Intro by Ilene
Jim McTague is shattered, so am I. I don’t know why these high speed stock trading computers are legal.
The computers, often "plugged right into the exchanges’ computers to give them an extra speed advantage," trade millions of times per day, at the speed of light, hold positions for less than 7 seconds, cause "several bizarre trading events every week," and would require continuous regulation (which isn’t yet happening) to prevent future flash crashes. Computers analyse the news instantly and probably set the tone for the market’s reaction before you and I could even read the headline. When that news is good, and stocks rise up in happiness, you might think investors are buying stocks having thought through the wonderful implications, but more likely, computer algorithms decided instantly to activate the celebration button and market participants are just playing along.
So financial sector companies can make billions of dollars running trading programs, via their computers that have speed, time and proximity advantages over us, but we human investors get to experience bizarre crashes that trigger our stop losses at the low end of the plunge (but probably not at the lowest, where the God of Bizarre Crashes makes an arbitrary decision to reverse the trades). If regulation ever gets kicked into gear, taxpayers will likely pay for it, rather than the financial companies that are benefiting from HFT casinos. If this is not made illegal (my first preference) then the companies implementing these unfair and abusive devices should at least have to pay for all the regulation and any unforeseen consequences.
What are the odds we’ll ever see that?
Next Danger: "Splash Crash"
Excerpts:
The possibility of a splash-crash nightmare springs from John Bates, the affable chief technology officer of Progress Software (ticker: PRGS), a $1.89 billion company whose worldwide headquarters is in Bedford, Mass. Bates has an impressive résumé, including a doctorate in computer science from Cambridge University. He’s also a member of a panel of technology experts that advises the Commodities Futures Trading Commission.
"I think there is an extreme risk of seeing this because we’re not serious about putting measures in place to police against it," says Bates, who freely acknowledges that his company has computer programs that it would like to sell to securities and commodities regulators to address this very issue.
HIGH-SPEED COMPUTERS TRADING millions of times a day on multiple exchanges around the globe have in effect linked once-disparate markets into an unstable, volatile whole. The nimble robotic brains are instructed by their masters to buy and sell stocks at the speed of light without human intervention. Packed full of pattern-recognition software and other advanced programs, these artificial-intelligence systems base their trading decisions on factors such as market volume, momentum and direction, and the historic pricing relationships between various stocks and asset classes.
Some of the programs even react to breaking news stories, translated for their consumption into algorithms by companies including Dow Jones, the parent of Barron’s, and Reuters. Each second, these talented robots monitor dozens of pricing relationships for multiple securities and commodities on many exchanges and buy or sell whenever an arbitrage opportunity arises. Many of the machines are plugged right into the exchanges’ computers to give them an extra speed advantage. They need it. Some of these opportunities are so fleeting—we’re talking milliseconds—that they are invisible to us mere mortals.
[…]
Often, the robots or their handlers blunder and, consequently, individual stock prices go haywire. Regulators have tried to dampen the effect with "circuit breakers" on the most popular stocks and ETFs—a trigger that halts trading when a stock’s price swings up or down by 10% within any five-minute period. Even so, there are several bizarre trading events every week. For example, last Wednesday, May 18, the Class C preferred shares of Strategic Hotels & Resorts (BEEPRC) rose to $2,600 from $28.32 in just 11 seconds, according to Eric Hunsader of Nanex, a market-data provider from Winnetka, Ill. Then, they reverted to their previous price
There’s also circumstantial evidence that some of the robots are mechanized Ivan Boeskys, attempting to manipulate prices. "Everybody knows it," says Bates. "The regulators know it. So do the exchanges. They should begin actively policing trading."
[…]
"POLICING REQUIRES YOU TO ACTUALLY sit within the stream of data as it is being generated," Bates adds. "That way the regulators can catch the malicious machines in the act and stop them before they can impact the markets." The SEC, in conjunction with the Justice Department, is conducting a more traditional investigation, poring over historical market data to detect patterns of criminal behavior.
Bates isn’t a lone voice. Other market experts agree that a bigger flash crash is possible. Joe Saluzzi of Themis Trading in Chatham, N.J., warns that fixes like the circuit breakers are Band-Aids: "Even if regulators had their 10% limit-up/limit-down circuit breakers in place for all stocks, the market could still drop 10% in a matter of seconds or minutes. This will shatter already-fragile investor confidence."
Full article here >
