# Stock market plunge of May 6 2010 **URL:** \ **Category:** Great Debates\ **Created:** [May 7, 2010, 4:17am UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600 "2010-05-07T04:17:31Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Saffer](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/saffer/32/6440_2.png) [@Saffer](https://boards.straightdope.com/u/Saffer)\ **Post date:** [May 7, 2010, 10:32pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/21 "2010-05-07T22:32:18Z")
> [@YogSosoth](#): > > 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 How would someone go about selling the market this low and profiting from it? Everyone who sold, as a result of their own stupidy, are probably very much regretting it now. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [May 7, 2010, 11:00pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/22 "2010-05-07T23:00:45Z")
> [@Saffer](#): > > How would someone go about selling the market this low and profiting from it? > Everyone who sold, as a result of their own stupidy, are probably very much regretting it now. Stupidity or panic? First, I agree that no one could make money by selling the market low deliberately. I also agree this didn’t happen out of malice. That would be easy to stop - it is not like someone making a gazillion dollars off of something like this could hide it in a safe somewhere where no one could find it. What scares me is that with the speed at which trades must be made today, there is no time to reflect on the rationality of a supposed bit of news. Given the state of nervousness over Europe, is selling in the face of a steep decline stupidity or a perfectly rational desire to get out before the bottom? If there was a good reason for the decline, those people would look smart. Whatever triggered the beginning of the selling clearly was not someone really thinking that someone was trying to sell a billion shares of something. I’ve been designing software for a long time, and it does not surprise me at all that the software would do the wrong thing in this case - you can’t consider everything. This is kind of like one reason why orbiting nuclear weapons are a bad thing. At the moment there is enough time, when a signal of an attack comes in, to consider if the signal actually makes sense. If we had to react nearly instantaneously, we might have to fire for fear of losing the chance. Is it worth the risk? Is HFT worth the risk of high volatility? ---
**Author:** ![Capt.Ridley\_s\_Shooting\_Party](https://avatars.discourse-cdn.com/v4/letter/c/cc9497/32.png) [@Capt.Ridley\_s\_Shooting\_Party](https://boards.straightdope.com/u/Capt.Ridley_s_Shooting_Party)\ **Post date:** [May 8, 2010, 1:03pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/23 "2010-05-08T13:03:50Z")
> [@The\_Lurker\_Above](#): > > 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. That’s what I was thinking. If this happens again what’s the incentive for anybody to buy, thus driving prices back up, if purchases have been invalidated this time around? ---
**Author:** ![emacknight](https://avatars.discourse-cdn.com/v4/letter/e/3ec8ea/32.png) [@emacknight](https://boards.straightdope.com/u/emacknight)\ **Post date:** [May 8, 2010, 2:13pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/24 "2010-05-08T14:13:46Z")
> [@Capt.Ridley\_s\_Shooting\_Party](#): > > That’s what I was thinking. If this happens again what’s the incentive for anybody to buy, thus driving prices back up, if purchases have been invalidated this time around? On a simple level you’d be right, but the invalidated trades were considered 60% below the start of day value. I think the lesson would be that there is no sure thing, and if it looks too good to be true it probably is. ---
**Author:** ![Tom\_Tildrum](https://avatars.discourse-cdn.com/v4/letter/t/e95f7d/32.png) [@Tom\_Tildrum](https://boards.straightdope.com/u/Tom_Tildrum)\ **Post date:** [May 8, 2010, 3:22pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/25 "2010-05-08T15:22:49Z")
I have to think that there are going to be some lawsuits over the arbitrary invalidation of some trades. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [May 8, 2010, 6:17pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/26 "2010-05-08T18:17:27Z")
