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Government The Almighty Buck

New "Circuit Breaker" Imposed To Stop Market Crash 460

Posted by samzenpus
from the financial-feather-fall dept.
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.'"
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New "Circuit Breaker" Imposed To Stop Market Crash

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  • Good Fix... (Score:5, Informative)

    by LostCluster (625375) * on Wednesday May 19, 2010 @07:01PM (#32271432)

    What happened on May 6th was that sell orders were present without matching buy orders for an instant, and that allowed some really wacky trades to complete... nearly every Dow and S&P 500 component was affected, and some ETFs even traded for a penny a share for that brief instant. Then when news got out that there was bargains to be had, the buy orders started showing up and things returned to a run-of-the-mill down day.

    Now, the NYSE and NASDAQ have always had this circuit breaker rule that allowed them to call a "time out" where they wouldn't process orders in order to draw attention to the wacky situation and give all involved time to react. The problem is that these new "market centers" allow trades to be completed rapidly, but also without the same oversight rules. While the big exchanges had the time out in effect, orders simply routed around them and the wacky drop continued. So, now the SEC is taking the NYSE/NASDAQ rules and making them their rules, so all the new players have to observe the timeouts. That should fix this problem.

    • Re:Good Fix... (Score:4, Insightful)

      by Peach Rings (1782482) on Wednesday May 19, 2010 @07:08PM (#32271532) Homepage

      This sounds like a band-aid solution to a bigger problem. Millisecond trading is exploiting the system; it just sucks profit out of tiny variations in the market. Why is it allowed?

      • Re:Good Fix... (Score:4, Interesting)

        by LostCluster (625375) * on Wednesday May 19, 2010 @07:15PM (#32271622)

        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.

        • Re: (Score:2, Interesting)

          by Anonymous Coward

          "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)

          by bertok (226922) on Wednesday May 19, 2010 @07:54PM (#32272140)

          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!

          • Trading and manipulating money is an illusion.

            Come to the dark side of economics...

            Come to...

            Mutualism!

            http://en.wikipedia.org/wiki/Mutualism_(economic_theory) [wikipedia.org]

          • Re:Good Fix... (Score:5, Insightful)

            by thrawn_aj (1073100) on Wednesday May 19, 2010 @08:15PM (#32272360)
            THIS! A million times THIS! Why do you have to write something so sensible when you know it'll never be done? Are you trying to depress us to death =p

            Of course it's gambling, plain and simple. Even worse, because these SOBs don't even have the decency of common gamblers to use their own money for the purpose. The whole profession is based upon extracting stuff out of that little space under your fingernails and calling it gold.

            The worst part of it is that these hucksters can (and do) cause real harm to productive brick and mortar businesses for no earthly reason (but the whim of the big trader).
          • Re:Good Fix... (Score:5, Insightful)

            by Jah-Wren Ryel (80510) on Wednesday May 19, 2010 @08:22PM (#32272478)

            Explain to me just what a multi-billion company could do in under a second that would fundamentally change the value of their stock?

            You are begging the question. It isn't what a single company could do in under a second, it is what external events might occur to change the perception of a company's prospects. Given the hundreds of millions of events that occur every second it is no stretch to believe a handful of them are relevant to a single company, even if only minutely so.

            Sure you become more vulnerable to cascade effects, but you also get plenty of benefits like significantly increased liquidity.

            • Re:Good Fix... (Score:5, Insightful)

              by lennier (44736) on Wednesday May 19, 2010 @09:40PM (#32273330) Homepage

              Sure you become more vulnerable to cascade effects, but you also get plenty of benefits like significantly increased liquidity.

              Explain how stock trading liquidity is a benefit in and of itself - to human society and the Earth's biosphere - rather than as a benefit only to those wanting to extract wealth from the markets due to volatility.

              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.

              Remember also that every trade on the market which is not directly linked to the true value of a stock actively destroys information because it introduces noise into the market, polluting the use of that stock's trading symbol as a measure of real wealth (rather than imaginary fantasy wealth).

              Explain clearly how, despite the information-destroying nature of speculation, nevertheless 'providing liquidity' to enable this destruction of information is still a significant human benefit.

              Show all your work.

              • Re: (Score:3, Insightful)

                by Jah-Wren Ryel (80510)

                Explain how stock trading liquidity is a benefit in and of itself -

                Because the alternative is market makers who really rape anyone trying to buy or sell a stock that does not have good liquidity.
                Those thieves are the ones who massively "extract wealth from the markets." Good riddance to those bastards.

