At 14:47:25 ET Thursday May 6th, the Dow Jones Industrial average dropped 998.5 points, or 9.19 percent to below 10,000 points for a few short, stressful moments as panicked gripped markets. The nightmare question of any investor- “Does someone know something I don’t?” – echoed through the minds of Wall Streets finest.
First reports sought to place the blame on the ‘fat finger’ fallacy, when a trader incorrectly places an order, causing market mayhem as the order is executed.
These fat fingers have created problems for banks in the past. In 2001, UBS mistakenly sold 610,000 shares of Japanese advertising giant Dentsu Inc at 16 yen per share, instead of selling 16 shares at 610,000 yen – causing severe volatility in the stock for hours, and causing a massive loss for UBS.
Amid all the conspiracies around the Wall Street fall, including alleged financial terrorism, a few days after “D-day”, the surfacing truth reveals that it was the machines….
Today's stock markets are overwhelmingly governed by mathematical algorithms programmed to jump in and out of the markets almost at the speed of light, in a frenzied search for trades that yield a quick profit. Much of the fall was caused by traders who had selling orders in the trading systems that were executed when the index fell a certain amount. Likewise, non-human controlled operations in which index futures were bought and sold when certain events occurred. Bottom line - the machines took over.
The machines were triggering sells orders and wrecking havoc on the market before human beings with qualitative senses could get a handle on what was happening. According to the Hindu (A public Indonesian Newspaper), only when traders began to manually respond to the sharp drop did the market seem to turn around, said the official, who spoke on the condition of anonymity because the investigation was not complete.
Today’s trading programs and systems, used by some of the most sophisticated institutions in the world is far removed from the primitive software that allows someone to enter a B instead of a M (billions instead of millions). "If you make a major mistake, you could destroy all your capital," said Lawrence Harris, a finance professor at USC Marshall School of Business. "The security of the firm depends on the fidelity of these systems,"
Jeremy Grant from the FT – “Algo-trading – changes speed of the game for Wall Street” – revealed his opinion on the dark side of this aspect of the financial world, outlinging that more than half the US equity markets involve the use of a form of algorithmic or high-frequency trading. Tomi Kilgore from the WSJ – “The Dark Side of Algorithims” – suggest computer based trading is the source for much of the volatility in financial markets, pushing passive investors, such as mums and dads, away from this asset class. These financially savvy bots may one day make even the most financially savvy humans irrelevant in the trading world.
Moreover, trading takes place not only on the main exchanges - the New York Stock Exchange and Nasdaq - but on a plethora of other platforms, including "dark pools", which a opaque platforms used by investment banks to execute block trades in seconds. Less than 35 per cent of trading in NYSE-listed shares actually takes place on the New York Stock Exchange these days.
Yohanes Obor from the Jakarta Globe criticised the use of computer trading and displayed an opinion seeking to keep it out of Indonesian equity markets, which remain relatively inefficient when compared to the equity markets of developed nations.
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The key question is should this systems be allowed in a market where mums and dads invest their retirement money? Is it fair for Mrs Jones to invest in Proctor & Gamble when computers designed by far more savvy and short-term focused traders, seek to make a quick buck?
The role of these systems in financial markets will not doubt come in question shortly following the key cause of the event. This issue will be watched even more closely by the ASX when Chi-X begins a rival exchange in Australia.
These fat fingers have created problems for banks in the past. In 2001, UBS mistakenly sold 610,000 shares of Japanese advertising giant Dentsu Inc at 16 yen per share, instead of selling 16 shares at 610,000 yen – causing severe volatility in the stock for hours, and causing a massive loss for UBS.
Amid all the conspiracies around the Wall Street fall, including alleged financial terrorism, a few days after “D-day”, the surfacing truth reveals that it was the machines….
Today's stock markets are overwhelmingly governed by mathematical algorithms programmed to jump in and out of the markets almost at the speed of light, in a frenzied search for trades that yield a quick profit. Much of the fall was caused by traders who had selling orders in the trading systems that were executed when the index fell a certain amount. Likewise, non-human controlled operations in which index futures were bought and sold when certain events occurred. Bottom line - the machines took over.
The machines were triggering sells orders and wrecking havoc on the market before human beings with qualitative senses could get a handle on what was happening. According to the Hindu (A public Indonesian Newspaper), only when traders began to manually respond to the sharp drop did the market seem to turn around, said the official, who spoke on the condition of anonymity because the investigation was not complete.
Today’s trading programs and systems, used by some of the most sophisticated institutions in the world is far removed from the primitive software that allows someone to enter a B instead of a M (billions instead of millions). "If you make a major mistake, you could destroy all your capital," said Lawrence Harris, a finance professor at USC Marshall School of Business. "The security of the firm depends on the fidelity of these systems,"
Jeremy Grant from the FT – “Algo-trading – changes speed of the game for Wall Street” – revealed his opinion on the dark side of this aspect of the financial world, outlinging that more than half the US equity markets involve the use of a form of algorithmic or high-frequency trading. Tomi Kilgore from the WSJ – “The Dark Side of Algorithims” – suggest computer based trading is the source for much of the volatility in financial markets, pushing passive investors, such as mums and dads, away from this asset class. These financially savvy bots may one day make even the most financially savvy humans irrelevant in the trading world.
Moreover, trading takes place not only on the main exchanges - the New York Stock Exchange and Nasdaq - but on a plethora of other platforms, including "dark pools", which a opaque platforms used by investment banks to execute block trades in seconds. Less than 35 per cent of trading in NYSE-listed shares actually takes place on the New York Stock Exchange these days.
Yohanes Obor from the Jakarta Globe criticised the use of computer trading and displayed an opinion seeking to keep it out of Indonesian equity markets, which remain relatively inefficient when compared to the equity markets of developed nations.
.
The key question is should this systems be allowed in a market where mums and dads invest their retirement money? Is it fair for Mrs Jones to invest in Proctor & Gamble when computers designed by far more savvy and short-term focused traders, seek to make a quick buck?
The role of these systems in financial markets will not doubt come in question shortly following the key cause of the event. This issue will be watched even more closely by the ASX when Chi-X begins a rival exchange in Australia.
