This is being investigated, and the rumor is that it started with an erroneous trade being entered into the system, but it’s being suspected that the problem was really due to the High-Frequency Trading (HFT) that goes on, which is of very high volume, automated, and reacts to stock market movements in milliseconds (if not less). On the other hand, this link says
“Several high-frequency firms, including Tradebot Systems Inc., which says it often accounts for 5% of the U.S. market’s volume, stopped trading when the market grew volatile. With these traders on the sidelines, there were fewer potential buyers, which may have contributed to the plunge.”
so maybe HFT was not the cause of this.
What do you guys think? Of course we should wait for a post-mortem, but until then, what do you think caused this?
Also, if it is HFT, do you think anything should be done about it?
This has made me kinda wonder whether it would be a good idea to keep some limit orders going to buy a few selected blue chips at say 10% of their value. Just in case something like this happens again
I would imagine that 1 cent price for Accenture was only available for a very brief time and on very small volumes but yeah it would have been an extraordinary bargain.If you were luck enough to buy 10,000 shares of at one cent and then sell them for 40$ you would make 400,000 on an initial investment of 100 in under ten minutes.
Yes, lots of people snapped up the 1cent stock, then sold it when the price recovered back to $30.
Sounds great right?
Wrong, the market regulators went back through the trades and set a cut off of 60% below the original price, and reversed the trades below that value.
So then it sounds like a wash right? They reversed the trade? Wrong again, they reversed the trade BELOW the 60% but kept the trade above.
So the people that bought at 0.01 (+1 trade) and sold at 30 (-1) woke up this morning to find that instead of a closed trade, they are now holding a short sale at 30, on a stock that bounced back up to 40.
ETA In this case, the buy order at 0.01 was reversed, leaving you with a short sale at $40. The stock is now near $41 so you are at a loss of $10,000.
That seems very unfair: those selling at 1 cent either did so willingly, or had delegated their selling activity to a computer program. They should be the ones carrying the loss. If you get a computer program to buy and sell for you, it should be entirely at your own risk.
I agree it is not fair, but we need some way to prevent manipulation of the market in this way. If there were no penalty, it seems one could put buy orders at a certain level and then shock the market in some way in order to profit. I’m thinking the major players could do this.
That wasn’t a “fat finger” trade - it was heavy selling followed by panic selling coupled with a lack of liquidity as market makers got run over and pulled their quotes.
Corporate bonds, preferred stocks and closed end funds were getting hammered well before the general market drop off (Check out tickers HYG and PFF). Also, the fixed income markets and currency markets reacted before the equity sell off. A fat finger trade in Proctor and Gamble can’t have that kind of effect. On trending days (up or down) market makers tend to get loaded heavily either short or long. As MMs get more inventory, they start to make wider markets and offer to trade less size. Before the big drop most MMing programs were probably quite negative on the day. Eventually, everyone got overwhelmed and there was an air pocket with no bids. Market orders in that environment can move prices a huge amount, even though not much stock was sold.
A VIX that’s up 50% in a week in addition to a potential sovereign debt crisis is good enough for a market panic, in my opinion.
I am now convinced that if computers ever take over the world and destroy civilization, they will not do it using nuclear weapons and robots, a la Terminator, but by destroying our financial system a la yesterday.
If the purpose of the market is to measure underlying values, I don’t see how HFT algorithms help, since they work on movement, not value. If the purpose is to make as much money as possible for those with the right software, that is different.
Perhaps all HFT programs need a panic button, which can be pushed to stop them either through human intervention or when a certain drop or increase is reached - one lower than the one that would have stopped trading. But I think this mess illustrates that Wall Street has gotten far away from its purpose.
There are many different high frequency strategies and many them do make trades based on value.
That pretty much was the problem. The HFT community stopped trading. They hit the panic button and pulled their quotes. Market orders to sell came in, and there was no one bidding for stock.
I don’t know but it worries me that a bank can accidently sell several billion shares and cause such a significant drop in the stock market. To me, it suggests an inherent instability in the stock market if a one bank can do that. What happens if this happens again and the drop leads to an even wider sell-off?
As for HFT, I’m not necessarily against it, I just wish that everyone had the opportunity to make risk-free money, too. Ideally, I’d love to see a mechanism in which one could sell and purchase an unlimited amount securities over the Internet without paying a processing fee. That way, I could purchase and sell thousands of shares per second for the sole purpose of generating risk-free wealth like the banks do.
Accidentally selling a gazillion shares is a Very Bad Thing and loses tons of money. If this is what caused the trough, some fund just lost its shirt, and I expect heads to roll by the bucketload. Banks and hedge funds want to avoid this happening again; it is not a Sinister Plan from Evil Wall Street. (And it’s not “inherent instability”. You see a ridiculous drop in the market, you BUY while it’s cheap, driving it back up.)
Want to make so-called “risk-free money” from HFT? You can do that, the same way you can make “risk-free money” investing in pork bellies - buy shares in a company or fund that does it. That’s if you’re really sure it’s risk free and makes above-market returns.
I thought at least some who bought when it was cheap had the trades invalidated? If I see a ridiculous drop in the market tomorrow I not only have to wonder if all the sellers know something I don’t, but if the price goes up again do I even get to keep my newly-purchased stock.
Think of liquidity as “ready and willing buyers AND sellers”. The key point here is that there are people willing to trade at current prices on both sides. Both Buyers and Sellers.
You should also know that a market order is an order, that has been given to a broker, to trade at current market levels. Sometimes you can specify a certain participation rate. For example, you can tell the broker to sell stock at market levels and do it at 20% of volume that is seen in the marker during the life of the order. So if the broker sticks this order in an algo (basically a computer program that trades using an algorithm) and then someone comes along and sells a bunch of stock, the algo will have to maintain its 20% instruction and get some done. However, if there is a lack of liquidity, and the order book has been heavily sold, then there is only one way to get it done, and that is to accept a lower buy order.
Normally there should be controls in place to prevent trading at a ridiculous price such as specifying a limit price with your order.
I don’t know how this managed to happen, other than a combination of panic and stupidity. As someone else said earlier, we will have to wait for the post mortem.
My question is, what’s the prevent this from happening again, and on purpose?
Say some unscrupulous putz decided to cause some havok and profit off it by doing the same thing. He does and the stock market goes crazy while he is in position to snap up the losses. How do we prevent this?
In my mind, they need to simply void yesterday’s entire buy/sell list and start over as if it never happened. It’s the only way to be fair to those who lost money or profited off this very human, and very easily repeatable mistake