              • Re:Good Fix... (Score:4, Informative)

                by tukang (1209392) on Wednesday May 19, 2010 @11:38PM (#32274476)

                Remember also that every trade on the market which is not directly linked to the true value of a stock actively destroys information because it introduces noise into the market, polluting the use of that stock's trading symbol as a measure of real wealth (rather than imaginary fantasy wealth).

                Not only is a trade "directly" linked to the true value of a stock (or whatever is being traded) but it defines the true value of the thing being traded. The true value is what the buyer and seller agree to.

              • Re: (Score:3, Insightful)

                by Rockoon (1252108)
                Do you realize how wide the swings would be in your once-a-day scenario?

                What you are trying to do is add punctuation to the system. Please explain why punctuation is good, and then explain why a 24 hour punctuation is better than 1 hour, or 1 minute.

                The traders skimming the sub-second trading are angling for very small margins... fractions of a percentage point. So if you sell your $100 worth of AT&T, and these guys might be taking a few pennies of it.. and I say might because if they werent doing w
              • Re: (Score:3, Interesting)

                by Alpha830RulZ (939527)

                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:Good Fix... (Score:5, Interesting)

                  by bertok (226922) on Thursday May 20, 2010 @03:00AM (#32275698)

                  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:Good Fix... (Score:5, Informative)

                by alexhard (778254) <alexhard@@@gmail...com> on Thursday May 20, 2010 @01:42AM (#32275318) Homepage

                >Explain how stock trading liquidity is a benefit in and of itself

                The higher the liquidity, the lower the bid-ask spread. Illiquid assets have gigantic spreads, to the tune of tens of percentage points on their actual value.

          • by mangu (126918) on Wednesday May 19, 2010 @08:34PM (#32272616)

            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

            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.

          • Re: (Score:3, Insightful)

            by Eil (82413)

            So you propose a permanent end to day trading. Okay, but keep in mind that day trading isn't just some speculating little wonk sitting in his apartment all day poring over charts and trends. Many major financial companies have automated and manual day trading operations. And if you piss them off, all you're going to do is drive them into building some kind of new over-the-counter network that's loose enough to avoid the most onerous exchange restrictions.

            Short-term volatility doesn't affect long-term invest

      • Re: (Score:3, Insightful)

        Why is it allowed?

        Exactly because "Millisecond trading is exploiting the system; it just sucks profit out of tiny variations in the market."

        Oh, you mean why do the American People allow the stock market to exist without taxing the hell out of speculators? I blame a national battered wife syndrome.

      • Re:Good Fix... (Score:4, Insightful)

        by brian0918 (638904) <brian0918@g m a i l .com> on Wednesday May 19, 2010 @07:21PM (#32271712)

        Millisecond trading is exploiting the system

        I don't think that word means what you think it means.

        It just sucks profit out of tiny variations in the market.

        How does one go about "sucking profits"? What does that even mean? If you're going to advocate telling people how, with whom, and when they are allowed to buy or sell items with other willing individuals, you should at least have the common courtesy to clearly explain why such voluntary trades should not be permitted to occur.

        • Re:Good Fix... (Score:4, Insightful)

          by feepness (543479) on Wednesday May 19, 2010 @07:38PM (#32271952) Homepage

          How does one go about "sucking profits"? What does that even mean? If you're going to advocate telling people how, with whom, and when they are allowed to buy or sell items with other willing individuals, you should at least have the common courtesy to clearly explain why such voluntary trades should not be permitted to occur.

          I'm pretty libertarian, but I agree these should be stopped. As the other poster said, it gives real estate closer to the market servers an advantage, I'm not quite clear how it works, but it is evident that it does because people are doing it. I assume they can recognize short term patterns and jump in ahead of anyone else who might try to take advantage of them.

          Trading is something where we want to have as level a playing field as possible. It's also something specifically designed to serve humans. The speed of your computer and connection shouldn't give you an advantage. It keeps our market freer.

          • Re: (Score:3, Insightful)

            by PotatoFarmer (1250696)

            I assume they can recognize short term patterns and jump in ahead of anyone else who might try to take advantage of them.

            More than just recognize - the biggest players can manufacture short term patterns because they control large segments of the market. Oddly enough most of them seem to be located in that prime real estate mentioned earlier...

          • The speed of your computer and connection shouldn't give you an advantage.

            Why not? I mean, Capitalism grew out of feudalism where people retained their lands and means of productions.

            It is called "capital", money that makes money, he who has the most money will make take most money out of everyone else.

            It is not only allowed by capitalism, its it's very end.

          • Re: (Score:3, Insightful)

            by mrand (147739)

            How does one go about "sucking profits"? What does that even mean? If you're going to advocate telling people how, with whom, and when they are allowed to buy or sell items with other willing individuals, you should at least have the common courtesy to clearly explain why such voluntary trades should not be permitted to occur.

