High-Speed Trading Glitch ?
By Barry Ritholtz - May 7th, 2010, 12:30PM
NYT:
One official said they identified “a huge, anomalous, unexplained surge in selling, it looks like in Chicago,” about 2:45 p.m. The source remained unknown, but that jolt apparently set off trading based on computer algorithms, which in turn rippled across indexes and spiraled out of control.
We don’t know yet for sure, but this chart sure looks like an error in process to me:
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May 7th, 2010 at 12:36 pm
How about we ban (and program computers to refuse) any sale or purchase of stocks at prices more than 40% higher or lower than the previous days close.
May 7th, 2010 at 12:41 pm
See $NDX April 4, 2000
May 7th, 2010 at 12:42 pm
Its right out of Terminator when Skynet takes over and humans cannot control the computer systems. this is a glimpse of Judgment day! Now we have to defend humanity against the computers. If we just keep going the quants will gain power exponentially and in 5 – 10 years its really mind boggling the potential.
It’s really surreal that this event is right out of sci fi
Long live the Robotic Defense League
May 7th, 2010 at 12:43 pm
Your kidding right? You know there are legitimate reasons why stocks can fluctuate outside of those bounds.
May 7th, 2010 at 12:45 pm
Why cann’t we just blame it on Goldman?
May 7th, 2010 at 12:48 pm
Nothing would make me happier than if this was Ken Griffin and the rest of the scubmags at Citadel and their funds imploded
May 7th, 2010 at 12:48 pm
VIX • 2 year chart
http://uk.finance.yahoo.com/q/bc?s=^VIX&t=2y&l=on&z=l&q=l&c=
May 7th, 2010 at 12:49 pm
@alpha_bet, yes there are but after a 40% move it is a lot more likely that someone needs a nap than that something legit is going on. Yes such a rule may end up hurting someone innocent- but a lot of innocent people were hurt (scammed) yesterday. You often have to chose the lesser of evils.
May 7th, 2010 at 12:52 pm
…, “a huge, anomalous, unexplained surge in selling, it looks like in Chicago,” …
Remember July 4th weekend of last year?
http://blogs.reuters.com/commentaries/2009/07/05/a-goldman-trading-scandal/
http://newyork.fbi.gov/dojpressrel/pressrel10/nyfo021110.htm
May 7th, 2010 at 12:59 pm
Unfortunately, while we would all like to believe that a human error &/or a computer glitch was responsible for yesterdays market crash, the financial/securities industry does not have the luxury of that explanation, excuse, or totally made up reason…for the market ‘malfunctioning’ in the way it did yesterday. Completely lame & not credible to blame anything other than the market makers/specialists, exchange leadership, regulators for this market disruption. There is no way that the industry can use that/those excuses or be ok with or accept that…investors certainly won’t. The system broke yesterday…a system that everyone believes is the best system in the world, the most fair system, the most regulated, & a system that is supposed to be immune to disruptions due to all the checks & controls in place. By any measure what occurred yesterday is unacceptable & untenable. If nothing else the system must maintain its integrity…whether the economy is good or bad whether earnings are good or bad…the system must operate properly…that did not occur yesterday & if it could happen once…it will happen again.
May 7th, 2010 at 1:03 pm
Dr. Merkwürdigliebe , Jack D. Ripper, Merkin Muffley, Col ‘Bat’ Guano, Miss Reed (Playmate of the Year), and General Kisov are “Persons of Interest” in the histrionics and financial fiasco yesterday.
May 7th, 2010 at 1:10 pm
The lesser of evils is to not hand-hold grown ups in a grown up market. A 40% move usually means your making bets on biotechs or your company just posted some very bad earnings, what happened yesterday is a very rare event and it still hasn’t even been proven that it was a system error.
May 7th, 2010 at 1:11 pm
Whether yesterdays action was a mistake or program trading run amok, it is the latest evidence that equity markets are no place for the average retail investor. Equity investing has become a contradiction in terms. Equity markets today provide speculation and gambling. They do not provide superior long-term returns, nor efficient allocation of capital.
