New "Circuit Breaker" Imposed To Stop Market Crash 460
Lucas123 writes "The SEC and national securities exchanges announced a new rule that would help curb market volatility and help to prevent 'flash crashes' like the one that took place on May 6, when the Dow dropped almost 1,000 points in a half hour. That crash was blamed in part on automated trading systems, which process buy and sell orders in milliseconds. The new rule would pause trading on individual stocks that fluctuate up or down 10% in a five-minute period. 'I believe that circuit breakers for individual securities across the exchanges would help to limit significant volatility,' the SEC's chairman said. 'They would also increase market transparency, bolster investor protection, and bring uniformity to decisions regarding trading halts in individual securities.'"
Re:Good Fix... (Score:4, Interesting)
It's allowed because the current theory is that anybody who wants to do it, can. I think the best argument against that is it takes real estate close to the market computers in order to have a fast enough ping time to trade by the millisecond.
My fix for that situation would be to dumb down the market clocks to only timestamp to the second, and anything received in the same second gets the same priority, with randomness as the tiebreaker when needed. That should suck the life out of these vultures.
Why? (Score:3, Interesting)
Re:Why do traders have such worst-case rules? (Score:3, Interesting)
The lowest sells weren't really about high speed traders, but about stop orders. A stop order triggers when a price goes under a specific price, and sells as a market order: It takes the best offer available at the time. That's where the high speed traders really come in: They see a huge drop, with sales still there, and reap a crazy amount of profit by buying the shares for pennies.As the price lowers, more stop orders are hit, and everyone that had one gets taken to the cleaners.
Now the question is: In a market as volatile as the one we have, why would anyone really want to place a stop order? Something like that, but with a lower bound, would have stopped the dip a whole lot faster than it did.
Re:Good Fix... (Score:2, Interesting)
"Why is it allowed?"
I think the answer is obvious [msn.com]. We are going to get into a full on depression soon with another economic crises within 2 to 3 years with derivatives, gold, and bonds if someone doesn't stop these guys soon. Crashes were quite common before regulation and our system is turning very 19th century with the new barrons and billionaires. These crashes happened in 1908 and 1873. In 1908 all the bankers forgave each others loans and the problem went away. The 1873 depression was almost as bad as the one in 1929 and we have a veyr large inflated value of derivatives of hundreds of trillions in non existence value that is more than the World's GDP.
I do not mean to make the fellow slashdotters mad or anything but guess where our tax money went for our bailout? It went to Rand Paul and others to make sure they can screw you over with no reforms and a free pass to play with your money you deposit in your bank.
Time to join a coffee or tea party. I do not have faith with so much money going to both parties that a solution will be developed before another diasaster appears. Obama looks pretty powerless at this point too to do anything about it.
Perhaps I am "Old School" . . . (Score:3, Interesting)
Sound the alarm but do not stop trading. Have traders be responsible for all price deviations from the time of the alarm until the 'crisis' is over. If they suddenly have to "cover the spread" then they will stop trading until they figure out what is wrong.
Re:Good Fix... (Score:2, Interesting)
"I think the best argument against that is it takes real estate close to the market computers in order to have a fast enough ping time to trade by the millisecond."
The flash traders have full supercomputers right under the trading floor and analyze all data coming in and out before it reaches the other shareholders.
Goldman Sachs is making a ton of money off them.
Re:Good Fix... (Score:4, Interesting)
It's allowed because the current theory is that anybody who wants to do it, can. I think the best argument against that is it takes real estate close to the market computers in order to have a fast enough ping time to trade by the millisecond.
My fix for that situation would be to dumb down the market clocks to only timestamp to the second, and anything received in the same second gets the same priority, with randomness as the tiebreaker when needed. That should suck the life out of these vultures.
A second? How about once a day!
Explain to me just what a multi-billion company could do in under a second that would fundamentally change the value of their stock?
Think about it this way: there is no way for traders to gain information on the underlying asset of a stock second-to-second. There is no public source of information that fast! No corporation gets updates internally that quickly. Most of them only roll up their accounts for reporting daily, and some only get an internal update of their financial status monthly or even slower. Even if some huge announcement was made that suddenly changes the value of a corporation, what difference does it make if people get to sell their stock a second or a day later?
The whole concept of the stock market is to create a central point for people to invest in a corporation. How is buying and selling a stock in under a second anything at all like "investing"? It's pure gambling, milking the real investors of cents on every dollar, putting it into the pockets of traders that provide zero value to society. They produce nothing except market crashes.
