SEC Blames Computer Algorithm For 'Flash Crash' 218
Lucas123 writes "The US Securities and Exchange Commission and the Commodity Futures Trading Commission today issued an 87-page report (PDF) on the results of a months-long investigation into the May 6 'flash crash' that sent the Dow tumbling almost 1,000 points in a half hour. The Commissions are holding a single trading firm's automated trade execution platform responsible for the crash, saying it dumped 75,000 sell orders into the Chicago Mercantile Exchange over a period of minutes causing an already volatile market to come crashing down. The SEC has already enacted some quick rules to pause trading if a stock price should rise or fall by 10% in a five minute period, but the regulators said they expect the results of the investigation to prompt additional rules limiting the functions of automated computer trading systems."
Re:Regulatory Agencies Don't... (Score:4, Insightful)
So... (Score:4, Insightful)
Remind me, why do we have such a fragile system at the very core of modern civilisation?
Ouch (Score:4, Insightful)
Hope the person(s) who wrote that algorithm aren't writing nuclear reactor code. I'll admit though that I'm a bad programmer too. Back when I did write code I used such gems as DIM TotalSales AS INTEGER. That didn't work so well.
Re:So... (Score:2, Insightful)
Because the stock market is not civilized place, it's rigged by supercomputers. The idea that mankind is civilized is the falsehood. A civilized species would not engage in what mankind today engages in.
Because it works? (Score:5, Insightful)
Seriously. I think most people will admit it isn't perfect, and it looks like they are trying to improve the system as a result of this. However fundamentally, it works. It helps money move around more, so that businesses can get financing, individuals can invest and so on.
The reason why you find that prosperous nations have things like a stock market and other capitalist features is because they work. Doesn't mean you ignore them or let them run totally wild, but fundamentally they get the job done, where as a command and control economy does not. While it may add instability it also adds flexibility and that is important.
Re:OS = kernel + libs + apps (Score:3, Insightful)
This wasn't a BSOD or General Protection Fault kind of crash, or even a DIV/0. It was an order that didn't have any of the safety measures that should have been there, any one of which could have prevented this from making news. So, there's a new rule... if somebody yells "SELL!" and no buyers show up... they don't fill orders for a penny, they stop, report there's a crazy man in the room, and then there's an auction held to determine who the lucky bidders are.
Re:So... (Score:2, Insightful)
Because no one hates an honestly earned dollar more than the wealthy, greedy aristocrats that run Wall St. That's why they hate unions. That's why they hate regulations. That's why they hate the minimum wage. They sincerely believe that they are entitled to million dollar bonuses, and everyone else is meaningless.
Their worst nightmare is having to go out and earn their keep. They want to continue gaming the financial casino, and having the middle class cover their bets when they lose. But since they've already gotten away with it and have the money, in the eyes of many Americans they're not crooks, but just good at business.
The reality is that they're just a crime family with better lobbyists that deal in bullshit ponzi schemes instead of drugs.
Re:A time out is the right solution. (Score:4, Insightful)
Put in a market buy order with no limit, and you open yourself to limitless losses if there's nobody willing to sell at the moment. You'll match the first offer to sell no matter how high it is.
Put in a market sell order with no limit, and if there's no covering buy order you just put in a request to give it away for a penny a share.
Limit orders rule.
Re:So... (Score:5, Insightful)
This entire issue boils down to a particular group of people whining about a single firm's stupid computer algorithm, because that algorithm broke the stupid computer algorithms that group relies on (i.e. stop loss orders). For value investors, this whole thing is just a bunch of noise. Civilization rolls on.
Insightful my ass (Score:5, Insightful)
Except that stock speculation has NOTHING to do with investment anymore. Wall street does NOT invest, it speculates. It is gambling on the minute by minute perceived loss and gains in the world with a hefty amount of making events happen.
Take the recent event of a speculator simply buying up chocolate to drive up the price. What has that got to do with investment or making money go around? Nothing at all.
You have the idea that the stock market is still the old idea of buying a share in a ships voyage when this was first made official in Holland centuries ago.
Yes, if you buy shares in a company hoping to get dividend from it in the future, then you are investing. When you are shorting stocks on the difference in value over a period of minutes, that is NOT investment.
Stop pretending that it is.
Re:A time out is the right solution. (Score:4, Insightful)
It's perfectly legal for a business to say "We think we're worth 5% more a share, and we're willing to pay that price to anybody willing to sell." It's called a buyback, and as Cramer calls the "Sir Mix A Lot Corollary" he says "I like big buybacks and I cannot lie."
Re:A time out is the right solution. (Score:3, Insightful)
Safety rules are there to prevent people from being stupid even if they want to be stupid.