May 7th, 2010 at 1:19 pm
@BuffaloBob:
Well stated.
May 7th, 2010 at 1:22 pm
There is no handholding in banning 40%+ moves within a day. It simply allows a level playing field and stop the scammers. I know some people get outraged when robbing with a pen is stopped, but why should that be treated any different than robbing with a gun. It gives time to allow a fair distribution and evaluation of information. The next day when everybody has had the fair time to get all information and shennanigans have been ruled out the market may want to move another 40% in the same direction and then that is OK. The exchanges should just ban sales of big blocks the next day.
May 7th, 2010 at 1:22 pm
Why did we get rid of the up tick rule again?
May 7th, 2010 at 1:24 pm
@Buffalo Bob
Considering that in 2007 40% of ALL corporate profits came from the Financial Sector, which is essentially doing pretty much of nothing but turning a piece of paper into a crude but intricate piece of Origami, is it any wonder that today we are left with markets that, while not entirely decoupled from the companys’ underlying performance, are just another form of a lottery?
I’m pretty sure Howdy Doody was a puppet.
May 7th, 2010 at 1:36 pm
Whatever happened to that stolen software that disappeared into Europe? I was thinking that now would be just about the time that someone would have figured out the code and designed a program that could have tricked the GS megabot into doing something like this.
I don’t know, just a hunch
May 7th, 2010 at 1:38 pm
So that’s how it’ll end, with a whimper blaming computers.
This is just casino “investing”, and it looks like another buying opportunity today, Cognos.
May 7th, 2010 at 1:43 pm
How about we ban (and program computers to refuse) any sale or purchase of stocks at prices more than 40% higher or lower than the previous days close.
The commodity markets have trading limits. I’m not saying I agree with them. Just adding insight.
The thing is the reason many commodities go limit up/down is because people have been bullying the market and using force to lock prices in place or in trend until the stranglehold breaks (the gold market manipulation is a good example)
If you could make the system more liquid and less prone to manipulation you will have less chance of the violent counterspikes happening. How do you do that? I don’t know. More competition? Less leverage?
May 7th, 2010 at 1:47 pm
“40% of ALL corporate profits came from the Financial Sector”
And what that really means is that the value created by those who have a real job is being sucked out and distributed to those who don’t work for a living. I never thought I would live to see this, but the productivity advantages of the capitalistic system (the output of the greed engine) is all being pi$$ed away by the inefficiency and theft from the capital distribution, of that same capitalistic system.
May 7th, 2010 at 1:49 pm
I’m not at all a specialist of stock markets, how can the source of the surge be unknown/unexplained ?
Could it be some kind of stock market manipulation or even terrorism ?
Could a hacker do something like that without using real funds ?
May 7th, 2010 at 2:04 pm
This looks like the classic sign of a V recovery. I am backing up the truck.
May 7th, 2010 at 2:10 pm
Could it have been blackmail? Could it be the financial institutions wanted to send a message to Washington over the possibility of an audit of the Fed or financial reform?
May 7th, 2010 at 2:13 pm
Have a great weekend everybody!
May 7th, 2010 at 2:28 pm
Agree with Buffalo Bob… even if it was a “glitch” … it happened and the negative results are immeasurable in terms of the trust of every investor out there.
May 7th, 2010 at 2:38 pm
flipspiceland at 1:03pm
Very good!
The young Stanley Kubrick, if he were starting out today, would have Strangelove (who the Germans call Dr Seltsam by the way) working his ‘magic’ on Wall St…
To quote from a Tom Lehrer song– “I’m learning Chinese…”
May 7th, 2010 at 2:39 pm
Via: Wall Street Journal:
Last-minute maneuvering in the Senate allowed the Federal Reserve to sidestep legislation that would have exposed its interest-rate decision-making to congressional auditors.
Pressure from the Obama administration led Senate lawmakers to alter a provision pushed by Sen. Bernie Sanders (I., Vt.) that was gaining momentum despite opposition from the Treasury and the Fed. It would have largely repealed a 32-year-old law that shields Fed monetary policy from congressional auditors….