            I'm pretty libertarian, but I agree these should be stopped.

            Me too (on both accounts)

            As the other poster said, it gives real estate closer to the market servers an advantage, I'm not quite clear how it works, but it is evident that it does because people are doing it. I assume they can recognize short term patterns and jump in ahead of anyone else who might try to take advantage of them.

            Trading is something where we want to have as level a playing field as possible. It's also something specifically designed to serve humans. The speed of your computer and connection shouldn't give you an advantage. It keeps our market freer.

            This discussion is more accurate than most of you probably realize... I work for a router equipment vendor. Guess what the main market for ultra-low latency routers is? That's right - they have realized on Wall street that a router with lower latency means a higher chance of getting your trade in before your competitors. If your router has a latency of 500 nsec while your competitors all have 600 nsec routers, you have the advantage. At least until someone ponies up and buys one

        • Re:Good Fix... (Score:5, Insightful)

          by Jake73 (306340) on Wednesday May 19, 2010 @07:45PM (#32272028) Homepage

          Actually, the term is "arbitrage" (http://en.wikipedia.org/wiki/Arbitrage) and it really is "sucking profits". It is exploiting (yes, I mean that) small variations and inefficiencies in market representations. These points are being closed, but they still exist.

          • Re:Good Fix... (Score:4, Informative)

            by FooAtWFU (699187) on Wednesday May 19, 2010 @09:02PM (#32272920) Homepage

            Arbitrage exploits inefficiencies, but it also reduces them. If there's a buy order in Market A for $50 and there's a seller in Market B who wants $49, then there's really nothing wrong about offering him $49.10 and then turning around and selling it in A and pocketing the $.90. (Real arbitrage usually would involve higher quantities and lower spreads.)

            There are plenty of other people who would be willing to arbitrage the same thing as you are and give the guy on the other end a slightly better deal. So you'd expect that the profits that come from it are reasonable, and in line with the profits you could make by taking the money and effort of building a high-frequency trading system (programmers, fast computers, the risk of losing money on a bad trade, etc) and applying it elsewhere. It's really not a big deal.

            As for a look at an extreme version of what the market would be like without people playing high-frequency trading games and the like, go look up your favorite small- or mid-cap stock on E*Trade during extended hours trading some time. Right now, my company stock can be bought for $12.30, or sold for $11.80. That's like a 4% fee to buying the stock. Yow! (The annualized real rate of return of the stock market is about 4%. That's like a year's profit, just gone, if you have to take those prices.) If big trading outfits can reduce that spread, they're welcome to whatever profits they can make off my money.

        • Millisecond trading operates in a timeframe that prevents everyone in the market from reacting in a timely fashion. That means a large part of the market players are practically excluded from helping to steer the market prices until much later, when big changes have already happened.

          In particular, you can get price fluctuations which would be nigh impossible in a functioning market with many players, because there's only a very small number of players in the millisecond timeframe. Those unlikely fluctuati

        • by nedlohs (1335013)

          Because it's fundamentally unfair.

          Some people have access to data before everyone else and get to inject orders in reaction to that data before everyone else even sees it.

          In doing so they take profits from others who don't have access to the data early.

          But it'll fix itself, at some point people get fed up enough with it and don't bother dealing with such a biased market. For now it's a money printing machine for those on the inside.

        • Re:Good Fix... (Score:4, Insightful)

          by SETIGuy (33768) on Wednesday May 19, 2010 @08:59PM (#32272868) Homepage
          The problem is they aren't voluntary transactions because the buyer and seller have no control on the timescale of the transaction.

          Buyer X wants to buy 10,000 shares of a stock at $20.10 per share. Seller Y is trying to sell, will accept $20 and has been waiting for an offer for half a second. Flash trader GS's supercomputer located at the market floor sees the offer and ask and sells 10,000 shares to X at $20.10, then buys Y's shares at $20, quickly pocketing $1000. Y never gets to see X's bid. X never gets the see Y's asking price. That $1000 came out of X and Y's pocket.

          All that has happened is that money was sucked out of the market and into GS's pockets. Now multiply it by every freaking trade. There is no benefit to the market, or to anyone else. Markets work on knowledge and are only efficient if everyone has knowledge. Flash trading is using information before it can be generally made known. That alone makes it a force that doesn't belong in any market.

        • by jeko (179919) on Wednesday May 19, 2010 @10:22PM (#32273808)

          What the original poster means is that the brokers are, against fiduciary duty, siphoning money from their customers. Consider the following, very rough, case:

          I'm Mr. Megabroker. A new multibillion dollar marketing campaign hits, and suddenly I have a ton of BUY orders for SLUSHO stock. I hold those orders for a split second and buy up SLUSHO, knowing that the ton of orders I hold will drive up the price. Once I secure my stocks, I submit my ton of buy orders after my own.