> [@kingbighair](#): > > 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. Something has gone far wrong when HFT, and certain other computer-trading modes, are allowed to dominate the market. They provide little or no service to society, are just ways to loot the system at the expense of small players, and put the system at risk, as we saw Thursday. I assume HFT players won overall Thursday, but don’t know for sure and, in any event, doubt that the market action was deliberately orchestrated. However it seems quite likely that HFT players, having now seen what’s possible, will provoke further plunges, but taking stocks down only 10% or whatever to keep the trades from being invalidated. Obviously HFT trading is unrelated to the credit derivatives that led to the 2007 crisis. However both are symptoms of the financial world’s embracement of “hyper-efficient” methods, which contribute nothing to society but risk, and whose only purpose is to enrich traders. That U.S. financial regulators drew only the most limited lessons from financial crises of 2007 (and earlier) is a travesty. ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [May 8, 2010, 11:00pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/27 "2010-05-08T23:00:29Z")
I have a friend who is a big investor. Yesterday he said,"I am not a conspiracy believer but if someone figured out how to game the market, thats what it would look like. " The market dropped like a rock and returned within half an hour. Someone who knew could buy great stocks really cheap and then get out at a high price , all within 30 minutes. Money transferred to secret accounts in a millisecond. ---
**Author:** ![dalej42](https://avatars.discourse-cdn.com/v4/letter/d/67e7ee/32.png) [@dalej42](https://boards.straightdope.com/u/dalej42)\ **Post date:** [May 8, 2010, 11:38pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/28 "2010-05-08T23:38:18Z")
Actually, I don’t think a terrorist attack on the market would look anything like Thursday mess. Unfortunately, it would look too much like the scenario in Tom Clancy’s\* Debt of Honor\* It was far easier to go through and bust trades 60% away from the market than the scenario in _Debt of Honor_ where there were **no** records of any trades. Since\* Debt of Honor\* came too close to reality nine years ago with the crashing of airplanes into buildings, let’s hope the other part of the book never happens. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [May 9, 2010, 5:33pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/29 "2010-05-09T17:33:50Z")
> [@Quartz](#): > > You’re clearly very knowledgeable. Do you think you could rerender your post in noddy language for us lesser mortals? Here’s a helpful definition From _Trading and Exchanges_ by Harris, pg. 401 to start: > [@](#): > > Market makers are dealers who allow their impatient customers to trade at bid and ask prices that the market makers quote. Market makers often trade very frequently. They try to buy after they sell, and vice versa. They avoid large inventory positions because they generally do not know the fundamental values of the instruments that they trade very well. Large inventory positions expose them to losses if the market moves against them. Market makers simply try to discover the prices that produce balanced two-sided order flows. > > Market makers primarily supply liquidity in the form of immediacy. They usually quote narrow markets, but only for small size. If asked to trade large size, they will quote wide market to protect themselves from losses to well-informed traders. Market makers are dealers in stock. They function just like any other dealer - antiques, baseball cards, jewelery, Beanie Babies, etc. A silly example: There is an antique dealer who specializes in antique wagon wheels. He normally carries 15 wheels in his inventory. He subscribes to Wagon Wheel Monthly and knows that his wheels are worth ~$50. He goes to the county fair and sets up his booth with a sign stating his is willing to buy up to 5 more wheels at $45, 5 wheels at $40, and 5 at $35. His is also willing to sell, from his inventory, 5 wheels at $55, 5 wheels at $60, and 5 wheels at $65. So, initially, he’s making the following market: Ask 5 x $65 Ask 5 x $60 Ask 5 x 55 (Theoretical Value) Bid 5 x $45 Bid 5 x $40 Bid 5 x $35 Let’s say in the first 10 minutes he’s open for business people “hit” his bid and he buys 5 wheels at $45. 10 minutes later he’s bought another 5 wheels at $40. He normally only trades 5 wheels/hour. This is very unusual market activity and he now owns more wheels than his is comfortable with. He might start to think there there is some fresh news about the wheel market, and he doesn’t want to get “run over” as prices collapse. He wants to offload some of his inventory, so he quotes a new market: Ask 5 x $60 Ask 10 x $55 Ask 15 x $50 (T$V) Bid 1 x $45 Bid 1 x $40 Bid 1 x $35 Over the next hour, the dealer manages to sell out of excess inventory. It turns out there was a just a large seller that demanded liquidity and was willing to sell his wheels at a lower price. The wheel dealer then move his quotes back up to $45 bid x $55 ask. That’s a simple example, but is essentially what market makers and most HFT algorithms are doing. The only difference is in the complexity. As opposed to just using Wagon Wheel Monthly to get a sense of where to quote a market, market makers in financial markets rely on dozens, hundreds, or perhaps thousands