Posted in Coincidence?, Dictatorship, Economy, Elite, Perception Management
http://cryptogon.com/?p=15257
It would have largely repealed a 32-year-old law that shields Fed monetary policy from congressional auditors….
2010 – 32 ~ 1978 , 1977-81=39, not 40..
May 7th, 2010 at 2:45 pm
And to make a further point to go with Buffalo Bob, those of us who are working our asses off to try and do good for our customers get our names dragged through the dirt whenever something like this happens. I haven’t had anyone get mad about it, or at least not to my face, but they have a right to vent. Good news about most of my customers is that their wealth sits in mutual funds or separate accounts that don’t trade like normal equities. So, net result, they were down about 2.5% yesterday, which isn’t totally off the wall like 7-8-9% is.
May 7th, 2010 at 2:55 pm
bigal Says:
“Why cann’t we just blame it on Goldman?”
Yes we can (LOL):
Goldman Trading-Code Investment Put at Risk by Theft
By David Glovin and Christine Harper
“… The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways, Facciponti said, according to a recording of the hearing made public today.”
May 7th, 2010 at 2:56 pm
@ DeDude
I have a gub [sic]
:D
May 7th, 2010 at 3:13 pm
selling leads to more selling leads to more selling……If 1 error can lead to this, what does it really say about the market. Good luck trading the rigged ponzi scheme.
Would you want to be long going to the weekend?
Why would anyone want to be long going into this weekend???
We close at the lows…..and open lower Monday!
May 7th, 2010 at 3:26 pm
Once the markets get turned into a casino, what counts is throughput. A casino can pay out 99% on slot machines so long as lots of money gets pumped through them.
In the stock market, volatility equals that throughput, doesn’t it? There is every incentive by the big speculative traders to make the market more volatile. This includes getting the press to talk endlessly about Greece, for example.
In what I’ve read on the events yesterday, the one key point missing from the reports is how much money was lost, and commensurately how much money was gained on the other side of those transactions.
As they say, follow the money.
May 7th, 2010 at 3:57 pm
One lesson from yesterday’s events is that it resolves the question about whether the market can make larges moves independent of value. If the real estate bubble didn’t bury the efficient market hypothesis, then yesterday’s events did.
Next is the question of whether the market can be manipulated by the computers. Last year when that quant-statistician left GS and took software code, the attys were in court claiming that the software had the potential to move the market. Some paid attention then, but obviously nobody paid attention who also had influence on policy. It appears that the computers can move the market in large ways.
The last question is whether the computers moved the market intentionally or unintentionally. That is the key. If it was intentional, then the markets as we know them are doomed and need fundamental restructuring. I’d start with the high-frequency-trading / front running schemes. But that’s just me.
May 7th, 2010 at 4:18 pm
Perhaps there needs to be a rule that you need to hold any equity you buy for your lifetime … or barring that at least 10 minutes.
It sounds like the vast majority of trades today in equity markets are program trading, not transactions between parties that actually intend to hold or have held the equity for any period of time. I would have thought the example of energy trading/Enron/tulips/South Sea shares/etc. would serve as a lesson in what happens to pricing and stability when rampant speculation takes over a market. I don’t see that kind of ‘liquidity’ being anything but damaging to the market.
May 7th, 2010 at 4:41 pm
Shouldn’t this be pretty easy to figure out? Who made the first erroneous trades on PG and ACN, as everyone seems to agree that this may have started it all? Isn’t it on a computer somewhere?
May 7th, 2010 at 4:54 pm
If this is what happens without a real event what would happen following a real event? The NYSE might have a circuit breaker but they need a GFCI for this high speed trading!
May 7th, 2010 at 5:01 pm
A clear demonstration that the NBBO works if it were observed by all the players in a transparent and fair marketplace. We lived for years with the specialist making certain this wouldn’t happen; the least we could try to wait for the slower adults in the room to honor the NBBO rather than blasting away liquidity in milliseconds. It’s hard to believe and rather surreal this conversation is even occurring.