          Suddenly, I'm sitting on a bunch of SLUSHO stock that's had a guaranteed jump in price. If I had executed my customer's orders immediately, that increase in price would have been theirs, not mine.

          Baby Cloverfield hits Manhattan, and suddenly SLUSHO is radioactive waste. I get a ton of SELL orders. I dump my SLUSHO holdings before the ton of SELL orders hit, having perfect knowledge this is about to occur because I'm the one who's about to do it. I sell my SLUSHO when prices are still high. My customers bleed out.

          I've made money coming and going for no other reason than I hold the orders in my pocket and therefore have perfect knowledge of the future. The money I make is not reflective of any real productivity, but is instead theft I can get away with by ignoring my fiduciary duties for a brief while.

      • Re: (Score:2, Interesting)

        by Billly Gates (198444)

        "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

        • Re: (Score:3, Insightful)

          by theaveng (1243528)

          >>>Obama looks pretty powerless at this point too to do anything about it.

          He could have ended the war and saved ~100 billion per year. He could have pushed through legislation to raise SS and Medicare minimum age from 68 to 78 (gradually over time), and then fixed it to the Life Expectancy. It's supposed to be a last-resort safety net, not an entitlement. ----- He also could have converted these programs to "needs based" systems where only people with life incomes below 10 million would be eli

    • by lennier (44736) on Wednesday May 19, 2010 @07:18PM (#32271674) Homepage

      More and more the markets seem decoupled from reality. Why is it so hyper-urgent for a trade to complete in milliseconds, even if it means selling at rock-bottom price? Isn't that just really dumb programming?

      Imposing a global circuit breaker seems like one way of fixing it... but why is the trading so frenetic in the first place? Why this absolute pressure to trade nownowNOW?

      These are real companies people are betting on. Companies have lives in the years to decades, and at best their profits are measured in quarters - and even that's far too short-term thinking compared to human society, the biosphere and the ecological damage our industrial activities are doing.

      There just isn't any meaningful data that can be generated about the activities of corporations on the millisecond scale. Not really any on less than a yearly scale, if you think about it. The biggest news right now is the Deepwater Horizon oil spill, and what's the timeline for fixing that? Weeks to months.

      What does society actually gain from ultra-fast gambling on the markets? Other than a cheap thrill and massively increased risk?

      • by lalena (1221394) on Wednesday May 19, 2010 @07:26PM (#32271800) Homepage
        Exactly. Some of those automated trades were selling stocks at pennies on the dollar when there was no fundamental reason for that stock to be down at all that day. I would think the fact that these auto trades caused banks to lose millions would be the incentive for the banks to fix the system themselves.
        • And that's why that club of banks/brokers called the SEC was called in, and they are fixing this problem with this new rule.

          • by jd (1658)

            Instead of having unrestricted trades followed by a drop-dead-you-bstard rule, why not have a sliding rule such that the delay is a function of the number of trades pushed through in the previous N ms, where N can be tuned in the future. This would be analogous to packet-dropping schemes in computer networks, in that service is degraded in a controlled manner so as to prevent it ever reaching the point of needing to cut out or die. It also means that inherent instabilities created by the extremely low laten

            • Re: (Score:3, Interesting)

              by LostCluster (625375) *

              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.

        • by lennier (44736)

          You'd think that the logical response from the HFT guys would be 'okay, let's put in a rule such that if the stock price drops by X amount, hold off from trading for Y seconds in case it's a market glitch'. But from some reports, that's exactly what happened and the fact that some of the HFTs were missing from the market caused the others to panic (well, as much as computers can; calmly fire their worst-case rules I guess). 'Nobody's bought this stock at all in the last second - it must be a real turkey! Se

          • by lennier (44736)

            In short, this is what I'm proposing:

            The amount and frequency of trading of stocks should be on roughly the same order of magnitude as the practical ability of the corporate entity to reallocate its real capital.

            Does it cost half a trillion dollars and take ten years to build a new refinery? Then you really shouldn't be juggling investments in that refinery more than, say, once a year at best. Because it doesn't matter how fast you trade, that refinery's not going to get built any faster. Physics doesn't wo

        • by Dunbal (464142) *

          Some of those automated trades were selling stocks at pennies on the dollar when there was no fundamental reason for that stock to be down at all that day.

          Supply and demand are fundamental reasons. Someone sold a huge position of Procter and Gamble based on the declining S&P 500 reaching a certain level, and this started a cascade of selling in that stock. That it happened in under 5 minutes does not change the fact that there was an over-supply of stock. The laws of supply and dem

      • Re: (Score:3, Interesting)

        by hibiki_r (649814)

        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

        • by Dunbal (464142) *

          more stop orders are hit, and everyone that had one gets taken to the cleaners.

