you expect..

    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Intertemporal+Time+Preferences+Marginal+Demand+effects+on+Pricing

    and, this: “if only the world were as smart as me” is, too, telling..

    this statement: “remember, our Ignorance knows no bounds, and, with that, We have to, always, Learn more than we’re Taught..” is, totally, inclusive..

    differently, here’s a ‘plain English’-explain–”…Definition of Fractal System
    A Fractal System is a complex, non-linear, interactive system which has the ability to adapt to a changing environment. Such systems are characterised by the potential for self-organisation, existing in a nonequilibrium environment. FS’s evolve by random mutation, self-organisation, the transformation of their internal models of the environment, and natural selection. Examples include living organisms, the nervous system, the immune system, the economy, corporations, societies, and so on. In a fractal system, semi-autonomous agents interact according to certain rules of interaction, evolving to maximise some measure like fitness. The agents are diverse in both form and capability and they adapt by changing their rules and, hence, behaviour, as they gain experience. Fractal systems evolve historically, meaning their past or history, i.e., their experience, is added onto them and determines their future trajectory. Their adaptability can either be increased or decreased by the rules shaping their interaction…”
    http://www.fractal.org/Bewustzijns-Besturings-Model/Fractal-systems.htm
    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=fractal-complex-adaptive-system

  62. Fixing Wall Street’s Autopilot

    Thursday afternoon, the Dow plunged 1,000 points within a few minutes, followed by an equally sudden recovery. We don’t know all the details about the drop, but it was almost certainly the result of computer or human error in a high-speed trading program.Among the many arcane corners of the financial world highlighted by the Wall Street crisis, high-frequency trading — in which computers scan billions of bits of market data for trading opportunities that may exist for mere fractions of a second — has generated a surprising amount of discussion. Alongside the risk of expensive errors like what happened Thursday, critics say, these programs facilitate insider trading and overwhelm regulators’ access to critical information.These are fair criticisms. Fortunately, they can also be easily addressed without undermining the positive role that high-frequency trading plays in the market.

  63. izimbra says:

    DC, there was a few stocks that hit crazy prices and if you were lucky enough to be around and notice that, you could have made some profit at the expense of whoever was selling at that price, perhaps a stupid computer program. The topic here is the pro and con of the idea that people need to be protected from stupid computer programs. Claiming that the stupid programs are taking the wrong side of unsustainable pricing doesn’t make that argument, as far as I can see. It rather argues that the stupid program operators are making less money that they should be.

  64. ACS says:

    The action Thursday reminds me of the April 27, 1987 intraday silver crash. No computers to blame back then, so why does it HAVE to be anything other than very rare normal market behavior?

  65. The Quants’ Computers All Sold At The Same Time

    The European debt crisis fuels a global rush to gold and Treasuries while quantitative models take over and plunge stocks lower.

    The sovereign debt crisis in Europe finally cracked the equity markets everywhere, not only in the U.S., but in Asia, Europe and South America. On Thursday the downside volume on the NYSE was 96%, meaning that nearly everyone was in the market to sell—especially the quantitative hedge funds. The day before, open sell orders were 93% of all Big Board trading.

    StreetTalk warned of this possibility of frenzied selling in a 2008 column, “Watch Out for the Quants,” which described the worrisome volatility in the markets caused by huge, computer-driven buy and sell orders that sometimes overran a fragmented market made up of all the national and regional stock exchanges, as well as dozens of private “dark pools” run by major firms like Goldman Sachs ( GS – news – people ) and Credit Suisse ( CS – news – people ).

    Obviously, a large number of quant hedge funds all tried to get out of the stock market at the same time on Thursday afternoon. The downdrafts in Procter & Gamble ( PG – news – people ) and MMM, about 25% in a few minutes, were responsible for several hundred points in the 998-point drop.

  66. mbelardes says:

    Mystery Solved.

    CNN just reported that former President Bush caused it when he “clicked yes on selling 1 billion shares PG at mkt thinking he was approving all his facebook friend requests at once.”