May 7th, 2010 at 5:04 pm
A clear demonstration that the NBBO works if it were observed by all the players in a transparent and fair marketplace. We lived for years with the specialist making certain this wouldn’t happen; the least we could try to wait for the slower adults in the room to honor the NBBO rather than blasting away liquidity in milliseconds. It’s hard to believe and rather surreal this conversation is even occurring.
What we have here is simply a failure to communicate. Slow up, you are speeding past the rational market.
May 7th, 2010 at 5:55 pm
looks to me like the sort of a pointed thing that might be used to pop a bubble …
May 7th, 2010 at 6:28 pm
This is the kind of thing that makes Los Vegas look like a good investment . At least there you know you are going to loose a small percentage at the slots (in the long run). With the market doing these kinds of crazy things, who knows how much you’re going to loose in say a milli-second.
As was stated above follow the money. If this dies and we never know who/what/why, the market is shall we say fixed.
But I guess if corporations can have the right to free speech, computers should have the right to manipulate the market. Makes sense to me.
Now I am starting to wonder about Barry. Did he see this one coming?????? Man is he good.
May 7th, 2010 at 6:29 pm
Could this have been a test?
I.e. could some party have had the capacity to downspike the market for a few minutes and the incentive to do so in order to gain information about how programmed traders would respond?
Did someone just “buy” a lot of intel on on other trader’s programmed strategies?
(Sorry if it’s a dumb question. It seems plausible from my incomplete understanding perspective.)
May 7th, 2010 at 7:29 pm
“…. We don’t know yet for sure, but this chart sure looks like an error in process to me…..”
That’s exactly the way that it’s supposed to look…….! Just take a look at the order placement…. The buying in the minis was matched lot for lot with sell stops and asymmetric buy scales were in were in “no mans land”… The HFT trade got slaughtered their algos were reversed by the unusual and extraordinary order flow….. someone played them like a cheap John….. The same thing happened today….. I say it was China… everything else is proprietary (NCD)….
Best regards,
Econolicious
May 7th, 2010 at 7:46 pm
Geeze, if the past few days action in the markets is any indication, I’m going to have to stop watching so much porn during market hours and start paying more attention to my stock portfolio.
May 7th, 2010 at 8:25 pm
How about we ban (and program computers to refuse) any sale or purchase of stocks at prices more than 40% higher or lower than the previous days close.
Very simplistic approach. I propose we go much further:
1. Put NYSE halts at levels that give a pause and do it up to 3:45 (why did halt rule go off at 2:00?)
I propose a 5 minute halt at 5% and a 10 minute halt at 10% right up to 3:45. After 3:45 a halt would close to the next day. NYSE rules do not close until market is down 20% – too late to catch your breath.
2. Put a “Governor” on all trades (human or computer) no system can accept a single trade with a dollar value above $500 million. A fat Finger MFer would have to enter 18 uniques trades to sell $16 Billion
3. Stop HFT from skimming and destabilizing our markets. You can’t ban these guys, so just tax them. I propose a $1 / $100,000 principal liquidation for all trades. A $1 million a month trader won’t even notice. A $1 Billion a day HFT will kick in $10,000/day. Why should HFT get all the benefits and stick the public with a collapse like 5/6/10.
4. Put a halt on individual stocks (40% is too wide I bought IVW at $32 which is off 40% and someone really got hosed) I propose a 10 minute halt at 10% and a 20 minute halt at 20%. If an event driven stock is on the way to zero, a couple short pauses shouldn’t hurt. A coworker was stopped on IVW at $53 and the sell was filled at $1
5. Declare the anniversay of the AIG/Lehman collapse National Criticize Golman Sachs Day. Hold contest to find the most creative or hateful things to say about Goldman Sachs. If we are lucky enough to put Goldie out of business, this day can be used to hoot on every fraud approving accounting firm who gave a blessing to AIG / Lehman / Madoff … etc, and the overpaid, head in the sand execs at all the other big banks.