of separate data points. In the wagon wheel example, the dealer adjusted his quotes 2 times in an hour. HFT algorithms might adjust their quotes 1000 times each minute. On May 6, the market was trending down all day. This means the MMs and HFT algos were probably buying a lot of stock. Similar to the wheel dealer, this would cause them to lower their bids and offer less size to trade - they don’t want to hold a large inventory. Less liquidity on the bid allowed orders that normally wouldn’t move the market to exhibit a notable effect on prices. Eventually, when prices really started to drop, HFT algos hit their panic loss limits and pulled their quotes. This would be like someone coming up to the wagon wheel dealer (who has just bought 30 wheels from $45 down to $30) and offering him 20 more wheels at a price of $20. The dealer would freak out. He’s already deeply underwater on his current position and wouldn’t be willing to make a market and buy any more. The stock market hit a similar “air pocket” on May 6. This is exactly what happened when Accenture hit $0.01. The market orders (market orders are orders to sell at the bid, no matter what price) to sell hit the market, but there were no meaningful bids. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [May 9, 2010, 11:21pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/30 "2010-05-09T23:21:41Z")
> [@Trom](#): > > There are many different high frequency strategies and many them do make trades based on value. What’s your definition of value here? A stock price should reflect the current perception of value. New information can change this, but I don’t see HFT algorithms processing new information, from news wires, say. We don’t have the AI for that. I can see them attempting to deduce this kind of value based on market movements initiated by news - which is where we ran into trouble. A billion share sale of something kind of indicates doomsday, does it not? ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [May 10, 2010, 12:25am UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/31 "2010-05-10T00:25:39Z")
A small financial transaction tax could clean up some of this mess, and raise just a touch of revenue, to boot. It would come at a price of some market liquidity, but at a certain point, the benefits of stability outweigh the advantages of being able to trade so quickly. And I haven’t heard any other downsides to such a transaction tax, but I can’t claim to be an expert in high finance. Based on what I know, it seems a solid idea to me. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [May 10, 2010, 5:05am UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/32 "2010-05-10T05:05:52Z")
> [@Hellestal](#): > > A small financial transaction tax could clean up some of this mess, and raise just a touch of revenue, to boot. > > It would come at a price of some market liquidity, but at a certain point, the benefits of stability outweigh the advantages of being able to trade so quickly. And I haven’t heard any other downsides to such a transaction tax, but I can’t claim to be an expert in high finance. Based on what I know, it seems a solid idea to me. Thank you!! Join the tiny elite club of those of us who have figured out the obvious. The reason it wn’t happen is because Congressional hearings will be dominated by Wall Street figures driving Porsches. What would be a loss of only pennies to you or me will prevent those Porsche drivers from upgrading to Lamborghinis. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [May 10, 2010, 2:50pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/33 "2010-05-10T14:50:05Z")
> [@Voyager](#): > > What’s your definition of value here? A stock price should reflect the current perception of value. New information can change this, but I don’t see HFT algorithms processing new information, from news wires, say. We don’t have the AI for that. I can see them attempting to deduce this kind of value based on market movements initiated by news - which is where we ran into trouble. A billion share sale of something kind of indicates doomsday, does it not? HFT firms [definitely](http://www.ft.com/cms/s/0/bb570626-ebb6-11db-b290-000b5df10621.html?nclick_check=1)trade based information from [news wires](http://www.bankingtech.com/bankingtech/article.do?articleid=20001705560). If a firm trades a certain stock, they know when that company will be reporting earnings. When the earnings numbers hit the wires the firms will instantly update their models and send orders to market based on their new assessment of the company’s value. Google “machine readable news” for more on this. As far as the billion-share-order-crashed-the-market theory… I think it makes for good headlines and attempts to provide a quick and easy explanation for a very complicated event. It’s BS. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [May 10, 2010, 3:03pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/34 "2010-05-10T15:03:52Z")