    The guy never lets up…

  67. DC says:

    Hoffer and izimbra –

    I enjoy studying math and even fractals. It’s clear that Mandelbrot and others have insight that has application across many disciplines.

    But I don’t agree that this is a question of whether “stupid computer programs” did anything. Computers operate based on programming supplied by humans. I don’t believe that the Thursday episode was some sort of sci-fi, out-of-control HAL 9000 event. Until convinced otherwise I assume it was intentional and that the programs themselves apparently performed spectacularly well.

    As what was once known as an “investor” as opposed to a “speculator” or “riverboat gambler” I have until now had a reasonable expectation of rational pricing. A marketplace which marks as valid prices that are double-digit standard deviations in seconds has moved outside the experience of most carbon-based lifeforms. I’m not so simple-minded that I assume Wall Street is akin to sunbathing. Limit orders, stop losses — got it, do it. Actually I had barely 10% equity exposure on Thursday (missed most of the March-April run up, so I missed the drop).

    Imagine if housing were subject to such deviations. Ditto for bonds or any other asset class (which is what stocks are — they are not derivatives of assets). If you accept this mechanism for pricing equities is there any reason not to accept its validity in other transactions?

    I have a reasonable expectation that this evening I will not be hit by a falling, flaming jet airliner carrying a load of weapons-grade plutonium (and hookers and DVDs) on a secret mission to North Korea.

    It is absolutely, 100% possible. But if it happens it’s not necessarily due to my “ignorance.” I’ll brush up on fractals if you guys will revisit probability and statistics.

  68. ubnutsagain says:

    Now all you sophisticated financial whizzes need to bear with me since I’m just an old farmboy out here in flyover country.

    I have a question: It seems clear that Thursday’s magnificent vertical fall resulted from HFT triggers to sell, sell, and sell.

    I got that.

    But what I’d like to know relates to the reverse side when that magnificant vertical line reversed course and took off on the upside like a rocket to Mars.

    My question: Since it took a mighty big chunk og green to drive the market values of so many stocks so high so fast, who did the buying?

    Fed? Treasury? Both? Neither? Who?

  69. izimbra says:

    DC, you seem to be confusing four different claims. The first claim, which nobody disputes, is that something very unusual happened last Thursday. The second claim, which is probable is that computer algorithms were active trading Thurdsay – this is probable because they apparently average 60% of the volume on a typical market day. The third claim, which is apparently highly disputed, is that computer algorithms were particularly active during the period of highest volatility – some, writers -e.g. Paul Kedrosky, are claiming that the volatility was caused by many computer algorithms being inactive at that time, drying up liquidity; I really have no idea where the truth lies on that score. The fourth claim, which you seem to believe and may have good luck selling to Oliver Stone, is that it must all have been a big planned conspiracy carried out by computer programmers to gainsay some illegitimate gain in some unspecified way. Neither probability or statistics, and especially not logic, gives any evidential connection between claims 1-3 and claim 4.

  70. alfred e says:

    @ubnutsagain: Fascinating question.

    Hope you get an answer, but my sense is …..

    Some pocketed an awful lot of someone else’s money.

  71. Nic says:

    @ daveirl
    The Dow/SnP circuit breakers don’t apply after 2:30PM (see the NYSE website) so in fact at the time there were no circuit breakers in place. I agree some are needed, they work very well in futures markets.
    Actually he timing of the whole incident is a little suspicious to me.

  72. crunched says:

    One thing I strongly believe no matter what…this cyclical bull is over. Pull up SPY on a weekly chart and tell me that’s not the end of something.

  73. [...] are pointing at high-frequency traders for the flash crash.  (Big Picture, [...]

  74. rktbrkr says:

    Whats the High Frequency Kenneth?

  75. izimbra Says: May 8th, 2010 at 2:05 pm

    How the Common Man, which is it: okay to sell just because the price dropped or not okay or not my concern? Okay to contribute to a mindless market plunge or not okay or not my concern?