May 7th, 2010 at 9:06 pm
“or barring that at least 10 minutes”
I like that idea. All shares should be registered and no share can be traded more than once in a day. Fairly simple and it would simply get rid of some of the gambling – not affect important market functions.
May 7th, 2010 at 10:20 pm
We may be living in the computer age, but I think Napoleon Bonaparte may have hit the nail on the head a few hundred years ago: “Never ascribe to malice, that which can be explained by incompetence.”
May 7th, 2010 at 10:30 pm
and then to follow Genomik’s Skynet analogy, the problem with incompetence in the computer age is it can have much farther reaching and serious repercussions…..maybe we all should just be thankful this happened in the stock market rather than with our missile defense command (though which I think/hope still has some manual intervention required)
May 7th, 2010 at 10:32 pm
not sure why nobody check the terrorist link. on saturday you get a fail bomb on time square. if it would have been successful the market on monday would have crashed. let’s not talk about the fake failure…
so what do we have a failed terrorist attack and a lot of short knowing what will happen. was has there a lot of shorts on friday?
On Saturday the terrorist attack failed.
On Monday the market goes up? not sure why and forget about Greece. shorts are buying back but not enough?
On Tuesday market goes down but not enough and the changemyTshirtoncameraguy his caught, oups
Wednesday info say the guy is talking but the market is not going down enough even with the Greece stuff bombarded back from/to the media
Thursday, get me these $$$$$$$$$$$$ that “I” shorted. ok finally.
friday who cares i got my $$$$$
wonder may be BP did it!?
http://deepseanews.com/2010/04/the-gulf-of-mexico-oil-spill-a-timeline/
May 8th, 2010 at 1:35 am
No one made any money on Thursday from this right? wink wink
May 8th, 2010 at 3:36 am
Zero Hedge has a good article on the anatomy of the crash
http://www.zerohedge.com/article/dissecting-crash
May 8th, 2010 at 4:34 am
selling leads to more selling leads to more selling……If 1 error can lead to this, what does it really say about the market.
It says the market is overpriced. Yesterday was an attempt to create price discovery
One lesson from yesterday’s events is that it resolves the question about whether the market can make larges moves independent of value. If the real estate bubble didn’t bury the efficient market hypothesis, then yesterday’s events did.
What? Are you trying to tell us that yesterdays trading wasn’t reflecting all known information in the market on a minute by minute basis? Say it ain’t so! :)
The last question is whether the computers moved the market intentionally or unintentionally. That is the key. If it was intentional, then the markets as we know them are doomed and need fundamental restructuring.
I would disagree with this. Big money and price discovery would take care of these shenanigans pretty fast if the government wasn’t goosing the market in the first place. It would only take a few short bombs for the funds to be sitting on the sidelines and waiting to swallow up all those low bids. Some small traders would get hurt but they would quickly be swept out of a market they clearly have no place being in in the first place.
The reason big money doesn’t play in these firefights is because the government has made it clear they will backstop the market every time it gets the sniffles. Take that corruption out and a new order will automatically form via the price discovery mechanism
May 8th, 2010 at 6:25 am
HtMCI Says above: – “Take that corruption out and a new order will automatically form”
chrispycrunch Says at:
http://www.ritholtz.com/blog/2010/05/markets-flat-for-2010/#comment-294085:
“We’re seeing a post-crash bubble based on countries exchanging corporate debt for public debt”
me Greg0658 Says at:
http://www.ritholtz.com/blog/2010/05/do-not-press-this-button/#comment-293434
“blame the ability of corporations to create paper stocks .. ie cash equivalents”
.. give corporations money to do what they want with it – allow them to extract their paycheck first – allow them to borrow with their prowess facilitated by you – once you believe in their prowess your caught (either they perform or you lose) … there is no alternative it seems – corporate structure gives them the upper hand in all dealings:
- invest time at a company (get the paycheck & the benefits*)
- invest in a bank account (take the interest)
- invest in a single home or building (super-business can multiply them faster and you lose)
- invest in a business of your own but don’t try compete’g with the established – system will let you for a time – helps the bottom of the trickle down diamond – then public debt takes over – wash rinse repeat
of course (again) I’m talking to primarily the wrong crowd – folks in here at TBP want/need the investment portfolios and hense corporation structure to achieve the American dream – ie labor button pushers …. you know why its starting to fall apart** – these schemes only work with a dumb & dumber populace .. everyday more and more become not that
coda
* benefits that are retractable thru system processes
** and to many people replaced by technology on a dwindling resources planet
May 8th, 2010 at 7:25 am
market is as market does.