          No, if you have a stop loss you have agreed to lose (at most) a certain amount on your trade. So, you agreed with your broker to lose 40%? Well, congrats. One morning you wake up and 40% is gone.

          Stop loss is silly. It's used by amateurs in highly leveraged positions to prevent them from imploding their accounts. However you are actually telling someone else "how low" you are willing to

          • Re: (Score:3, Informative)

            by AK Marc (707885)
            No, if you have a stop loss you have agreed to lose (at most) a certain amount on your trade.

            Not even that. You can easily lose more than what you set because of situations like this. If it moves faster than you can sell for that amount, you will sell at below your stop loss number. You can set it at 40% and lose 99% (as some did here, though many of those were rolled back).
      • by mysidia (191772) on Wednesday May 19, 2010 @07:40PM (#32271976)

        There just isn't any meaningful data that can be generated about the activities of corporations on the millisecond scale.

        No, but there is meaningful data to be generated about the supply, demand, and liquidity of their stock on the millisecond scale.

        I think you forget the stock is an asset itself governed by market forces, apart of and independent from the company itself. And valuation of the company and its profits barely effect its valuation at all, over sufficiently short periods of time.

        What does society actually gain from ultra-fast gambling on the markets? Other than a cheap thrill and massively increased risk?

        It's not actually gambling, necessarily. But for every investor, there has to also be a speculator, otherwise, the transaction won't ever get made.

        Increased liquidity has a great advantage for society -- like the ability for businesses to obtain capital, for investors to get their money, for enterprise to thrive and generate more capital.

        The average American's retirement also relies on all this "gambling".

        • Re: (Score:3, Interesting)

          by rastoboy29 (807168)
          But *trading* stocks is a zero sum game.  *Investing* is good for society and investors, as well as the companies themselves.

          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.
      • High frequency traders argue that they provide liquidity to the markets. They'll also throw out terms like "Price Discovery". This basically means that they make it easier for everyone else to buy/sell positions at the right price. Whether or not they're full of crap I don't know.
      • Re: (Score:2, Informative)

        by Billly Gates (198444)

        .. but why is the trading so frenetic in the first place? Why this absolute pressure to trade nownowNOW?

        The stock market is a theoretical long term investment. It was before glass-seagul was appealed.

        Here is how flash trading works. Basically a super computer sits below the trading floor watching incoming and outgoing transactions. Lets say you have $300,000 in savings and want to put $100,000 in company A as its stock price looks reasonable. It lists for $16 a share and you put down your $100,000 in shares

      • Re: (Score:3, Insightful)

        by khallow (566160)

        Imposing a global circuit breaker seems like one way of fixing it... but why is the trading so frenetic in the first place? Why this absolute pressure to trade nownowNOW?

        That's simple to answer. The faster trader gets the good deals. We could put a delay in, but what would be the point? If a trade can complete in milliseconds, then why not do it? These fast mass behavior effects of the market help weed out traders with bad programs (especially variations of "do what everyone else is doing").

      • Re: (Score:3, Insightful)

        by thrawn_aj (1073100)
        No pressure at all. It's an ecological niche in the business world that had to be filled by someone - and it was.
    • by hackus (159037)

      Yeah and if you believe that explanation I got swamp land in Florida real cheap right now that is a real GOOD DEAL.

      The markets are rigged and if you are stupid enough to plan your retirement around the activities of thieves, crooks and criminals then you deserve to be broke in your old age on a street corner with nothing but public food stamps and health care like 1 in 4 kids in the US right now.

      -Hack

  • Great idea (Score:5, Funny)

    by MrEricSir (398214) on Wednesday May 19, 2010 @07:03PM (#32271470) Homepage

    I'm so saddened by these stories about stock traders getting electrocuted. It was about time they added circuit breakers.

    • by eclectro (227083)

      I too was sickened by the smell of stock traders flesh being burned. I'm also glad that they added a circuit breaker to turn on a fan to vent the smoke. I hope that they can continue with reform and add an impaling spear whenever a synthetic credit default obligation is traded. That will be less smelly.

  • by CaptainNerdCave (982411) on Wednesday May 19, 2010 @07:05PM (#32271496)

    This is what happens when people who aren't competent in a field start dictating the activities in it.

    How many legislators are Series 7 licensed? Series 66? 63? 6? Do any of these buffoons know how the market works? No floor also means no ceiling, there is no cap to how much an investor can make/lose.

    • by geekoid (135745)

      No, they talk to people who are experts, if not gurus, in the field.