> [@Hellestal](#): > > A small financial transaction tax could clean up some of this mess, and raise just a touch of revenue, to boot. > > It would come at a price of some market liquidity, but at a certain point, the benefits of stability outweigh the advantages of being able to trade so quickly. And I haven’t heard any other downsides to such a transaction tax, but I can’t claim to be an expert in high finance. Based on what I know, it seems a solid idea to me. :smack: The evidence gathered on markets similar in quality (size, volume, liquidity, etc) to the US stock market indicates an _increase_ in volatility when a financial transaction tax is present. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [May 10, 2010, 3:13pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/35 "2010-05-10T15:13:12Z")
> [@Trom](#): > > :smack: > > The evidence gathered on markets similar in quality (size, volume, liquidity, etc) to the US stock market indicates an _increase_ in volatility when a financial transaction tax is present. How big of a transaction tax? Cite? I _think_ what you’re saying is that one would experience, say, 0.9% price movements instead of 0.7% movements. This isn’t the problem we’re trying to solve. We’re worried about the 15% movements or, thinking of Thursday, the 99% movements. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [May 10, 2010, 4:03pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/36 "2010-05-10T16:03:58Z")
> [@septimus](#): > > How big of a transaction tax? Cite? > > I _think_ what you’re saying is that one would experience, say, 0.9% price movements instead of 0.7% movements. This isn’t the problem we’re trying to solve. We’re worried about the 15% movements or, thinking of Thursday, the 99% movements. [http://www.sciencedirect.com/science/article/B6VBX-458WNFW-1V/2/9eb747e670a725e7854822875fc57936](http://www.sciencedirect.com/science/article/B6VBX-458WNFW-1V/2/9eb747e670a725e7854822875fc57936) [http://www.ecu.edu/cs-educ/econ/upload/zhangli.pdf](http://www.ecu.edu/cs-educ/econ/upload/zhangli.pdf) (pdf) [http://www.springerlink.com/content/l01474853x768394/](http://www.springerlink.com/content/l01474853x768394/) > **[The effect of a transaction tax on exchange rate volatility](https://ideas.repec.org/a/ijf/ijfiec/v15y2010i2p123-133.html)** > > We argue that a transaction tax is likely to amplify, not dampen, volatility in foreign exchange markets. Our argument stems from the decentralized trading practice and the presumable discrepancy bet I agree that 5%+ broad market movements in a day are a bad thing. I also agree that the current microstructure of the US equity market, specifically the role of HFT, is something that needs to be examined. However, I think a transaction tax is throwing the baby out with the bath water. The evidence that a Tobin Tax works is dubious at best and there is a lot of room for the Law of Unintended Consequences to mess things up even further. There are steps that could be tried before we advocate policies that could seriously disrupt the US capital markets. For example, why not try something like a requirement that firms must wait 1-5 seconds in between transaction is a single security? Or perhaps stricter limits on positions or volume for individual firms? ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [May 10, 2010, 4:18pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/37 "2010-05-10T16:18:22Z")
Some interesting quotes to think about: > [@](#): > > “Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. October 24, 1929 showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid … Repeatedly and in many issues there was a plethora of selling orders and no buyers at all. The stock of White Sewing Machine Company, which had reached a high of 48 in the months preceding, had closed at 11 on the night before. During the day someone had the happy idea of entering a bid for a block of stock at a dollar a share. In the absence of any other bid he got it.” John Kenneth Galbraith, 1955, _The Great Crash_ > [@](#): > > “I started accumulating stocks in December of '74 and January of '75. One stock that I wanted to buy was General Cinema, which was selling at a low of 10. On a whim I told my broker to put in an order for 500 GCN at 5. My broker said, ‘Look, Dick, the price is 10, you’re putting in a crazy bid.’ I said ‘Try it.’ Evidently, some frightened investor put in an order to ‘sell GCN at the market’ and my bid was the only bid. I got the stock at 5.” Richard Russell, 1999, _Dow Theory Letters_ > [@](#): > > Thursday was a fascinating day in the market, featuring a 20-minute span in which the Dow moved from a loss of about 300 points to a loss of nearly 1000 points and then back again within a span of about 15-20 minutes. While the decline and recovery was interesting, the fascinating part was the eagerness of investors to view the decline as a “glitch” in trading. My hope is that the opening quotations in this weekly comment are sufficient reminders that illiquidity is not a “glitch,” but a typical feature of panicked markets. In a market where active market makers have increasingly been replaced by “high frequency” trading algorithms that can be switched off at will, it is important for investors to avoid the assumption that there will be a willing buyer close at hand if risk concerns begin to escalate. John Hussman, [Hussman Funds - Weekly Market Comment: Greek Debt and Backward Induction - May 10, 2010](http://hussmanfunds.com/wmc/wmc100510.htm) ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [May 10, 2010, 6:08pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/38 "2010-05-10T18:08:33Z")
I’m not sure what transaction tax is appropriate. I’d guess 0.08% might be enough to curb excesses. > [@Trom](#): > > [four URL’s] Thanks for the references; let’s look at them: (1) “Volatility did not decline in response to the introduction of taxes … Large proportions of trading activity migrated overseas to London when the tax rate was increased to 2% in 1986.” (abstract, rest pay for view). (2) " Chinese gov’t increased tax from 0.3% to 0.5%" (3 and 4) confused, no specific tax mentioned. These tax rates (2%, 0.5%) are _much_ larger than would be imposed on NYSE. As for technical analyses of volatility, please people, realize Gaussian models are flawed: Google “Black Swan Events.” I don’t know if HFC has been proven responsible for the 99+% price drops on Thursday. Assuming it is, and agreeing, as is clear, that it is the natural result of a pseudo-frictionless market, to argue that such practices reduce market volatility is absurd, based on Thursday’s facts. Put a 99+% drop into your Gaussian/VIX computation! :dubious: And I’m sure I need not [remind informed Dopers](http://www.erisk.com/learning/CaseStudies/Long-TermCapitalManagemen.asp) that Nobel-Prize winning models have led to crises. I’m a mathematician, but I know when common sense is the better tool. > [@Trom](#): > > I agree that 5%+ broad market movements in a day are a bad thing. I also agree that the current microstructure of the US equity market, specifically the role of HFT, is something that needs to be examined. However, I think a transaction tax is throwing the baby out with the bath water. The evidence that a Tobin Tax works is dubious at best and there is a lot of room for the Law of Unintended Consequences to mess things up even further. To worry about the unintended consequences of a 0.08% transaction tax is to show poor judgement, in my view. Improved market stability, at the expense of some Wall Street types’ Lamborghinis? It’s a trade-off I can live with. > [@](#): > > There are steps that could be tried before we advocate policies that could seriously disrupt the US capital markets. For example, why not try something like a requirement that firms must wait 1-5 seconds in between transaction is a single security? Or perhaps stricter limits on positions or volume for individual firms? We don’t need stopgap measures that make an overly-complex system even more complex; and even encourage evolved methods of cheating. We needn’t preserve the “hyper-efficiency” that allows robots to trade billions of shares. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [May 10, 2010, 7:47pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/39 "2010-05-10T19:47:12Z")
> [@septimus](#): > > I’m not sure what transaction tax is appropriate. I’d guess 0.08% might be enough to curb excesses. > > Thanks for the references; let’s look at them: > (1) “Volatility did not decline in response to the introduction of taxes … Large proportions of trading activity migrated overseas to London when the tax rate was increased to 2% in 1986.” (abstract, rest pay for view). > (2) " Chinese gov’t increased tax from 0.3% to 0.5%" > (3 and 4) confused, no specific tax mentioned. > > These tax rates (2%, 0.5%) are _much_ larger than would be imposed on NYSE. As for technical analyses of volatility, please people, realize Gaussian models are flawed: Google “Black Swan Events.” > > I don’t know if HFC has been proven responsible for the 99+% price drops on Thursday. Assuming it is, and agreeing, as is clear, that it is the natural result of a pseudo-frictionless market, to argue that such practices reduce market volatility is absurd, based on Thursday’s facts. Put a 99+% drop into your Gaussian/VIX computation! :dubious: I completely disagree that HFT has been proven to be at fault for this crash. In fact HFT firms _left the marketplace_ during the sell off. If they had continued trading and hadn’t pulled their bids, the drop would have been less dramatic. Are the HFTers trading