Algos gone wild

July 31, 2009

The many proponents of high-frequency trading keep saying there’s no reason to be concerned about a rogue algorithim sparking a 1987 market-style crash. HFT supporters keep saying show us a case where a rogue algo even caused a minor hiccup in the market.

Well, Bernard Donefer, a professor at CUNY’s Baruch College in New York City and a critic of highly-automated trading programs, says the world already has gotten a glimpse at the kind of mayhem a rogue or simply a misfiring algo can cause.

Donefer, in a soon to be published research paper, blames high-frequency traders and an algo gone wild for a bizarre $9 drop in United Airlines’ stock on Sep. 8, 2008. The sudden plunge in UAL shares wiped out $1 billion in market value in just 12 minutes, after a six-year-old headline about the airline filing for bankruptcy erroneously hit some news wires.

The airline’s stock quickly recovered after it was determined that the bankruptcy story was an old, old story. But Donefer argues the percipitous drop in UAL shares “was mostly the result of the interplay between the algorithms that search and compile information from the Web and the ones that Wall Street firms and hedge funds use to make trades automatically.”

This is an isolated case, but Donefer says it’s only a matter of time before an event like the UAl one–or a series of events in which algos go wild–sparks a widespread market crash.

Will we see an event caused by algos gone wile in our markets? I believe it is inevitable. I am further convinced that with no planning…or regulatory framework it will be hard to stop. With unfettered or naked access, it might impact the viability of a broker.

This is the doomsday scenario I wrote about in my column Wall Street meets The Matrix. It’s also the kind of computer-driven catastrophe that the folks at and Joe Saluzzi of Themis Trading have been warning about.

The trouble is I’m not sure the Securities and Exchange Commission and other regulators are paying serious attention the growing list of high-frequency trading Cassandras.

Bonus feature: Here is an earlier paper from Donefer in which he writes about the risks posed by algos gone wild.

UPDATE: Donefer points out thathis soon-to-be published paper on UAL relies heavily on The New York Times version of events surrounding the plunge in the airline’s shares.


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There is no doubt on anyone’s part that High Frequency Trading played a significant role in the market events of the past 18 months. The exchanges and regulators have destroyed the economics of the traditional market maker along with the real liquidity, firm quotes, stability, and oversight they provided. Instead, we now have “electronic market makers ” who don’t make markets for humans. The new “liquidity providers” provide liquidity for other computers in the space of microseconds. Investors have been forced,without success to resort to the same HFT tactics and here we are today.

Posted by 21st Century Schizoid Man | Report as abusive

“In the short-run, the market is a voting machine; in the long-run it is a weighing machine,” said Ben Graham. All HFT programs do is “vote,” and that can kick a stock a short distance for a while, but in the long run, it has no effect on prices in aggregate — that gets determined by the underlying business fundamentals.

There may be reasons to dislike HFT, but this isn’t one of them.

BTW, congratulations on yet another rise in your visibility. You’ve come a long way since TSCM, and in my opinion, it is well-deserved. Keep up the good work.

[...] Have we already seen the effects of a HFT meltdown?  (Matthew Goldstein) [...]

I guess Herr Doctor Professor Bernard Donefer thinks the giant downswing on 9/17/01 was caused by algo trading as well. Brilliant observation, Sherlock: news moves the market!