Posted on 05/07/2010 6:02:41 PM PDT by Nachum
“Sorcha Fall” is a known pseudonym for a nutcase hoaxer.
Yes, setting stops is a stupid way to "protect" the investment position. They will be taken out in cascade fashion.
Unfortunately, one of the first things that all these expensive "free" "investment schools" and "investment seminars" teach the people who have no idea about market, is that they can "protect" their position with "tight stops". That's one of the best ways to guarantee the steady loss of money; sometimes fast enough to learn and stop doing it, but often slow enough to steadily lose most of it.
High-Speed Trading Glitch Costs Investors Billions - CNBC / NYT, 2010 May 07, by Jackie Calmes and Binyamin Appelbaum
In recent years, what is known as high-frequency trading — rapid automated buying and selling — has taken off and now accounts for 50 to 75 percent of daily trading volume. At the same time, new electronic exchanges have taken over much of the volume that used to be handled by the New York Stock Exchange. In fact, more than 60 percent of trading in stocks listed on the New York Stock Exchange takes place on separate computerized exchanges. ..... The Securities and Exchange Commission and the Commodity Futures Trading Commission said they were examining the cause of the unusual trading activity. ..... One official said they identified “a huge, anomalous, unexplained surge in selling, it looks like in Chicago,” about 2:45 p.m. The source remained unknown, but that jolt apparently set off trading based on computer algorithms, which in turn rippled across indexes and spiraled out of control. Many firms have computers that are programmed to automatically place buy or sell orders based on a variety of things that happen in the markets. Some of the simplest triggers are set off when a stock drops or rises a certain percent in the trading day, or when an index moves a specific amount. ..... Some circuit breakers do exist, a legacy of the reforms made following the 1987 stock market crash, but they only kick in after a huge drop — and only at certain hours. Before 2 p.m., a 10 percent drop in the Dow causes New York Stock Exchange to halt trading for one hour. Between 2 p.m. and 2:30 p.m., the pause shrinks to a half-hour and after 2:30, there is no halt in trading. ..... “We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime,” said James Angel, a professor of finance at the McDonough School of Business at Georgetown University.
Why the Trades Were Clearly Erroneous - CNBC, 2010 May 07, by Bob Pisani
How did this happen? We don't know if the sudden drop was caused by an erroneous trade, or by a technology malfunction, or if the stock traded away from the NYSE and there were simply no bids. What we do know is that similar events happened quickly with other stocks. In the most egregious example, Accenture went from $40 to $0.01 in a couple minutes. There were other examples as well. Again, how could this happen? In one sense, it doesn't matter what caused the drop. These were clearly erroneous trades. Any common sense definition of "erroneous" would tell you that when a stock goes from $40 to $0.01 something is wrong. After the close, NYSE Arca and Nasdaq said it canceled all trades executed 60 percent away from the market from 2:40pm to 3:00pm, which would include many trades in Accenture. What's wrong? Trading today -- stocks, bond, or commodities -- it's a combination of technology and judgment. Clearly there was a little too much technology here and not enough judgment. Where is the duty of care to clients from a broker when a stock goes from $40 to $0.01? At least the NYSE designated market makers saw something was happening and acted on it. Unfortunately, the way the rules are everyone can ignore them. Reg NMS says all markets must route orders to the best price, and if your market is not automatically accessible, or slows down, people can trade through you with complete impunity. That's what happened. ..... All stocks at the NYSE have circuit breakers here called LRPs -- when stocks trade rapidly outside of certain parameters, the designated market makers can slow trading for short periods to allow bids to catch up, something NYSE Chief Duncan Niederauer said earlier on Closing Bell. .....
