“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Today, the human specialist model has been replaced by an automated market maker model.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
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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.
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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/
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.
I expect this to generate some discussion and pushback . . .
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?
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.
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?
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?
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
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.
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.
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.
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
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BR: That great stuff. I’ll repost on the main page
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.
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.
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.
BR
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