Mercifully, the latest stock market crash might have been caused by something with which many of us have personal experience: a “fat finger.”
SDA, via commentor ‘Melinda Romanoff’ at May 6, 2010 10:59 PM…
No trading platform allows the use of common english, in place of numerics, for electronic trading. None. And the CME has said nothing untoward occurred in the e-minis (electronically traded mini (1/5) S & P 500 stock futures contract).
The list of “corrections” from the NASDAQ has some unique overlapping data points: mutual funds and ETF’s holding the same individual stocks, as a multiplier).
This was no error, and I have made very expensive mistakes on the Globex trading platform. (In the pits too, but I won’t go into that.)
Cjunk, quoting Zero Hedge on May 7th…
A year ago, before anyone aside from a hundred or so people had ever heard the words High Frequency Trading, Flash orders, Predatory algorithms, Sigma X, Sonar, Market topology, Liquidity providers, Supplementary Liquidity Providers, and many variations on these, Zero Hedge embarked upon a path to warn and hopefully prevent a full-blown market meltdown.
The trade by Universa, a hedge fund advised by Nassim Taleb, author of “Black Swan: The Impact of the Highly Improbable,” led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank Barclays PLC—to do their own selling to offset some of the risk, according to traders in Chicago.
Then, as the market fell, those declines are likely to have forced even more “hedging” sales, creating a tsunami of pressure that spread to nearly all parts of the market.
[…]
As more details of Thursday’s collapse become clear, there is less evidence to suggest a “fat finger” data-entry error caused the collapse. Instead, the picture is one of a rare confluence of events, some linked, some unrelated, that exposed weaknesses in the stock market large and small…
Phony Tulipmania has bitten the dust.
http://www.museumofhoaxes.com/hoax/weblog/comments/4547/
This is how bs like half the stuff in “popular delusions etc” get started. Thank God for the interwebs. Now if only everybody read ’em.
A combination of factors led to the sharp decline, including the Chicken LIttle button present in all human beings.
Understand human psychology and you can understand the stock market.
Many of those who thought they had all the answers had their asses handed to them on the stock markets.
It takes patience and an understanding of how economic forces affect human beings to be a successful player.
Having said that, about 70% of trades are done based on mathematical formulas based on trends.
Bottom line … buy low, sell high.
The only ‘fat finger’ was in their ear or perhaps nose.
As previously posted:
Of course “Black Monday” 1987 was blamed on digital trading as well…but they ‘fixed’ that didn’t they?
It would be hard to imagine that Proctor & Gamble sales of Head ‘n Shoulders shampoo contracted 33% in the last quarter.
Must be a case of ‘financial dandruff’ soiling the business suits.
Cheers
Hans-Christian Georg Rupprecht, Commander in Chief
1st Saint Nicolaas Army
Army Group “True North”
Nicholas Taleb, hmm, now where did I hear that name before? Look, I’ve said this before: this is what happens when you take independent computer systems that were designed to work independently and then you hook the outputs of system A to the inputs of system B and the outputs of system B to the inputs of system A. But would anyone listen to me? Nooo…
The truth is available if you search Max Keiser on You Tube.Max hold 132 patents on the technology that runs the 17 computers at the New York Stock Exchange.Max did an interview yesterday very revealing.Max has the background to tell it like it is, and does so in plain language.
Max Keiser is a conspiracy-monger who is getting rich off of gullible suckers.
Is Max Keiser Al Gore’s evil twin?
The WSJ article linked by Kate says:
While I’m glad Sauter agrees with me that we have a structural flaw, I disagree with his prescription. We do not need to preserve the immediacy. We need to eliminate the immediacy and mandate human intervention in all transactions. The immediacy is the structural flaw.
Vit.Why dont you stack your credentials up against Maxs and let the readers decide for themselves.
I vote for Vit.
Oh, sorry, Mike, the only credentials I have, other than a B.Sc. in Electrical Engineering and an M.Sc. in Computing Science, are forty years of experience in the design, development, and behaviour of globally internetworked computer systems. Perhaps if I got my own shows on Al-Jazeera and Iran’s Press TV, like Max Keiser, you would be more considerate?
The fickle finger of fat…
Cute, Kate.
In simple English, it is NOT real live humans doing this, it is software programs/algorithms.
Computers are programmed to do this trading for ALL the major players like banks, brokers, hedge funds, mutual funds, and the like …individual investors don’t amount to a fart in a hurricane in today’s markets.
although the computers sped up the sell off the sell off would have occurred. Instead of 15 minutes it may have taken a couple of hours but it would have happened.
It concerns me that folks may be forgetting the debt thing in Europe.
This isn’t the first crash nor will it be the last computer algo’s or no.