Don't Get Out Much? (Score:4, Insightful)
What I detect is that the smartest & most motivated people do NOT inhabit the regulatory agencies
That is by design. The agency wasn't ever going to go away, but their efficacy sure did in the holy pursuit of unfettered Capitalism. What has that gotten the majority of Americans who believed in the wisdom and efficacy of deregulation?
-Banking system on national life support.
-Consumers with no confidence in many forms of economic activity.
-A series of economic bubbles
It never works out and yet voters are more than willing to get screwed again under the new mantra of "fiscal austerity." That's more pocket picking for the recovering Capitalists living in your parent's basement.
Comment removed (Score:5, Insightful)
Re: Ouch (Score:2, Insightful)
You didn't have to tell us you where a bad programmer, the VB code was a big enough clue~
I'm proud to confess that I didn't have the faintest idea what he was talking about.
Re:No bugs, Nothing went wrong (Score:3, Insightful)
First, none of this involved a "bug" . All systems involved functioned as designed.
A program that runs as designed but produces a undesirable result has a "design flaw" which is a class of "bug". Such things need to be "fixed".
Re:Because it works? (Score:5, Insightful)
Re:Because it works? (Score:4, Insightful)
I mean it works in terms of making an economy work better. It provides a good way for people to invest and borrow money, which is important. A fundamental principle of money is that it has to move around to do anyone any good. It is just a construct to facilitate trade. Trading goods and services is what actually makes an economy worthwhile. Money is just a construct to facilitate that. Well that means money is only good if people spend it, if it moves around. The stock market is something that helps that happen.
If you've a better idea, then it would be great to hear it. All I'd caution you on is to do some research, because as with many things in life there are economic solutions that are clear, simple, and dead wrong. A command economy would be one of those. People say "Why not just have the government control it all? It is resilient but can change quickly." Ya well, command economies have been tried numerous times and failed miserably because they don't deal with human nature well.
As it stands, an open investment market is one of those things that helps economic efficiency. You will notice the US is not unique in it.
Attention, "regulators" (Score:1, Insightful)
Risk-taking strategies like the Martingale betting system [wikipedia.org], wherein you are very likely to make a profit but you risk a small chance of making a very big loss, is (due to the decreasing marginal utility of money) not a good idea.
The "too big to fail" regulatory system, wherein if you see someone making a very big loss you use a more prudent person's money to try to stop it, is an even worse idea, because it encourages Martingale betting on a grand scale, and because it makes it impossible for anyone to escape the consequences of the risk-takers.
"Buy low, sell high" is how prudent investment works, in stocks, or houses, or just about anything. The investor makes a profit of "high minus low", and the economy as a whole benefits from additional demand buoying depressed prices and additional supply damping inflated prices. The prudent investor sees that real estate prices have bubbled and sells, or sees that a stock price has unnaturally nose dived and buys.
"Buy rising, sell falling" is how a speculative bubble works. The speculator makes or loses money based on whether they managed to randomly guess when the bubble ends, and the economy wastes misallocated resources during the booms and suffers for it during the busts. That applies when "buy rising, sell falling" is coming from stupid human psychology, and it especially applies when it's coming from a stupider automatic algorithm.
In other words, if you want to regulate a market, and you see one group of people making that market more unstable and another making it more stable, then you don't "cancel trades", you don't "buy troubled assets", you don't "bail out failing banks", you don't hand any more of the economy back to the people who are ruining it, not just for the practical reason that you want to stop the economy from being ruined, but also for the moral reason that it's not their damn money anymore.
Re:No bugs, Nothing went wrong(Except Corruption) (Score:5, Insightful)
The algorithm didn't fail, Wall Street as an institution has failed. The simplistic view of why capitalism works is that individuals and institutions making informed decisions results in good allocation of resources. The profitable thrive and the unprofitable die, and on the whole society benefits.
None of the preconditions for capitalism exist in the current setup. The big entrenched special interests change the nature of the system so that they take profit and are shielded from risk. The technical term for this is "moral hazard". The TARP bailout is the perfect example of this. All the big Wall St. firms made huge amounts of money by playing insider games with mortgage back securities (MBS) and collateralized debt obligations (CDO), and then when their gambling resulted in failure, the were bailed out to the tune of ONE HALF TRILLION DOLLARS, and the government is left with the bad assets. And the people who caused the mess are still in charge and got to keep all the money they stole during the bubble, as well as the money they got from the Treasury. Does the phrase "moral hazard" seem sufficient to describe this behavior, or would "rape, pillage and burn" seem more appropriate?
Programmed high frequency trading (along with hedge funds) are another mechanism for taking wealth from the system that breaks the capitalistic model. The claim is the it "increases fluidity" and therefore make the market "more efficient". The plain English translation of "more efficient" is theft, and "increases fluidity" is like saying "magic pixie dust".
