Flash Crash Analysis of May 6 Stock Market Plunge 411
Jamie found an interesting site that has many charts and graphs about the strange May 6 stock market plunge and rebound. There's a lot of information to consume over there, but it does a pretty good job of showing high-frequency trading is getting to be a real problem.
The reason why the stock prices went to zero (Score:5, Informative)
The problem wasn't the NYSE. The problem was that when the NYSE decided to execute trading delays, the other markets replied "the computer sez no" and kept on trading at high speed. Because there weren't enough buyers at the time to satisfy all the selling, all the market sellers saw their prices plummet because the computers were programmed to find a buyer no matter what the price, as long as the transaction would clear.
So... what's the problem? If you picked up Accenture at a penny a share you should be fuckin' lucky. I wouldn't shiv that stock off to a homeless man for a nickel.
Re:How is this a problem? (Score:1, Informative)
Re:barrier of entry is a problem (Score:4, Informative)
Re:HF Trading reduces spread, increases liquidity (Score:4, Informative)
You, the original buyer get screwed and they, the original sellers, gain no benefit.
THAT is exactly the crux of the thing. The article sings of the benefits of rapid price discovery but completely glosses over the fact that it is NOT the original seller that sees the benefit.
To use his own real estate analogy, the high speed trader sees what the developer is about to do and quickly buys up the homes one by one for about what the developer would have paid,. So, no benefit to the sellers there. He then sells for a much higher price to the developer because HE knows what's up. Certainly no benefit to the developer there. The only entity that benefits is the high speed trader who made himself an unwanted middleman in a transaction that would have actually been easier without him.
Electronic trading is great! It's sure a lot more efficient than a bunch of people running around with slips of paper like chimps on meth, High speed trading is bunk. Things would actually work a LOT better if the transactions were made at 1 minute or even 15 minute granularity.
Re:How is this a problem? (Score:5, Informative)
High frequency trading adds a lot to the market. Just not the way you think it should. I for one like the fact that there is ALWAYS someone buying or selling EVERYTHING. That makes it easier for me to buy and sell. Liquidity is not something that should be overlooked as a great thing to have.
You seem to have bought into the commonly repeated lie about High-Frequency Trading. It's existense is not there to "help you" via providing liquidity to the market. In fact, HFT requires a pretty high level of existing liquidity to work in the first place! If little to no people are trading a specific stock, there is little liquidity and there is no viable way to make money from it via HFT. If a given stock is being traded by institutions utilizing HFT, it means there were no liquidity issues to begin with. If there were, these institutions wouldn't have been able to make money using HFT in the first place!
Re:HF Trading reduces spread, increases liquidity (Score:3, Informative)
It doesn't make a market more efficient or better if a market ARTIFICIALLY gives some traders an advantage over the others.
http://www.nytimes.com/2009/07/24/business/24trading.html [nytimes.com]
http://www.nytimes.com/imagepages/2009/07/24/business/0724-webBIZ-trading.ready.html [nytimes.com]
Re:How is this a problem? (Score:5, Informative)
Wow, I know this is asking a lot, especially given the length and depth of the article, but seriously, go read it. They've clearly put a lot of effort into analyzing the situation immediately before and during the crash and that is not what the evidence says. For one thing, only a single affected stock was in 'Slow trade mode' at the beginning of the crash, and only 3 were by the time the crash was at its worst. Furthermore, the stocks in slow trade mode trailed behind the stocks that actually caused the problem.
Basically, the first thing that went wrong is that the NYSE received too many quotes too fast, faster than they could process them. So their systems put them into a queue and processed them as quickly as possible. The next step where things went wrong was that these quotes were timestamped when they left the queue, instead of when they entered. This means that the apparent price on the NYSE was lagging a little bit behind reality. Problem number three occurred when the high frequency trading systems detected this apparent price difference and attempted to capitalize on it, driving the cost for the affected stocks even low and generating more quotes on those stocks as well, causing a feedback loop that bottomed out the market.
Now the question is, why were there so many quotes for these stocks, up to 5000 a second from a single source in some cases. I'm hardly an expert, so I'll just quote the conclusion the report comes to:
What benefit could there be to whomever is generating these extremely high quote rates? After thoughtful analysis, we can only think of one. Competition between HFT systems today has reached the point where microseconds matter. Any edge one has to process information faster than a competitor makes all the difference in this game. If you could generate a large number of quotes that your competitors have to process, but you can ignore since you generated them, you gain valuable processing time. This is an extremely disturbing development, because as more HFT systems start doing this, it is only a matter of time before quote-stuffing shuts down the entire market from congestion. We think it played an active role in the final drop on 5/6/2010, and urge everyone involved to take a look at what is going on. Our recommendation for a simple 50ms quote expiration rule would eliminate quote-stuffing and level the playing field without impacting legitimate trading.
High Frequency Trading != High Volume Trading (Score:5, Informative)
HFT 99% of the time is actually a healthy process - it allows relative mispricing to be quickly corrected and gives investors a chance to trade at prices which are fair whenever they come in to buy or sell.