Whoever got that bid with the circle around it is a hero. I picture Forrest Gump pushing the button.
May 8th, 2010 at 7:47 am
DeDude Says: May 7th, 2010 at 12:36 pm
How about we ban (and program computers to refuse) any sale or purchase of stocks at prices more than 40% higher or lower than the previous days close.
…
That’s not any different in principle from what the Pakistanis tried back in 2008 …
http://bigpicture.typepad.com/comments/2008/07/pakistani-inves.html
… look how well THAT turned out …
And for the others pushing various conspiracy theories, this sort of thing, with networked computers competing against each other until one of them manages to spontaneously arrive at a kamakazi approach to competition, with all the others falling in line, that’s a well-known and recognized thing. It happened due to the proprietary nature of those systems, with absolutely nothing in the way of cooperative algorithms (i.e., “Rules”) built into them to avoid this sort of thing. The only surprise is that it took this long to happen.
As Napoleon observed, “Never ascribe to malice that which is adequately explained by incompetence.”
May 8th, 2010 at 8:02 am
been pondering that post of mine above .. I should back off on corporations as the boogieman .. many are super-business structures that build super-things .. the boogieman or boogie-process is hitting marks for the investors .. so the business structure is not abandoned in place without operating cash in a super-fast capital flight structure of this DisCap marketplace
May 8th, 2010 at 8:48 am
@constantnormal; No my suggestion is quite different from “what the Pakistanis tried back in 2008″. I am not suggesting that that stocks should be prevented from falling (or rising) to their try market value – just that the speed of the fall should be held to 40% per day to keep certain types of manipulation from ripping everybody else off.
But it may be easier just to ban the sale of any given share more than once in a day. That would fix a couple of other problems at the same time (and allow day-traders to find a real job and do something productive with their time).
May 8th, 2010 at 9:01 am
When you allow price-discovery to occur within minutes or seconds you give a huge advantage to the big guys with the big computers and information factories. Those people already have way to many advantages. It is getting to the point where those who do not take care of their investments as a full time job, can barely get returns above inflation, because of losing out to those who skim and scam on financial products all day. The investor strike will only get worse unless we do something drastic against those parasites. Look at the amount of money in money market accounts at a time when they have negative real returns and mutual fund managers have deployed all their cash.
May 8th, 2010 at 12:58 pm
It is interesting tht not many agreed that computers are at the heart of the problem. I guess its a matter of scale or perspective. I think alot about technology and trade a bit on the side, whereas many of you might be more into the trading game. I agree that rules can help, my feeling is allowing trades no more than once in 24 hours would help alot. I stopped actively trading two years ago, mostly because I dont have time, but also cos my advantage might be lost against massive trading firms with crazy computers.
When I said this was the baby Skynet kicking I am serious. The specific rules of this are important but underlying all the rules is the reality that computers are running faster n smarter. Most importantly, they are not stopping here.
Here is an interview from Fast Money with Mark Fisher who seems like a pretty legit guy. Maybe you dont respect Fast Money but this guest seems like he has credibility. He runs a trading firm and says they cannot keep up with what their own systems are doing.
http://www.cnbc.com/id/37002752/
This automation is creeping into all aspects of our lives and this shows that when it breaks or if the rules are too weak it can be catastrophic. I pulled some of my money out of the market Friday because now we face not only world volatility but mechanistic volatility.