    I would always advise people against entering stop losses that become market orders. Perhaps it’s those type of orders that should be banned. Should I call my Congressional representative to try and enact a law to stop those people who use them from hurting themselves? Do you advocate that?

    Definitely not. What I question is do the robots have access to all the stop losses and do they trigger a plunge not only to trigger the stop losses but also to swamp liquidity in such a way as to create environments where penny bids rule the day? In other words are all the sheep penned with the gate open and in perfect view of wolves that haven’t eaten for the day?

    If so then these computers have too much control over the market or there is not enough competition in these markets in order to counteract this potential. Or, where are the flippin’ shepherds? Off getting drunk and viewing porn?

    It would also help if brokerages were to educate people on how stop losses work. You would think that educating a client after they have lost 60% on a stock investment would be kind of counterproductive towards future goodwill

    @ DC Says:May 8th, 2010 at 3:05 pm

    Even if it was only for a picosecond (though reportedly it lasted two minutes), to price a profitable going concern such as Accenture at one cent per share is insanity.

    I’m not a technician. Just a simple caveman. But I was taught that equities at some level reflected the value of a company. P/E multiples. Cash flow. Growth rate.

    At the end of the day the stock market is is an auction bid system. The price of a stock is only worth what the next sucker in the door is willing to pay. If no more suckers come though the door then the theoretical value of the stock is zero, even if it is a viable business. That is kept in check by the vast size of the market which, again in theory, will provide a bid for every seller.

    It does break down though when people in other aspects of the economy run out of money and thus have no funds to invest. This is called a buyer’s strike when no one will pay you for you company.

    It is times like that when the stock returns to the true owners of it as the old saying goes

    You say (to paraphrase) that the plunge was not rational. For a few moments it wasn’t. Once the ‘market’ realized the irrationality of the situation it was quickly corrected. This, in some ways, speaks to the genius of the stock market. Even in the midst of a catastrophic error in trading (something resembling) price discovery was found within a matter of minutes. Probably the only thing that was hindering the process was our bumbling public officials who don’t like to accept down markets.

    Others have also stated that this great volatility does not reflect the economy. I would argue that it does. Think that for just one second, the market, graphically representing the mind of the economy, briefly contemplated committing suicide. That’s probably what it would look like. Given the insanity that is breaking out all over the world would that possibility not be an accurate reflection of a world hell bent on destroying itself.

    Since the stock market is supposed to be a mechanism to measure the future, maybe somewhere down the road it is seeing us reach a crisis point that threatens the destruction of the world. Can we really rule that out? Is it any wonder why our ‘savior’, the government, would want to ‘protect’ us from such an insight?

    /wild eyed rant off

  76. daveirl says:

    @ubnutsagain why do you think the Fed/Treasury had to do the buying, I trade equities for a bank in Europe, couldn’t believe the prices ADRs had been pushed to by the market sell-off. I covered all my shorts and went long. Almost every European trader I know was a buyer of that dip. Fair enough I got in too early and was in the red for a while but I knew stocks weren’t going to open down 10-15% in Europe the next morning.

  77. R. Cain says:

    Forbes
    ‘And who are the program-trading firms?

    ‘The top-ten program-trading firms last week were Morgan Stanley, Goldman Sachs, Barclay’s Capital, Wedbush Morgan, Credit Suisse, Deutsche Bank, JPMorgan, RBC Capital (Royal Bank of Canada), Schon-Ex, and Penson Financial.’

    http://blogs.forbes.com/greatspeculations/2010/05/08/program-trading-needs-to-be-banned/?partner=msn

  78. rktbrkr says:

    The more that becomes known about Thursdays chain of events the more upset investors will become.

    That 60% off decision is going to create a lot of unhappiness.

    What we will hear is that they’re “working on the problem but “there’s nothing we can do about it” – the questionable trades under the arbitrary 60% threshhold that skinned so many stop lossers.

    The top ten trading firms listed above just had a great year Thursday.