Chicago markets caught in domino effect - Chicago Tribune, 2010 May 06, by Greg Burns
Rather, so many orders were flowing into the all-electronic exchange that its market-making "book" was "exhausted down to the final quote at a penny," noted David Harris, chief executive of the stock exchange. Under regulations common to all U.S. securities exchanges, trades occurring at those erroneous prices either are canceled or adjusted to a reasonable price, Harris said. Regulators consider sorting those outlying trades afterward a better approach than trying to stop them before they happen. Meantime, CME Group sought to squelch a rumor that a bank trading system ran amok in its e-mini stock-index futures contracts. In an unusual statement issued Thursday evening, the Chicago-based company said that stock-index trading by Citigroup Global Markets Inc. "does not appear to be irregular or unusual in light of market activity today." ..... Accenture, Chicago-based utility company Exelon Corp. and Philip Morris International Inc. were among 27 U.S. stocks with at least $50 million in market value that dropped more than 90 percent as U.S. equities tumbled, before recovering by the close. ..... Exelon plummeted to a hundredth of a penny during trading before closing down 4.2 percent, at $41.86. Philip Morris of New York, the world's largest publicly traded tobacco company, sank 96 percent, to $2, before ending at $47, a drop of 3.5 percent. ..... One of the wildest 20 minutes in Wall Street history spilled into Chicago's major markets Thursday, prompting one exchange to declare a series of trades "clearly erroneous," and another to suggest that a hot rumor was wrong. .....
Computers, Not Human Error, Likely Caused Market Meltdown - CNBC, 2010 May 07, by Jeff Cox
These experts think the intensely accelerated electronic trading was sparked by the Greek debt crisis and other events and not a trader who typed a "b" for billion instead of "m" for million in executing a trade on Thursday. Friday's market volatility seemed only to confirm that investors are afraid of what lies ahead and are wary of the stock market. "It wasn't a fat finger," said Dave Lutz, managing director of trading at Stifel Nicolaus in Baltimore. "The markets became unglued...Most of it was centered on the fact that currency markets affected the equity markets." Not everyone is so sure. Authorities are probing the trading activity and looking to see whether a human mistake or manipulation was at play. ..... "We believe the electronification of markets and the fragmentation of liquidity — stocks trading simultaneously on many exchanges and alternative execution venues — has enhanced the risk of catastrophic meltdowns of excessive volatility," the firm wrote. "We believe instances like yesterday's 1,000 intra-day point sell-off could become much more common if changes are not implemented." ..... "A lot of these (electronic trading) models become very sensitive when volatility is high," said Aaron Gurwitz, managing director and head of global investment strategy at Barclays Wealth in New York. "It's possible that a lot of these models got to a point where they got strong reduce-risk signals, that things are not working right." "In that context," he continued, "even a small glitch, a slightly overweight finger rather than a fat finger, could have triggered a lot of the things that happened... A lot of very substantial traders become very sensitive. There's not that much difference among these models. We've seen this can be a source of potential systemic risk that really does need to be investigated." ..... Computerized sell programs triggered by global events—rather than trader error or a "fat finger"—appear to have caused Thursday's unprecedented market swing, according to market pros who are reconstructing the nearly 1,000-point stock selloff.
How High-Frequency Trading Works - CNBC, 2010 May 07, by Barbara Stcherbatcheff
Supporters of high-frequency systems claim to add essential liquidity. But some critics claim that HFTs have increased the amount of volatility and instability in the markets. ..... There was initial speculation of human error. Now there is a focus on computerized trading. ..... High-Frequency Trading systems (HFTs) are computerized trading programs that make money two ways. They place bids to make small amounts of money from liquidity rebates provided by the exchanges, or they make tiny per-share profits. While this is only dealing with fractions of cents per transaction, HFTs together execute trades on billions of shares a day, rendering it extremely profitable.
Trading System May Have Dangerous Flaw - CNBC, 2010 May 07, by Bob Pisani
The argument that computers are not in control of the markets, that they are merely programmed by traders, does not hold a lot of water when a stock goes from $40 to $0.01 in a matter of seconds, as happened with Accenture. In other words, there may be a flaw at the heart of the trading system, which is now routinely seeing 6 billion share trading days due to high frequency trading. Yesterday, the NYSE consolidated tape saw 10.7 billion shares changing hands. ..... ..... Fat fingered trade? Computer glitch? It's possible that one of these was the cause of yesterday's drop, but as traders stream into Wall Street, the worry is that this could have happened without a computer glitch or fat fingered trade. ..... That's what happened; once liquidity was removed from the NYSE floor, even for 90 seconds, trading went to markets where there were obviously thin or nonexistent bids. .....