HFT firms don't care if the P&G share is fundamentally worth 60, 5 or 100$: they are only concerned about the relative value of the stock versus other financial instruments. If for example you know that product X has a robust 1:1 correlation with product Y (for example cash vs. future), and one goes up while the other goes down for no apparent reason, the HFT guys step in and immediately buy X and sell Y until they are realigned. This will usually be for small volumes because such discrepancies don't last for long and are due to people who just aggressively buy or sell one of the products.
Simply put, HF trading firms inject liquidity into the market, they allow thousands of investors to be able to buy and sell literally any financial instrument with a relatively predictable cost (the bid/ask spread).
The real danger IMHO are the "high volume" traders, whether they are hedge funds who take directional bets or some large bank with dubious moral values. These guys will look for markets where they can push the prices up or down using sheer volume. I see this quite often on stocks which are prone to takeover rumours, "large buyers" or "large sellers" suddenly step in and start buying or selling anything they can get their hands on - all market makers panic and think that there is either something they don't know or someone who has insider knowledge. Once things settle, they calmly sell away their new position to other investors (the trend following sheep) who step in to trade on the unknown rumour.
Re:How is this a problem? (Score:3, Informative)
High frequency trading adds a lot to the market. Just not the way you think it should. I for one like the fact that there is ALWAYS someone buying or selling EVERYTHING. That makes it easier for me to buy and sell. Liquidity is not something that should be overlooked as a great thing to have.
This is a myth. HFT adds volume which creates the illusion of liquidity. 1,000 shares passed back and forth 1,000 times will show up as 1,000,000 transactions. This artificially created liquidity makes it appear as if the stock is liquid when it is in fact, not. It's only 1,000 stocks. Someone that wants to buy 10,000 stocks would think 1,000,000 volume is fantastic, when in fact there is no real volume there. This all happens in milliseconds, before anyone without a million dollar computer hooked up next door to Wall St. can react. Sure, you can still make money on the stock, but the HFT have already skimmed off a nice GUARANTEED profit.
Re:Summary... (Score:4, Informative)
It basically sounds like the author is attributing the "Flash Crash" to lag [wikipedia.org] from an insufficient quoting computer.
And to an intentional use of this infrastructure deficiency to blind competing trading algorithms for short periods by issuing bursts of quote requests that will overwhelm competitors for a few milliseconds.
Re:HF Trading reduces spread, increases liquidity (Score:3, Informative)
All the HFT's are doing is trying to scoop up money via arbitrage- scooping up a smidge here, a smidge there in the noise of trading during the day. There is nothing that supports the claims that they increase liquidity (HOW? Liqidity is cash not bound up in action doing something- nothing more. A penny here, a penny there isn't that.)
Re:Nobody knows what stocks are for? (Score:3, Informative)
Stocks are for dividends. They're not baseball cards, for chrissake.
That's how it should be, but can never be as long as dividends are taxed more than capital gains. If I'm holding stock long term, I pay a lot less to the government if the company retains earnings and aims for growth than if they pay those earnings out as dividends.
Ever wonder why the market rewards growth over all sanity, and punishes reliable stable earnings? Tax law.
Re:HF Trading reduces spread, increases liquidity (Score:5, Informative)
This is just plain wrong. Most research points to HFT accounting for around 70% of trading volume. Your also assuming HFT's don't trade amongst themselves, and that they don't make transactions on longer time periods when no buyer/seller can take their trades. When HFT's stop trading market liquidity plunges, and everyone complains when they do NOT trade the market [businessinsider.com].
It's not just right, it's dead on the money and is the main problem with flash trading - it adds a grand total of zero liquidity, instead it "skims off the top", essentially pocketing a small percentage on every sale it conducts.This is the very basics behind flash trading, and the reason why flash trading is being conducted in the first place - if it were a zero sum game, it wouldn't be worth the investments needed for flash trading. The massive fraud you talked about before is indeed horrible, but one crime doesn't make another currently legalized but essentially criminal and highly unproductive (from market's perspective) activity.
The main reason why people can argue it adds liquidity is because it's the entire purpose of flash trading scheme to catch the buy/sell BEFORE it happens, and essentially conduct it twice, pocketing the difference. If buyer and seller contacted each other directly, as would imminently happen in a few moments if there was no flash trading going, liquidity would stay exactly the same.
In fact, it is far more often argued that flash trading in fact reduces liquidity, by removing and pocketing extra funds from buyers and sellers.
Also, please stop linkin businessinsider.com, which is essentially a professional magazine for people working in the stock market and will always be supportive of ways these people can use to pump money out of the actual companies/trades and into their/their owners' pockets as some sort of a reputable source. While a decent source on what's happening in the industry, it's about as trustworthy to present an unbiased and truthful point of view on this issue as an ultra orthodox jewish magazine would be on Palestine problem.
Re:Quote Stuffing = DDOS Attack (Score:1, Informative)
I read the report. This was a DDOS attack used for personal gain. They exploited a weakness in the NYSE quote system that had been seen before.
Probably did not require much programming skill either, in an industry of wickedly skilled programmers. Just ramp up the quote requester and wait for your HFT system to take advantage of it, easy money.
I wonder if there is source information that could be tracked back to the culprits.
Why isn't Homeland Security all over this like white on rice? That's yer conspiracy, there.