The markets probably would have fallen anyway, Jeff, but the spike was algorithmic. The market reversed off most of the spike within minutes of it starting. Such a spike would not have happened if humans were in the loop. The price of good stocks would not have gone to zero if humans were in the loop. Shares would not have been traded when their price was zero if humans were in the loop. And, minor quibble: there was no crash.
Vitruvius, have you ever worked a market through a crash? I have. 1987 ring a bell.
First off when the margin calls come everything is tossed overboard especially on a move as severe as that one. I have on past occasions seen good stocks tank it’s what happens in a panic I don’t care what Cramer says sitting in his seat at CNBC.
People all run to one side of the ship at the same time. It’s called capitulation. Panic if you will.
The reversal may have taken more time to come back.
When 10% give or take comes out of a market I call it a crash I don’t know what you call it.
And when you take out 10% give or take, of the value of the market in minutes I don’t know you call it but I call it a crash.
It would actually be far messier with just humans they tend to freeze and do nothing in that severe a climate. The computers read the anomaly and bought, saved us some huge anxiety and maybe a continuation or worse.
Yeah, you’re probably right, Jeff. Perhaps I was getting a bit carried away (like Max 😉 And I certainly remember ’87 – it had no long-term effect either. Still, if all transactions had a reasonable minimum delay time (not too small), and a reasonable amount limit (not too high), then I think that such humans that are in the loop would have more time gather information, consider alternatives, and not panic. So, yes, “crashes” are to some degree part of a normal market functioning, but we still need to work to make sure that we aren’t making them worse simply by speeding up the transactions without adding any value to the market.
People are trying to make money off the market, not through it.
That’s immoral ~ it’s not what civilization needs from the market.
I understand what your trying to say Vitruvius it’s the margin calls that are the catalyst.
There is a saying in my business don’t try to catch a falling knife.
There’s a saying in my business: don’t drop the knife 😉
Seriously: one of the things I’m responsible for is a globally replicated network of backups. If we loose enough of the backups, there is no way to recover. There is no way to “catch the knife”. If we can’t prevent our markets from going bonkers when an trader sneezes, which does produce some irrecoverable results, then we need to re-engineer the mechanism. If margin calls are the problem, then they need to be fixed or eliminated.
That’s funny I needed the laugh.
Well you have just hit on a question for the ages, I certainly don’t have an answer to it.
However eliminating credit from the markets would shut down the short side of the market. That would be the brakes if you will in any sell off. Short sellers have to cover and they become buyers.
It is complicated the circuit breakers are supposed to do what you have suggested however what everyone questions is why did we come within a hair of triggering them and yet didn’t.
I’m glad you liked that 😉
Correct me if I’m wrong, Jeff, but my understanding is that different circuit breakers and circuit makers tripped in different markets, and that was a crucial component of this “event”. In my first comment above I mentioned two hypothetical systems A and B. I don’t think it would have happened this way if we were operating under a single consistent methodology within a single system.
But why do we need short? Why do we need long? They’re all just forms of legalized cheating. If I want to put some of my money to work by making it available to a productive company through an investment market, I don’t need any of that. And isn’t that what the market is for? Or is it supposed to be a casino? Is that what we want?
Both the NYSE and the Chicago Merc. have agreed upon circuit breakers. They basically shut the all markets down once triggered to let cooler heads prevail. They have been widened substantially since the 87 sell off due the rise in markets.
What effect narrower triggers would have I don’t know.
All stock exchanges (commonly referred to as the secondary market) are, is a place to sell the 10 shares of xyz you bought at the initial public offering. This was done so when you had to get you kids teeth fixed you could exchange your xyz for dollars and not be stuck with them forever.
Today however so much is blurred Stock exchanges or SRO’s Self Regulatory Organizations are for the most part public companies. Not that long ago they were a private domain and definitely not democracies.
In the end I suppose it is still about taking excess savings and putting it to work. The mechanism has become so complex that it would take a book to explain it.
Agreed. Well, many books, actually. And that’s part of the problem. It’s like our statutory codes. Nobody can understand them; instead, professional shysters pretend to understand them: for a fee. I call bullshit. The statutes, the markets, these systems we construct: they are constructed by humans and their only valid purpose is for humans. Not for shysters.
Vίt.People pay Max for his advice because he has a well proven track for being right and honest regardless of whether you like his politics, he has integrity. If you can prove other wise have at it.
I always figured that computers would be the end of us.
Maybe I was right …
While I am not able to discuss this as intelligently as many of you guys can. Two things stand out to me:
1) HFT systems, whose existence has been justified as a source of liquidity (even while it effectively front-runs investors) were turned off as soon as the event began. HFT doesn’t seem to be providing liquidity when it counts. I would like to see HFT outlawed (along with proprietary trading by dealer/brokers against their own clients) to give investors the feeling that the markets are not totally rigged.