      Your post is what happens when people don't actually think. Stop it.

      And tossing out a tidbit of knowledge to imply you know something is not only poor form, but makes you look the fool.

      • by eihab (823648)

        This is what happens when people who aren't competent in a field start dictating the activities in it.

        No, they talk to people who are experts, if not gurus, in the field.

        Yes. And I'm sure they are all well educated on the subject to form opinions and make crucial decisions just by talking to experts, while making sure whatever happens is in the best interest of the American people.

        Much like how Ted Stevens [publicknowledge.org] was on net neutrality and how the internet works in general. No?

        They are definitely not twiddling their thumbs and surfing porn [slashdot.org] all day.

        </sarcasm>

        • by geekoid (135745)

          No one said they where perfect. No one said it wasn't fallible
          The original poser was saying that this decision was made without consulting people who know the business. That is provably false.

          Every bureaucracy has fuck ups. Regardless if it's public or private service.

    • How many legislators are

      Wrong joke for the situation. The SEC is a self-regulation body funded by the brokerages, and not part of the government. It's job is basically to make sure everybody plays fair, such as in this situation where there were trades that really shouldn't have happened. The can call an "undo" on those trades, but it's cleaner to have a rule that says keeps the markets from going crazy in the first place.

    • We tried listening to the stock market "experts." And look how well that worked out!

    • Re: (Score:3, Insightful)

      by Monkey_Genius (669908)
      Any buffoon can take a course, cram, and pass the series 7 exam. All you need is a licensed brokerage to sponsor you. Now, if that was done for Microsoft licensing, there would be a hell-of-a-lot less MCSEs out there.
  • by BitHive (578094) on Wednesday May 19, 2010 @07:14PM (#32271614) Homepage

    This regulation will only strangle growth and innovation, slowing our economic recovery. But I guess it's easier to carry out a regulatory vendetta than it is to appreciate that the simple, universal truths of Austrian economics.

    • Given that the current economic crisis is a result of regulatory failure after the demise of Glass-Steagal and the chain of events in the late 90's and early 00's?

      Regulation is a good thing, in general.

      Let programmers do what they want and you wind up with useless software. Let investment bankers do what they want and you wind up with CDOs and derivatives trading.

    • Are you a bot that posts that whenever there's new rules?

      This doesn't allow things to instantly go to unthinkable lows, but set a timeline by which something can go to down with everybody getting their turn to ring in should they think it's worth more than that new low. See Jim Cramer's reaction on air live on CNBC as this happened. He was going to say PG was overpriced, but then the sudden drop had him calling out a pretend "buy order"... it then moved 10 points suddenly and we were back to where we were.

    • Re: (Score:2, Insightful)

      by Billly Gates (198444)

      I do not know if sarcasm is intended or not.

      If you are serious I would say its not capitalism as you and I do not have access to these systems with impossible barriers of entry. Fixed oligopolies and monopolists like Goldman Sachs have access to placing the super computers right under the trading floor at Wallstreet. Therefore its no different than communism where only 1 player exists to set supply and demand.

      • by BitHive (578094)

        Of course it's sarcasm. My other post to this article was modded flamebait (http://slashdot.org/comments.pl?sid=1658158&cid=32271774). I like to cover all the bases.

  • Why? (Score:3, Interesting)

    by tsotha (720379) on Wednesday May 19, 2010 @07:15PM (#32271626)
    Exactly what harm are they trying to mitigate here? Volatility isn't a bad thing in and of itself. If the underlying value of the stock is there, the price will recover. If not, well, it needs to go down.
    • Re:Why? (Score:5, Insightful)

      by LostCluster (625375) * on Wednesday May 19, 2010 @07:28PM (#32271822)
      The guy who needs protection is the poor sap who wanted to cash out his account at that point in time, who submitted a market order expecting to get $60,000 and having it execute and come back with $2700 for him. Should have used a limit order... but still, this just isn't "fair" and not likely to encourage people to invest in the market. So, that trade gets busted, he gets his stock back and gets to try again. Still, the market doesn't like busted trades either, so we need new rules designed to decrease the likelihood this will happen again.
      • by AuMatar (183847)

        And the poor guy who has money in a mutual stock whose administrators paniced. And the poor guy who panics himself, seeing a substantial amount of his retirement fund disappear for no reason.

        Lets end the myth that the stock market is a rational market and that it has rational actors. If it did, prices would only change surrounding major events- earnings announcements, dividends, and big deals. For that matter lets end the myth that the stock market is an indicator, or anythign other than it is- the wor

        • by tsotha (720379)

          Lets end the myth that the stock market is a rational market and that it has rational actors. If it did, prices would only change surrounding major events- earnings announcements, dividends, and big deals.