too much or too little? [Here’s](http://www.vimeo.com/11570780) an interesting recording of the S&P futures pit during the panic. All trading done in the pit is human to human. Listen to the panic in the pit announcer’s voice. The bottom dropped out because all traders pulled their bids. When the market bounced, there was no liquidity at the _offer_ price. Lack of liquidity is what allowed for such a volatile move. (There are a number annoying of 3-5 second gaps in the audio the first couple minutes, but it starts right back up.) Some terminology: “paper” = large institutional traders “handle”= 1.00 increment in S&P points, eg: 1130 and 1120 are 10 handles apart. He will usually call out the last digit of the S&P followed by the decimals. “Five evens” = 1105.00 “Three half” = 1103.50 “Offered at xxx” = offer to sell “Bid on xxx” = bid to buy Some notable moments: Around 3:50 he mentions there is a 10 handle difference between the bid and the offer. Normally, it’s between 0.25 and 0.75 handles. Again, no liquidity. At 5:30, the market takes off to the upside and he comments that there is “no offer in the pit.” No liquidity. At 9:00 JP Morgan is trying to buy and can’t get anything. No liquidity. > [@septimus](#): > > And I’m sure I need not [remind informed Dopers](http://www.erisk.com/learning/CaseStudies/Long-TermCapitalManagemen.asp) that Nobel-Prize winning models have led to crises. I’m a mathematician, but I know when common sense is the better tool. Agreed. Long Term Capital Management was a total debacle. It’s unbelievable that John Meriwether recently [opened](http://seekingalpha.com/article/168211-meriwether-s-new-fund-fool-me-thrice-shame-on-both-of-us) his third fund after blowing up his first two. > [@septimus](#): > > To worry about the unintended consequences of a 0.08% transaction tax is to show poor judgement, in my view. Improved market stability, at the expense of some Wall Street types’ Lamborghinis? It’s a trade-off I can live with. Hardly. Sweden taxed fixed income trades at 0.02% and bond trading volume dropped 85%. This led to increased borrowing costs for the Swedish government and weakened the Bank of Sweden’s ability to conduct monetary policy. This eventually led to a change in popular and political opinions on Swedish transaction taxes which were then abolished. [Cite](http://www.capco.com/files/pdf/70/04_REGULATION/01_Securities%20transaction%20taxes%20and%20financial%20markets%20(Opinion).pdf)(Of all the links getting thrown around, I think that one provides the best summary of the effects of transaction taxes.) I think it is shortsighted to think that average investors wouldn’t be [hurt](http://online.wsj.com/article/SB10001424052748703558004574579903734883292.html) by such a tax or to think the large HFT firms would actually pay such a tax. They would simply widen their markets enough to account for the lost revenue or pass on the charge to their clients. Or they could go the route that the UK financial institutions went and lobby the government so that they are exempt from the taxes. Only the little guys pay. > [@septimus](#): > > We don’t need stopgap measures that make an overly-complex system even more complex; and even encourage evolved methods of cheating. We needn’t preserve the “hyper-efficiency” that allows robots to trade billions of shares. If a transaction tax were to pass in the US, the first thing large firms would do would be to find the loopholes - or just do business on foreign exchanges. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [May 10, 2010, 9:39pm UTC](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600/40 "2010-05-10T21:39:00Z")
> [@Trom](#): > > [Here’s](http://www.vimeo.com/11570780) an interesting recording of the S&P futures pit during the panic. Fun link! Thanks. > [@](#): > > Sweden taxed fixed income trades at 0.02% and bond trading volume dropped 85%. This led to increased borrowing costs for the Swedish government The paper writes 0.15% max, but I’ll assume that translates to 0.02% for short-term paper. Still the “Tobin tax” on a short-term government bonds should be set _much less_ than on equities. The example does not demonstrate that, say 0.08% would be excessive on equities. (The same Swedish experiment used 1% and 2% as the tax on equities and options, _much_ higher than we’re talking about.) > [@](#): > > If a transaction tax were to pass in the US, the first thing large firms would do would be to find the loopholes - or just do business on foreign exchanges. One would want international cooperation. One would hope governments would finally be ready to join hands in the interest of financial stability, but that may be wishful thinking. [Previous page](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600.md?page=1) [Next page](https://boards.straightdope.com/t/stock-market-plunge-of-may-6-2010/538600.md?page=3)