2) This event shows just how nervous many large investors are about this market. It seems that as long as the music is playing, they are going to dance (to steal an analogy) but when it stops they all run for the exit. I expect this is only the first of a series of “black swans”, if you will, that will be coming to a market near you over the next few months.
So we like free markets, but not too free and not too fast?
“I call bullshit. The statutes, the markets, these systems we construct: they are constructed by humans and their only valid purpose is for humans. Not for shysters.”
For a second there, I thought Max Keiser was posting on SDA…
the elite companies and ceo’s and the billion and trillionaires did this on purpose to get more money all they did was force the glitch …..once the price dropped they baught all of there moneis worth and voila now they just tripled there net worth ..simple …it is hard to knock those people offthere pedistal ..youk now the presidents and priministers around the globe are put there with money people are willing to kill there daughters for sons all in the name of money …crazy world ..it will soon implode and i think jesus is getting his coat on and getting ready to go for a strole !!!
Paul in calgary
The difference, WingWalker, as I understand it (and I’ve been wrong before), is that he thinks that the big-shots know what they’re doing and that they are in control and that they are doing this on purpose ~ that’s where the conspiracy nonsense comes in. On the other hand, I think that the systemic mechanism is structurally broken, that nobody particularly did it on purpose, and that nobody has much of a clue what’s going on or is in control of anything. There’s a middle ground between being a control freak and being out of control; I think we’ve to some degree sacrificed that position to uncharted territory in the name of client greed ~ people who want to eat their cake and hedge it too ~ not in the name of the big-shots. Shysters can’t sell without gullible buyers.
Posted by: Paul at May 11, 2010 9:05 PM
Myi deictunery iz browkn.
If the rapid flash trading is a big part of the problem, why don’t we tax security transactions. Say the rate is 0.1% it won’t make much difference when we buy at $10 and sell at $14, however the algos buying at $10 and selling at $10.10 would be affected.
“… that he thinks that the big-shots know what they’re doing and that they are in control and that they are doing this on purpose ~ that’s where the conspiracy nonsense comes in.”
If Goldman being profitable on 63 out of 63 days and JPM losing money on just 4 days this quarter isn’t a conspiracy then I don’t know what is.
The odds? Oh, about 1,000,000 times less likely than one in a trillion.
Wing Walker.We must question the establishment.Republican or Democrat, Conservative or Liberal, it wont matter they all answer to the same people.They want us to fight their wars, work for peanuts and tax us to the limit until they decide to deindustrialize, then tell us, we are hot tempered and irrational for being upset.Goldman Sachs and the rest of the investment banks are a crime sindicate, the rules are written by them and for them its undeniable.Social Scientists are emlpoyed to advise them how to manipulate the unwashed masses, and play us off against one another, class against class, latino against gringo,and I could go on and on.Maybe if we bought some stock in an armaments corporation we could sit back and feel better.I cant Im cursed with a conscience.
Jeff, Vit:
The market makers on the NYSE did call a halt – for about 90 seconds – to let cooler heads prevail. Unfortunately, orders were then routed to the electronic markets, which did not halt. In the absence of bids for many stocks, the algos were programmed to bid a penny, which they did. This is one of the reasons for the ridiculous prints, which are now being canceled.
Today, if I understand CNBC correctly, all the major exchanges, including the electronic ones, are meeting to discuss better co-ordination and a common agreement on when to shut down trading. At least the lads are learning.
And there’s really nothing wrong with immediacy, Vit, so long as all players are playing by the same rules. “Immediacy” when accompanied by a rule that lets larger players “snoop” 30 ms ahead of order execution is a rigged game, IMHO.
Roger that, Kevin, that’s also my understanding of how
the halt / handoff / trade for a penny situation happened.
The very brief NYSE trading halt did not let any human “heads” cool. The intent of the NYSE trading halt was to slow down / stop the algorithmic computer trading long enough for a few buys to catch up with all the programmed sells.
To repeat, humans have successfully programmed “high frequency trading” algorithms to manipulate markets for the benefit of financial giants like Goldman-Sachs, Citi, etc.
“When elephants dance the ants get trampled.” Guess which one we are?
Circuit breakers? The CME has always had percentage based trading halt collars, both up and down. The stock exchanges had one under the “uptick rule” which was scrapped in favor of HFT by “liquidity providers”.
Get rid of sub-penny trading (yes, it exists) and limit HFT (transaction tax on securities held for less than a minute?) and this will go away.
This is complicated with some things that can be fixwd now, but won’t by thge powers that be.
More later.
Oh, and the SPX 800 put story about Taleb is a knee slapper too. The name “Barclays Capital” raised my eyebrows though, at one time, they were known as Lehman Brothers.