          I believe the market is a lot more rational than you imagine. Stock prices are based in large part on what investor expectation is regarding profits. It's quite rational to have large swings in price as a result of changing expectations regarding growth, currency fluctuations, or government action. If y

      • Re: (Score:3, Insightful)

        by Anonymous Coward

        He shouldn't be investing in the market then. Limit orders are not that complicated. If you don't specify a limit, then you are essentially declaring a 'fire sale,' and you shouldn't be surprised if you don't get the price you expect.

        Furthermore, one of the most important rules of investing is "Buy in over time." This means that you shouldn't buy or sell your entire position in one stock in a single trade. If you violate this rule, sooner or later you are going to get screwed. This rule is second only

    • Re:Why? (Score:4, Insightful)

      by dasunt (249686) on Wednesday May 19, 2010 @07:31PM (#32271866)

      Awhile back I read a book on big boom/busts in history, such at the Dutch tulip fiasco.

      The author's opinion was that some market bubbles had positive effects. One of the examples he cites was the rise of railroads in (IIRC) 19th century England. For awhile, it seems like everyone wanted to put money into making railroad lines. So a ton of lines were created, the market went bust, the individual lines went broke, and the few remaining players were able to snatch up the lines they needed from the bankrupt investors.

      In the short term, the bust was harmful, in the long term, the author stated that it helped create the modern railroad industry in England.

      Don't know if I agree with it, but it was an interesting idea.

      Boom/busts may be the equivalent of the precambrian explosion. Lots of interesting ideas are tried out, and only the fittest survive.

      • by tsotha (720379)
        I wondered about that in relation to all the fiber that got laid down during the dotcom bubble. As demand for bandwidth increases the fibers are already in place, whereas without the dotcom bubble there would have been a lag.
    • by geekoid (135745)

      And it will go down. They just pause it to be sure it's not a fluke that will cascade. It in no way stops a downward trend. Only sudden large movements.

      A cascade from an odd event could cascade to a market crash that isn't really justifiable by actual market trends.

      Two point:
      1) Something like this on a much broader scale is already in place, and has been there since the 80s

      2) This is a pilot program.

    • by icebike (68054)

      All sorts of margin calls can be triggered by these rapid plunges, which could force the liquidation of someone's entire portfolio as brokers enforce their margin call procedures.

      Further there are the common tactic of the large players to engineer a price drop in a given issue simply to free up a bunch of stock held under Stop Loss orders.

      Its easily abused.

  • Ban flash trading (Score:2, Insightful)

    by Billly Gates (198444)

    Problem solved!

    I do not have that kind of access to get rich off of other investors. The big boys should not be any different.

    I am sick and tired of these guys playing with my own money as well as, pensioners, my grandmas, and my employers money. A single mistake effects me and everyone reading this while the traders get bonuses. Where do you think your money goes when you deposit it? It does not sit in the bank or go to loans to help small businesses anymore. It goes to risky trading where you lose and the

  • they will make a better idiot. In this case the financial people will find a way to prevent the circuit breaker from tripping. I would like to find a way to get these financial people to "old Sparky" and bypass the circuit breaker and....

  • It is so obviously simple. Simply forbid selling anything on the NYSE at a price lower than you purchased it at! We would all be RICH I TELL YOU!!!

  • Markets seems to don't to like to be regulated, as with latest Germany measures [yahoo.com]. Next days we will see how they will take this regulation, if well won't happen in a 5-min period probably at the end of the day will get the kind of hit they want to prevent.
    • by daem0n1x (748565)
      It appears that they don't like to be unregulated a little more. They have the annoying habit of speculating themselves to death when given too much rein.
  • by NicknamesAreStupid (1040118) on Wednesday May 19, 2010 @07:43PM (#32272002)
    . . . but "circuit breakers" are not what is called for here. The market needs fuses. Not to be funny, but circuit breakers are too easily reset. Most trading is not done on the floor of the NYSE. If you want to stop trading AND get everybody's attention, then somebody needs to get burned. Otherwise, this breaker is going to go off, get reset, go off, get reset until it sounds just like chicken little. Think I am wrong? Well, the NYSE already has circuit breakers, since 1987. Notice that they do not get mentioned.

    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.
    • by Rogerborg (306625)

      Bingo. Price drops, ZOMFG SELL!!!! - the "breaker" trips, everyone waits 5 minutes, and since nothing has changed, ZOMFG SELL AGAIN!!!!!11!!!

      Maybe it'll give time for actual humans to over-rule the algorithms, but you know, I'm thinking not.

