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.

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.

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.

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.

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?

I agree with KidDynamite. Both Tobin taxes and uptick rules would be inefficient methods to wring out this sort of error. This sort of error could just as well occur in the presence of a Tobin tax with the only difference being that during normal market conditions, bid-ask spreads and other transaction costs would be higher.

One place to look might be the Tokyo Stock Exchange (TSE). The TSE has trading curbs for individual stocks. There are both overnight price change limits and intraday price change limits that place stocks into what they call a “special quote,” (basically an auction period) which can last as long as it takes to stabilize the market.

The TSE rules can be found here in the FAQ (in English): http://www.tse.or.jp/english/faq/list/st ockprice/p_k.html

Lastly, you write that these algorithms broke during a tail event and that they will be bailed out by rescinding the orders. I believe most HFT firms made out well yesterday. Most HFT strategies typically fare better during periods of higher volatility, and I’d venture that rescinding these trades will have little effect on most HFT firms.

High frequency trading is a scam which does not add liquidity but rather serves to allow algorithms to figure out the other side’s limit price and skim the difference.

“instead of providing liquidity, they intentionally probed the market with tiny orders that were immediately canceled in a scheme to gain an illegal view into the other side’s willingness to pay” — Denninger

This rigged market may cause large investors to seek other exchanges besides the NYSE. The perception (and reality) of a rigged marketplace will drive investors away.

The unfortunate upshot of yesterday is that more investors will use limit orders and be subject to the nickel and diming fraud of this high frequency trading.

but why would we try to solve this with a tax?

why not a much simpler solution: we have trading curbs for index arb – why not have them for single stocks too? there’s no reason why we couldn’t have a 30 second, 60 second, or 5 minute PAUSE in trading in any stock that declines more than, say 25%…