Next Danger: "Splash Crash"

barrons ^ | MAY 21, 2011 | JIM MCTAGUE

[george76]

Markets are ill-prepared for a high-speed trading disruption that might simultaneously affect stocks, commodities, bonds and other assets.

Last year's Flash Crash was a hair-raising experience for stock and commodities investors—comparable to the sudden descent of a large airliner from 38,000 feet to tree-top level, followed by an equally sudden and steep ascent.

A trillion dollars in equity vanished in minutes, as stock futures, exchange-traded funds and equities plunged. I've recently heard from a computer-trading expert warning of the very real possibility of a more widespread and catastrophic "splash crash," a dislocation by high-speed trading computers that could simultaneously splash across many more asset classes and markets. Imagine our metaphorical jet buried in the earth up to its tail.

...

fixes like the circuit breakers are Band-Aids: "Even if regulators had their 10% limit-up/limit-down circuit breakers in place for all stocks, the market could still drop 10% in a matter of seconds or minutes. This will shatter already-fragile investor confidence."

[Red Badger]

Bobby Darin
Splish splash

splish splash
I was taking a bath
long about a staurday night

Rub dub
Just relaxin in the tub
Thinkin everything was alright

Well I stepped out the tub
Put my feet on the floor
I wrapped my towel around me
And I opened up the door
and then
Splish Splash
I jumped back in the bath
well how was I to know there
was a party goin on?

There was a splishin and splashin
splishin’ and a splashin
Rollin and a strollin
Rollin and a strollin
movin and a grovin
Movin and a grovin
Reeling with the feeling
Rellin with the feeling
Splishin ana a splashin
Rollin and a strollin
On a saturday night

Bing bang
I saw the whole gang
Dancin on my livin room rug
Flip Flop
They were doin the bop
And they all had their dancin shoes on
There was lollipop, and peggy sue,
good Golly miss molly was even there too
well a Splish splash
I forgot about the bath
I went and put my dancin shoes on

There was a splishin and splashin
splishin’ and a splashin
Rollin and a strollin
Rollin and a strollin
movin and a grovin
Movin and a grovin
Reeling with the feeling
Rellin with the feeling
Splishin ana a splashin
Rollin and a strollin
On a saturday night

I was splishin and a splashin
rollin and a strollin
movin and a groovin
realin with the feelin

Splishin and a splashin
on a saturday night

[MichaelP]

They had better worry about it! Flash trades are dangerous and there is a potential for something far worse than we had. They need to impede this kind of trading period!

Mike

[ClearCase_guy]

"You almost need something like a Norad [the joint U.S.-Canadian North American Aerospace Defense Command]… for the markets," Bates says. Because some 15% of the U.S. economy is based on financial services and the markets, they should be protected on the basis of national security, he asserts.

SkyNet

[who_would_fardels_bear]

Isn't that a good thing? I thought that high-speed computer trading was adding to market liquidity.

You can't have much liquidity without the occasional splash!

[JPG]

Dream Lover, Mack The Knife, Beyond The Sea...great talent...miss him and his ex, Sandra.

[reformedliberal]

This sort of high-speed trading risk is keeping a lot of folks out of the market. Let the big boys play this sort of game. They can come back from it.

[MichaelP]

I'm with you....

Mike

[Red Badger]

Died way too young................

[Erik Latranyi]

Don’t worry, Obama’s people will not cause this until after the 2012 election.

[NVDave]

Fastest way to end this is put on a per-transaction tax for all trades in equities, commodities, options, etc for less than one market session.

If you want to avoid the tax, you have to hold the position overnight.

Set the tax at, oh, $0.10/transaction. Poof. End of HFT.

[gleeaikin]

They better put that 10% up/down circuit breaker into effect for commodities and anything else this could happen to.

[freekitty]

We can hear the giant sucking sound then the giant splash of money filling private slush fund tanks.

[Zeneta]

I was trading during the last flash crash.

There are a number of factors that contributed to the event. One factor, is that there are a lot more folks on “direct access” trading platforms, and they have no idea what they are doing.

The fact is a “market” order to sell, is really a limit sell of 0.01. The direct access broker,read computer, will attempt to hit every bid until it is filled.

It is still, for the most part, first come first served. When there are no bids of any size below the current price, one order can start this snowball effect. It's like walking on eggshells.

The High speed guys, for the most part, are trying to capture a rebate you get for providing liquidity. For example, if I put in a limit buy at or below the current bid, if my order is filled I get paid a few 10ths of a penny. I would then flip to sell at break-even or plus a penny and get paid again.

The liquidity they provide only works in flat, low volatile markets. They have no interest in taking the position risk of providing bids or offers. Market Makers used to do that, but the reward (bid ask spread) was removed by an SEC rule in 1997.

The markets today are superficial and lack depth on both sides.

[proxy_user]

But haven’t many sharpies put in buy orders well below the current trading level, hoping for another flash crash? You could do every stock in the S&P at 40% below the current price, and just wait. They couldn’t cancel your transaction if it is at least 50% of the previous day’s close.

[Zeneta]

I would be fundamentally opposed to any transaction tax.

Other than the fact it won't work, I would rather eliminate rebates and co-location.

Keep in mind, if you trade on a “Direct access” system, there is NO SUCH THING AS A MARKET ORDER.

[Zeneta]

I wanted to write a program like that.

Catchers Mitt.

I think the rule is 10% away from a 5 minute avg. price. (not sure exactly)

Anything outside of that would get busted. Cool.

You would think the “Sharpies” would have bids and offers out there. But they don't, or at least not on the public markets. They shop for size in a “Dark Pool”.

[Razzz42]

Don’t worry, if the big boys start losing on their bets, Congress will bail them out with our money. Can’t have stock markets down, makes things look bad. Needs another coat of QE3 whitewash.

[NVDave]

I’d like to see machine trading come to an end, period. A transaction tax could eliminate it, structured properly.

Co-location is only an issue insofar that it is is a competitive advantage in delivering lower latencies. Eliminate co-lo’s and all they will do is put a fiber run to some location off-site and enjoy largely the same latencies they do now - with a slightly higher capital expense. Eliminating co-lo’s is a non-issue. Cisco has a whole package for HFT’s, a veritable rubber-stamp template for them to just punch out a HFT operation without having to think much about it. Cisco even has an application engineering team to help make HFT’s happen as fast as possible. So putting in some physical barrier isn’t going to solve that.

Getting rid of the rebates might work, but they’ll merely call the kickbacks for order flow something else.

The central thing to make happen is to make the entire HFT enterprise non-profitable or a loss on every transaction. Then it will dry up and blow away overnight.

[WOSG]

“Keep in mind, if you trade on a “Direct access” system, there is NO SUCH THING AS A MARKET ORDER. “

Isn’t a market order just the same a ‘hitting the ask’ or ‘hitting the bid’?

I was going to ask you about transaction tax. I agree on being opposed - it would kill liquidity and send our trading offshore most likely.

A better question is:
Is it desireable to get rid of high-frequency trading? Does it help or hurt the markets? Doesnt it add to liquidity?