    Lots of ups & downs with margin calls from the past few days colliding with Euro relief (maybe?)

  79. Daffyorbugs says:

    This will be good for the options market.

  80. izimbra says:

    How the Common Man,

    There is a different issue with flash trading and other firms having extra information that they can exploit. I definitely support rules to maintain a level playing field. In theory, using computer algorithms to breakup big orders into small ones should make “outsiders” less vulnerable to that type of exploitation (retail customers don’t need to operate the algorithms directly as that may be done automatically by the intelligent routing mechanisms of their broker). I’ve got a similar take on other issues. HFT can’t be the real problem, but there may be other rules/regs that need fixing and which could theoretically be exploited by HFT. For example, one theory I saw about the other day’s volatility is that there was a big mistake order entered and some other firms with “extra information” was able to see that order coming and do some front running ahead of it. Whether or not computers were involved in that front running seems to me to be beside the point. The two problems that would need fixing if that scenario was true would be preventing the original mistaken large market order and preventing the front running, whether carried out by computer or not.

  81. ubnutsagain says:

    daveirl Says:

    May 9th, 2010 at 9:27 am
    @ubnutsagain why do you think the Fed/Treasury had to do the buying, I trade equities for a bank in Europe, couldn’t believe the prices ADRs had been pushed to by the market sell-off. I covered all my shorts and went long. Almost every European trader I know was a buyer of that dip. Fair enough I got in too early and was in the red for a while but I knew stocks weren’t going to open down 10-15% in Europe the next morning.
    _________

    Thanks for the input.

    I don’t “think” they did it, I just don’t know “who” had that much available loot to pull it off. As you suggest, it may well have been a whole lot of traders acting as you did.

    Yet in the aggregate, there was a whole bunch of long green furiously at work buying a tremendous dollar amount of equities over an extremely short period of time.

    The deepest pockets I know of are the Fed and/or US Treasury, and government (not limited to U.S., BTW) has a political motivation to avoid, or at least minimize, a disaster.

    Therefore, in order to get people’s attention and some input in re the basic question, I offered up four source alternatives.

    If the aggregate activity of the European folks had a material impact after 2:47pm, so be it. But then again, if they didn’t have a material effect, who did?

    There are two sides to the “down & up” event, and all we’re hearing about is the “down” side, but I suspect the “up” side may ultimately be more interesting.

  82. DC,

    I’m not, exactly, sure of what it is you’re trying to illuminate, here: “…Imagine if housing were subject to such deviations. Ditto for bonds or any other asset class (which is what stocks are — they are not derivatives of assets). If you accept this mechanism for pricing equities is there any reason not to accept its validity in other transactions?…”

    Markets, including the ones you name, above, are not as ‘tranquil’, nor ‘persistent’, as you seem to believe..

    Seriously, go to a Cash Auction for Agricultural Goods, as, but, one ex.–the Prices achieved for, seemingly, Fungible Goods, are often 10, 20, 30, +% ‘away’ from each other–on the Same Day..

    HTCMSI, above, here: “At the end of the day the stock market is is an auction bid system. The price of a stock is only worth what the next sucker through the door is willing to pay. If no more suckers come in the door then the theoretical value of the stock is zero, even if it is a viable business. That is kept in check by the vast size of the market which, again in theory, will provide a bid for every seller.

    It does break down though when people in other aspects of the economy run out of money and thus have no funds to invest. This is called a buyer’s strike when no one will pay you for you company…”

    gives a pretty good ‘short-brush’ of http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Intertemporal+Time+Preferences+Marginal+Demand+effects+on+Pricing

    LSS: ‘Market Liquidity’ is the exception, not the Rule.

  83. [...] politicians, media types, investors and exchanges are still trying to figure out just what happened to cause that sharp, [...]

  84. [...] big argument for high-frequency trading, or HFT, which many market analysts and participants see as dangerous and unethical, is that it adds liquidity to the market. As my colleague Alain Sherter points out, there have been [...]