  • by daem0n1x (748565) on Wednesday May 19, 2010 @08:02PM (#32272214)
    Just tax the fuck out of those speculative scumbags, that should reduce "volatility" a lot.
  • by BitZtream (692029) on Wednesday May 19, 2010 @08:15PM (#32272364)

    If you want to gamble, thats your business.

    If you invest too much money in stocks, you don't diversify, and you loose your life savings on the stock market ... thats YOUR problem.

    I have a really REALLY simple solution ... don't invest in the stock market if you can't deal with the consequences.

    The stock market has no basis in reality. They like to pretend it does, but it doesn't. There are all sorts of excuses and 'reasons' why it does, but it has no more basis in reality than paper currency.

    And yes, I think paper currency is retarded as well. When you're trading something that can be easily manufactured you are going to loose unless you're the guy who makes it.

    • by Anonymous Coward on Wednesday May 19, 2010 @08:48PM (#32272766)

      The stock market has no basis in reality. They like to pretend it does, but it doesn't. There are all sorts of excuses and 'reasons' why it does, but it has no more basis in reality than paper currency.

      The first part of statement was wrong. Then when you said your bit about paper currency you confirmed the fact that you simply don't understand economics. Instead, you're another gold standard guy enthusiast. I'm going to explain to you why that's not a good thing.

      The price of gold is set by the quantity of gold available and the demand for it, as is everything else. Since the total quantity of available gold isn't related at all to the production in any other industry, that's a really poor measure of the economic status of any one nation.

      Paper currency is easily manufactured, but the guy who makes it isn't guaranteed to win anymore than everybody else is guaranteed to lose. It's called supply and demand. If you print too much of it, you have inflation, and the paper will soon be worth nothing. If you take money out of circulation, you have deflation, and the paper is worth more. Consequently, that's exactly the same situation you have with gold. If we start mining a whole lot of gold, the price of gold comes down and you can exchange it for less things. If you start producing less gold, the price goes up, and you can exchange it for more valuable things. The value of everything in relation to everything else is constantly fluctuating, and you don't make it "stable" or more "real" by having a mineral or a very difficult to manufacture thing as your currency. It's all the same. If we suddenly print ten times more money than we currently have available, assuming everything else stays the same, the cost of everything product will go up because the people with that extra money in hand will be willing to spend more, people's salaries will go up, because employees will demand more money to compensate for the increased price of goods, and now everything you could buy with a $1 bill you buy with a $10 bill. But it's ok, because your salary will have gone from $70,000 / year to $700,000 / year. It's exactly equivalent and no actual value was lost anywhere.

  • Greed. (Score:3, Insightful)

    by clawhammer (1671506) on Wednesday May 19, 2010 @09:05PM (#32272942)
    You can't fix greed with a software patch.
  • clueless (Score:5, Insightful)

    by Anonymous Coward on Thursday May 20, 2010 @12:00AM (#32274648)

    Hi,

    Normally I would be content to sit by the sidelines but I'm jumping in just to clarify, there is a lot of misinformation swirling around this discussion, a lot of conjecture by smart people who really have little to no experience in high frequency trading which is rapidly becoming the new wall street boogeyman. HFT dramatically improves liquidity and price discovery. It has helped lead the way to more efficient markets, and for the most part helps stocks and various other instruments reach their "true" value faster than ever before.

    There are a lot of whiners out there complaining about how HFT is somehow "not fair", while they continue to get taken to the cleaners by their brokers, the banks, and hundreds of other middle men. Why do you think the spreads are so tight on a lot of these markets? HFT. Believe me, the institutional brokers would like nothing better than to make very wide markets and charge you for the privilege. The vast majority of investors who are taking long term positions in the markets are not effected by intraday moves. If you got burned because you were trying to make a profit intraday then you got what was coming to you, because not only are you not as fast as most of the firms out there, but also not as smart. (sorry) Frankly if NYSE's attempt to "restore order" wasn't so entirely broken the price discrepency would have been even shorter lived. However, because of the steps their market took to restore order most savvy shops immediately routed around them in order to complete and start new transactions (as they should). Attempts to regulate the markets in this way will not work as expected, because they are introducing arbitrary rules which will largely be ignored by the really big players (dark pools anyone?). So far there has been no indication that the recent price drop was the result of an HFT strategy gone awry, but rather a temporary blip made worse because of an outdated mode of operation. I think an interesting experiment would be if all of the HFT shops pulled their liquidity (this would never happen), the results would be fairly disastrous for short term investors, unless you like getting worse prices.

    Anyway, I don't want to rant any more. It is unfortunate that people aren't really looking at this from all angles. Competition is a good thing for everyone. It applies to Microsoft and Linux, but not the markets right? ...

Testing can show the presense of bugs, but not their absence. -- Dijkstra

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