Momentary Financial Crisis... And A Lesson In Unintended Consequences
from the watch-the-automated-trades-go-wheeeeeeeeee dept
As you may have heard, yesterday was a fun day when it came to the stock market, with something causing the Dow to go into freefall for a bit, before it then bounced back up. Initially, some thought that it was a full-on financial crisis, and then there were rumors of a "fat finger" trade, as has been seen in the past. Then there was the inevitable claims of high frequency trading systems having something to do with the mess. People are still figuring out all the details, but Bloomberg has a pretty good explanation of how things snowballed, and it appears to be a case of seriously unintended consequences. Planet Money has the shorter version of how a system designed to prevent the market going into freefall, may have actually aided the market going into freefall.Basically, there's a system for the NY Stock Exchange and the NASDAQ, called the Liquidity Replenishment Point (LRP), which is designed to stop electronic trading on stocks in freefall. The idea, of course, is to prevent the algorithms from going nuts. But, the LRP only works on those two exchanges, and we're in a world now where there are a bunch of other, electronic exchanges, that now handle an increasing percentage of stock trades -- and electronic trading on those exchanges is not stopped when the LRP is triggered. So, now things actually get worse, because orders that used to be spread more widely concentrate on these other exchanges by automatically jumping from the NYSE and NASDAQ to those alternative routes, and it can swamp those systems, which have a lot less money available. As Bloomberg explains:
While the system is designed to restore order on the Big Board, trading is so fast during times of panic that orders routed past the exchange may swamp other venues and exhaust buy orders, said Angel at Georgetown.And, speaking of unintended consequences, in talking about this very thing, Felix Salmon points to a blog post by Kid Dynamite explaining why the plan to cancel many of the errant trades is monumentally stupid and likely to create more unintended consequences in forgiving people for doing stupid things, and taking away incentives for others to step in and fix things:
That's when prices may plummet as orders execute against so-called stub quotes from market makers. Brokers can set the quotes as low as a penny a share because they're never expected to be used.
if buyers who step in later see their trades canceled, it removes all incentive for them to step in - and then you don't get the bounce back that we saw! Think about how much havoc it causes a trader who astutely bought cheap stock, then sold it out at a profit. He's now short! Or, he spent the entire day wondering if his order would be canceled, in a state of limbo. What's the alternative - that traders should just assume that the orders will get canceled, and NOT buy stock? Guess what - if no one buys, the stock stays cheap! SOMEONE has to buy, and that someone shouldn't be penalized in favor of remedying the ignorance of the seller who screwed up.Ah, setting off more unintended consequences in response to other unintended consequences. Sometimes you just have to let those who made a mistake take responsibility for their mistakes.
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Filed Under: financial crisis, unintended consequences
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Absurd!!! The government needs to take full responsibility of our actions at all times and that includes controlling us out of our freedoms. After all, government knows best.
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Re:
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Bailouts and Undos
What happened was that the wrong people lost a lot of money, and when that happens something will be done about it. Either the government will step in with a bailout or the system will just give the "wrong losers" a big "undo" (like five-year-olds demand when they lose).
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We are the "do-over" society
Every hates "big government" and "socialism" until it's their ass that needs saving. I say let them swing in the breeze...
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LRP
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LRP
[used 'less than' symbol in previous post which cut it off, please delete previous]
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Re: LRP
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Re: Re: LRP
Did you ever think that maybe, just maybe ... they arent computer glitches and the revolution has already begun. ;)
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Re: LRP
How many troops do you reckon it will take to invade and take over the UK so that the US can enforce the LRP on the London Stock Exchange?
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Having coded stock trade engines in the past ...
Most of the time that is correct. If this turns out to be one or more hacked trade engine(s) (computerized trading system(s)), an attempt to profit from a statistical fluke someone found doing a historical simulation and then set in motion, or any of the other number of things that can be used to manipulate the market to cause money to unfairly change hands. In situations like this it is better to be safe than sorry and stop any profit from attempts at market manipulation. Rather than wait a year for the investigation to conclude and find that it was an externally forced event.
JMHO
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Complex Systems Are Prone to Failure
Now we have people writing psychic programs to "sense" the anticipated movement of a stock. Unfortunately it looks like someone may have created a positive feedback loop. Oops!
My point, given the freedom to innovate, these companies should exhibit a degree of self control and ethical behavior. These "people" in their self-serving greed don't seem to care that their mistakes could destroy our economy and the lives of others. Given this greed, I'm probably on the wrong planet with my recommendation!
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Re: Complex Systems Are Prone to Failure
Perhaps after passing your seven you should also be sworn in with an oath like the hippocratic oath or an Officer of the court and held to a higher standard. Alot of good that does us with Officer of the court though.
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This is Brazil
"I had complications on my complications"
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Financial Crises
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high frequency trading
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Re: high frequency trading
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Forex Trading
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Regards,
banking information
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