Trades faster than a day should be simply outlawed, and it should not be possible to own a stock for a period of less than one day either. Real investors should investigate a company's fundamental value and invest for years, not sit there all day and shuffle money around like it's a game in a casino.
Consider this: if millisecond trades are possible, and make sense, then why not microsecond trades? Nanoseconds? Why should we stop there? Lets puts the exchange and the trader's computers on the same piece of silicon, and have them buy and sell stocks at gigahertz!
No, HFT is a front-running scam (Score:2, Interesting)
No, the best argument against it is that it allows automated front-running [seekingalpha.com] by allowing the high-frequency traders to issue and cancel small orders in quick succession to discover an ordinary buyers or seller's limit price, and then profiting by offering a sale that would have otherwise happened at a price more favorable to the initiator. To quote the link (which is highly recommended):
It's worse than that. (Score:2, Interesting)
No, it's much worse than this. High frequency trading allows its practicioners to cheat, quite literally, as I pointed out in another comment [slashdot.org] that linked to this blog post [seekingalpha.com].
When a buyer or seller places a limit order, their limit price is supposed to be a secret, and the market is supposed to deliver the best possible price for them relative to that limit. Flash trades and "immediate-or-cancel" orders allows high frequency traders to issue a flurry of really quick orders to discover a slower trader's limit price, and then trade at that limit instead of the price that the slower guy would have otherwise gotten.
So if ACME is trading at $26.10, slow buyer A enters a limit buy order for $26.40, and slow seller B enters a market sell order, the high speed trader is able to use really fast trades to discover A's $26.40 limit, buy B's shares at $26.10, and then sell them right away to A for $26.40, all before A can learn about B's more favorable sell offer and accept it.
Feedback systems don't work that way... (Score:5, Interesting)
I have a degree in Electronics Engineering and had to go through three courses on feedback systems and servomechanisms. What you are proposing may seem sensible, but that's not how nature works.
Feedback control systems can become unstable, but inserting delays into the feedback loop is about the *worst* thing you can do to destabilize them. If you want to stabilize a feedback system you should insert a "low pass" filter in the loop, not a delay.
A delay means that a lot of change will accumulate and suddenly be released. Putting a one day delay would mean that all the buy or sell orders would be stored hidden somewhere and then, all of a sudden, the market would become aware of that trend.
A low pass filter is, more or less, like a moving average. With a low pass filter, the market would get information on the average of the last X hours or days of transactions. That way everybody would be allowed to update instantly, to a microsecond precision if they wanted to, their estimates of the market trends, but those would not be instantaneous trends, they would be longer range.
Instead of limiting how fast market transactions can be done, it would be much better to limit the speed of the information on the system. Do not divulge *every* price for every transaction, but only the average of some period. This average can be updated every nanosecond if people want so, it will make no difference.
Awful example. (Score:2, Interesting)
While I certainly agree that once-a-day is too strict, your example is very flawed. If Ford's 5 o'clock bankruptcy is public knowledge, then its price will be zero-ish now, because nobody's going to want to pay a high price for a company that goes bankrupt in the next few hours. If it's not public knowledge, then you'd be trading on insider information, which is fraud. So being able to trade a second time that day only helps you if crime helps you.
Re:Why do traders have such worst-case rules? (Score:3, Interesting)
Liquidity is important, but parent's notion that there is no benefit to us all to trading on this microscopic scale, is I think a good one.
Re:Good Fix... (Score:1, Interesting)
Remember that extracting wealth from the markets and transferring it from one account to another is not the same thing as 'profit', because it reduces the wealth available to actual productive investment - the corporate processes which do not and cannot change any faster than the time it takes to gear-up a factory or harvest a crop.
Those prices wouldn't be in decline unless risks the company took (or didn't take) failed. This is not "blaming the victim" -- they might not even be at fault. But if the economic outlook changes globally, positions against the company's investments can rise. The sooner the market realizes something is wrong with the company's investments, the sooner it stops investing in the company.
Shit happens, and it hurts companies. Pretending shit doesn't happen will let you throw good money in after bad. You will lose more if you think the odds are with you, when they are really against you. That is what destroys wealth.
Consider that there was an over production crisis leading up to the last financial melt down. People were building houses in places where they were not needed, because they were betting on them being needed in the future. That is "actual productive investment". It also turned out to be a very bad idea, and those houses are being torn down. A waste of capital and labor.
