Comments on: Deconstructing the crash A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: dWj Sat, 08 May 2010 15:47:02 +0000 Incidentally, if I look at the S&P 500 on Thursday with Bollinger bands, the 2:30-2:45 period doesn’t look especially different qualitatively from earlier in the day, where the market was bouncing off new lows that were descending in an accelerating way. The liquidity collapse from market fragmentation presumably exacerbated what was going on; beyond that, it looks like a bunch of trades based on technical analysis could well have driven the market to the point where that amplifier kicked in.

By: TwasBrillig Sat, 08 May 2010 15:42:02 +0000 A fat-finger and some poorly coded algos could certainly trigger a meltdown.

Suppose you have 6 big algorithmic orders to sell significant positions in a stock and try to participate in 20% of every trade (VWAP orders – note that it’s hard for 6 people to each sell 20%, whoever is quickest would participate and the one left out would be looking to catch up)

Then suppose a technical level gets breached and a couple of algos say ‘sell now at any price’

If there’s insufficient buying volume and poorly written algos, you end up with a race to the bottom, and you could get stock offered at a penny or less before someone steps up to buy.

So the fat finger plus itchy-trigger-finger algos could certainly wreak some insanity in a nervous market.

By: dWj Sat, 08 May 2010 15:41:56 +0000 Can I place an order that says, “execute this only on NYSE/Arca”, rather than seeking out NBBO? If not, does it even make sense for different platforms to seek out sensible trading rules? If NYSE implements a trading pause — which seems like a good idea — and that causes my order to get routed to an ECN that doesn’t, that isn’t good for me, for NYSE, or for the stability of the market in general. There might well be some people who would always say, “NBBO”, but we need macroinstitutional rules that allow for competition among exchanges to create good microinstitutional rules. An NBBO mandate may well short-circuit that.

By: LucidOne Fri, 07 May 2010 20:57:44 +0000 Interesting…. however, lets suspend disbelief for a second to consider the following. Could the stock market have been hacked? I find the unusual pricing of certain “stable” stocks to be highly irregular. I dont think the HFT and trading algorithms would have led to such a decline. Also, why those stocks, why not other ones, or all of them? We should also be looking at the stocks that actually ended the day higher…why were they immune?

By: HBC Fri, 07 May 2010 20:49:51 +0000 En passant, liquidity is nice when you have enough of it to stay in the game, no matter who you are. Goes without saying, I know. Too bad too much of it has been placed out of reach for too many by so few. Yesterday may have been merely a warning shot in the financial corporate battle over the final fragments of humanity’s disposable income.

One of the numerous odious features of the (hopefully, temporary) post Glass-Steagall era is that those having synthesized the greatest liquidity are making it their business to steadily reduce everybody else’s to zero, crash by crash… because they can. That’s not a market worth saving, no matter how plaintive the TBTF supplication after they’ve wasted everybody else’s wealth.
Strictly speaking, it isn’t a market at all, more like a gated community full of parasites.

What happens now in our HFS Terminator economy is like killer robots on eBay determining the price of everything, but knowing the value of nothing. Life on Wall Street has become a plagiaristic heuristic imitation of that art piece of which you recently blogged. As an art piece it’s entertaining and educational – as an actual way of life, psychopathic.

While the actual line where Kid Dynamite’s reasoning ends and the real craziness began may be too blurry to determine, it’s evidently already been crossed, the market shamelessly out of control. What happened yesterday, more like an economically-transmitted Wall Street virus than a bug, is likely to replicate without further warning.

As its equal and opposite reaction, what just about everyone not indentured to one or other of the radioactive Darth Vader death stars of Wall Street now wants most of all is to see the whole shooting match not just regulated, but totally delenda-est-ed.

By: dedalus Fri, 07 May 2010 19:28:56 +0000 Felix,

You decry “bad liquidity” as the sort that “dries up to zero just when you need it most.”

But why would any sensible market-making human (or algo) offer the kind of liquidity you want — “just when you need it most” — at the same price (same bid-offer spread) as when it is NOT needed most, when it is NOT a “fast” or momentary crisis-likemarket?

It sounds like your criteria for distinguishing “good” from “bad” liquidity is whether or not one can get a tight, deep, two-sided market at ALL times, under ALL circumstances.

No market-maker, human or algorithmic, will do that, ever.

By: REDruin Fri, 07 May 2010 17:47:03 +0000 Felix, any further investigation into the true source and deconstruction of this would be appreciated. As I remarked to a colleague, it’s interesting how the most important financial reform bill in ages is going through Congress right now, and elements of Wall St are consistently shooting themselves in the foot.

By: o_nate Fri, 07 May 2010 17:01:41 +0000 Currently, with no transaction tax, HFT firms can earn a profit making a market on a stock with a 1 cent bid-ask spread. If the government put in place a 1 cent transaction tax, why wouldn’t the bid-ask spread just increase to 2 cents, with the HFT guys still making their 1 cent? When does the bid-ask spread get wide enough that human market-makers have an edge over HFT bots? Does it ever get wide enough? Or would the bots always beat the human market-makers to the punch and take their 1 cent, and the rest of us (investors) would pay the transaction tax in the form of wider bid-ask spreads?

By: kriscollins Fri, 07 May 2010 16:47:32 +0000 Used to be a NYSE specialist. I don’t know much, but I do know this…

The NYSE was specifically NOT the problem. As it relates to market structure, the problem is that LRPs are unique to the NYSE trading value. When things get wacky, the NYSE floor suspends algorithmic executions, reverting to a simple, yet sensible, human to match buyers and sellers. The system might slow down, but you’ll never see the type foolishness we all witnessed yesterday.

The LRP is valuable for listed companies and many market participants, but absurd if only a feature of one trading venue. Kind of like financial reform in one country. The SEC should mandate that all trading venues that report (in real-time) to the consolidated tape have LRP-like trading curbs.

By: rentpayer Fri, 07 May 2010 16:33:51 +0000 Don’t we already have a tiny tax on transactions? My broker adds a few cents for “sales fee,” I think they used to call it “SEC fee.”

Not that I oppose a transaction tax, but how could it be enforced? Wouldn’t some shysters come up with a way to agree to pretend that they’d traded, and settle up at the end of the month, reporting only the net?