The real world value of a company cannot change at millisecond resolution. The only things of economic value that change that fast are electronic abstractions of money. Therefore, high frequency trading is completely disconnected from real world value, so no capitalism is involved. The system is built so that insiders can become personally wealthy because they are the insiders, not because they do an efficient (good) job of allocating resources and benefiting society.
This is identical to the MBS/CDO monstrosity, in that there is no clear real world description of how value is created. For MBS/CDOs there was a lot of math that no one making decisions really understood, but somehow mortgages from buyers who were previously unqualified could become AAA securities. For flash trading there is "fluidity" and algorithms that traders don't understand. It is the same kind of scam.
As long as the stock market allows high frequency trading it will be intrinsically unstable, because this kind of trading is about manipulating the abstract system, not about real world issues. No set of rules will change things, because computationally based trading is about taking advantage of rules to get advantage via manipulation.
The only kind of rule changes that will help are things like increasing the cost of individual trades or keeping electronic traders from placing trades that they cannot or do not intend to make. (Trading algorithm determine price points by placing lots of orders and seeing which ones get responses.) Or electronic traders must be forced to honor trades or hold assets that they are trading, so they are exposed to the market risks of the underlying securities. Right now there is no cost for these traders for any manipulative practices, which effectively decouples risk from reward. All these kinds proposals move this kind of trading back towards actual capitalism.
It will be very hard to get meaningful changes to high frequency trading because the powerful and personally corrupt Wall St. insiders don't want a capitalistic system, they want their guaranteed profits. It is much closer to a Mafia style protection racket then a system that enables real business activity.
Re:Don't Get Out Much? (Score:1, Insightful)
It's worth noting that finance as we have it is not a purely private sector enterprise, given that the product (legal tender) is wholly supplied by the government. Even what the banking system produces through credit only exists through regulation. The free market doesn't mean no government involvement because the free market requires conditions only produced by government, like a functioning legal system to enforce contracts. The financial system, like the court system, is something that the government puts in place to enable the free market to occur. It should not be seen as the free market any more than our courts should be deregulated to allow Judges to put out bids for payment in return for decisions or politicians should be able to put out bids for payment in return for lower taxes.
The only way money can be a free market enterprise is if it is directly backed by a commodity so that supply is regulated by free market forces. If we as a society prefer government produced fiat currency (and it seems we do, even if not everyone agrees) then it ought to be recognised as a government service that enables the market and subject to any regulation deemed necessary to provide that service well.
Re:Because it works? (Score:2, Insightful)
Another option would be to only allow value changes once per day. Then high frequency traders would be put out of a job and their manipulations would be for naught.
Re:Valuation is an art (Score:3, Insightful)
Sellers can also throw out non-nonsensical prices just like bidders can offer nonsensical asks.
That's the trouble with some of the algorithms that HFT shops are allowed to run in their boiler room datacenters. Some of these guys can only afford 80ms-400ms of time to create a decision, and that doesn't leave them much room to insert code that takes a 25,000-foot-view of their total order volume and determine if their order flow is making sense or not, dealing with 50,000 one-off situations (such as somebody dumping huge amounts of paper on the futures markets by accident)..
and so the quants who came up with the automation trading algorithms and the programmers who put their drawing-board ideas into software code can only put circuit breakers in their own code that are self-serving, but have no interest to put in any collars that stop the trades if it's clear that the trading is damaging the market.
It's really too late now. Retail investors have been bailing out and moving over to safe-havens and leaving the exchanges to hedgies and HFT shops to mutually-masturbate with each other trying to steal each others' money.
Rather a Tobin tax (Score:2, Insightful)
Introduce a damping factor. Tax the earnnings by a small amount (say between 1 and 2 percent).
Every physicist, every engineer knows that dynamic systems without a damping factor tend to instability
Use this tax revenue to get the poorest economies out of their misery.
Sometimees those economist remind me of early proto-engineers (say Western Europe, Middle Ages). Quite capable, but blind-sided by ideology.
Re:Because it works? (Score:3, Insightful)
Of course they work, you just seem to be confused about what they do. The purpose of a Ponzi scheme is for the people on a level to screw the people below them. In that sense they work perfectly.
Re:No bugs, Nothing went wrong (Score:5, Insightful)
A program that runs as designed but produces a undesirable result has a "design flaw" which is a class of "bug". Such things need to be "fixed".
What program are you talking about? If you read the parent post you will notice that no single program had an undesirable effect. The market as a whole entity was what failed, the failure was not in any individual program.
If you want to know what I think, the market didn't fail. What was a failure was the response of freezing markets and reversing trades.
Those trades were made by consenting adults in good faith or the trading systems that they entered into willingly. Money was lost and money was made. Fuck anyone who got burned, that's a normal day in trading. Or it should be, but unfortunately if a enough big players lose enough money they reverse the trades for them.
Re:Why not just simply ban the practice? (Score:2, Insightful)
Wouldn't Interesting be a better fit?