Liquidity is good because it means there will usually be a counter party willing to bet against you. If you think the odds have turned against an investment, you can sell to somebody who doesn't. The fact that they have their own investment and trading strategy is their own business. Literally.
Re:Why do traders have such worst-case rules? (Score:3, Interesting)
I think the best solution to that is a "make up your mind" rule that gives you an N second lock from buying the same issue after a sell order, and an N second lock from selling the same issue after a buy order. In other words... if your opinion on the item has changed in N seconds, you clearly haven't seen that "I want to sell it... what I just bought!" commercial enough.
Re:Feedback systems don't work that way... (Score:3, Interesting)
However, nobody is suggesting that. People are suggesting:
-Prices update continuously
-But you can't trade except in one shot with everyone else at the end of the trading day.
Prices change only when people trade, hence prices cannot simultaneously "update instantly" AND "can't trade except.. end of the trading day"
You can't have both.
These high frequency traders are the liquidity in the market. To put it in geek terms, they are the buffer. The event in question was essentially a buffer overflow.
How do you think I found out about it? (Score:3, Interesting)
I initially read about this in a news story where the SEC employee was bemoaning the fact that they had cases they wanted to pursue, but couldn't due to interference from above. He was screaming that they had caught all the major players pulling exactly this scam, but the best he could get his bosses to sign off on were minor fines that didn't even qualify as "a cost of doing business."
I don't think anyone of note on Wall Street has been afraid of the SEC for quite some time...
Re:Good Fix... (Score:3, Interesting)
Um, the whole event that we are discussing happened because liquidity (buyers at a market price) disappeared for a few seconds. That sounds like liquidity might be pretty important.
To see this, consider for a second how you'd feel about your bank account, if you didn't know from day to day how much your $5000 was really worth. That is what liquidity is, and I'll bet your daily behavior suggests you value it highly.
Re:Feedback systems don't work that way... (Score:3, Interesting)
Actually, I think it's even MORE complicated.
If you're a brokerage firm, the trading costs involved themselves can vary, depending upon whether your proposed trade increases or decreases the overall liquidity of the market. To individual investors, the transaction cost will always be vastly higher, but if you're someone like Goldman Sachs, the cost to sell a million shares when there aren't a million buyers lined up is higher than the cost to sell a million shares when there are two million buyers lined up, and vice-versa. That's one reason why you have "market-makers", who themselves trade blocks of stock all day that they themselves have no interest in owning, or even holding for more than 5 seconds, but the fact that they bought 3,000 shares 2 seconds ago means they can sell 1,000 shares to each of two buyers who want that many, plus 500 to a third buyer, and 100 shares to each of 5 buyers (grossly oversimplified a bit, but that's the high-level explanation).
Market makers are the reason why you can put in a buy or sell order for just about any amount of shares someone less wealthy than Warren Buffett is likely to ever own, let alone buy or sell in a single transaction, and if your price is within a cent or so of the last transaction, your own transaction will go through almost instantly. It's also part of the reason why if the last trading price is $x, an order for $x won't likely go through until the last price is either a cent more than you offered to sell at, or a cent less than you offered to buy at (unless you're buying a staggeringly HUGE number of shares).
Re:Good Fix... (Score:5, Interesting)
Um, the whole event that we are discussing happened because liquidity (buyers at a market price) disappeared for a few seconds. That sounds like liquidity might be pretty important.
To see this, consider for a second how you'd feel about your bank account, if you didn't know from day to day how much your $5000 was really worth. That is what liquidity is, and I'll bet your daily behavior suggests you value it highly.
It's not as liquid as you think!
My bank account only allows a maximum of AUD 20K electronic transfers per day, for anything else I'd have to got into a branch,
which would take me over an hour, and even then, transfers between banks are batch processed once a day, during the night. Some transfers take several days to process.
Do you see the pattern emerging here?
Why is it that everybody is perfectly happy doing their banking, the most liquid of the ordinary assets most citizens have, on a daily basis, but for some reason corporations require their investment liquidity to be on a millisecond timescale?
No business model needs that, except for the day traders that want to generate profits at the expense of ordinary investors that aren't physically housed across the street from the Exchange data centre!
Re:Feedback systems don't work that way... (Score:3, Interesting)
Taxing buy and sell orders that are too close together would also apply a low pass filter to the market, and will not create moral problems by denying information to the traders.
A tax that is of 70% - 80% of the price difference for orders that are separated by 1ms or less, reducing linearly to 0 to orders that are 1 minute apart could do the trick ;)