The Blame Game: NYSE vs. Nasdaq - CNBC, 2010 May 07
"We provided continuous market support for that period of time. The stocks over the NYSE did not enjoy that luxury," Greifeld said. The NYSE "basically walked away from the stock." Well-known investor Jim Rogers piled on: "Somebody should hang this New York Stock Exchange!" Rogers said. "They claim to be the center of the world's capitalism, of the world's financial markets, you would think that in 2010 they could sort out simple things like electronics." ..... ..... "Our systems function flawlessly," said Nasdaq CEO Bob Greifeld, citing the fact that Nasdaq-listed stocks Microsoft, Intel and Cisco had modest drops, while NYSE stocks like P&G and Accenture fell off the rails.
This high frequency trading is done in the “dark” exchanges and the above board exchanges. I’ll guess the computer glitch started in the dark exchanges and infected the normal ones. Might have been a cyber attack in the dark pool exchanges which are more rowdy and less security than the above board exchanges
Nasdaq has bragged for years that it is more hi tech than the stodgy ol NYSE who that bald headed stooge Richard Grasso milked for a 140 million payout. Saw that puke on TV today
It was more hi tech since inception, so as they say, it ain't bragging if they done it.
Anyway, whether it was a mistake or a test, or an actual cyber attack, it's good that it happened at this slow but "nervous" time, after several days of selloff on Greece / Portugal / Spain, terrorism, oil spill and Obama "reforms" news. System got exercised pretty well and, I'd say, without too much disruption because it was so quick and not too far from the market close time.
More so than stocks, options will take some time to sort out, so volatility and volume should be somewhat heightened before starting to come down.
Funny puppy-— Trailing stops are what is better?
There is no fundamental difference between them, only calculation method. Stops have the problem with both volatility (overshooting down the price) and liquidity as it’s “walked down” on inadequate number of shares bid.
Either is susceptible to and is often taken out on a thin (lower) bid volume, especially if they are or get exposed to the trading system level.
Everyone needs to listen to this guy & read the comments (pro & con) at the article. It’s not a short clip, but it drives home what must have been a trading floor in chaos.
“MUST HEAR: Panic And Loathing From The S&P 500 Pits
Submitted by Tyler Durden on 05/07/2010 04:24 -0500
http://www.zerohedge.com/sites/default/files/Market%20Crash.mp3
“Guys this is probably the craziest I have seen it down here ever.” Here it is, memorialized for the generations and away from the now openly ridiculous disinformation propaganda of the mainstream media, just what a full market meltdown panic sounds like: straight from the epicenter, the S&P 500 pits. Luckily open ouctry still exists, if at least for shock value. Click here for a first hand account of the most shocking 15 minutes in recent market history. Fat finger my ass.”
http://www.zerohedge.com/article/panic-and-loathing-sp-500-pits
“by Itsalie
on Fri, 05/07/2010 - 08:11
Hey bernanke just invented another perpetual motion machine - tell the machines to remove all bidsand drop the thing 10%, then buy them cheap; sell the next day on no volume ramp up; a trillion wiped out, all in the Fed and cronies pockets, all in under 2 hours. And you guys are complaining about the Fed’s 2 trillion balance sheet? No need for any further treasuries auctions for the rest of the year. Was that why the Treasury Department was cutting back debt issuance despite lower tax receipts ? :) :)
by fsudirectory
on Fri, 05/07/2010 - 08:26
I wonder what time
1) The Bank Break Up Amendment Failed
2) The Sanders Amendment was delayed until approx. Tuesdsay.”
Hey, now—I resemble that remark!
Thanks for the advice. What is trading system level...being exposed to? Where you chewed up by computers?
Yes, exactly. It's not a limit order; once the stop level price is reached, the entire stop loss order's "sell at market" volume becomes exposed and bids can disappear and/or trail sharply lower in a waterfall pattern. Basically, stop loss offers only an illusion of protection; if someone doesn't feel comfortable with the position, short of outright sale there are usually better / safer or cheaper ways to protect it.
Taking out the stops is an occasional sport on WS, when volatility picks up or liquidity dries out, it's easy money for people who can see the order pipeline.
Stop-loss orders turn into double-edged sword - Globe and Mail, 2010 May 07, by John Heinzl
Stop-loss orders are supposed to protect investors when prices plunge, but during Thursday’s market chaos, the strategy may have backfired horribly and contributed to the massive slide in stocks.
A stop-loss order instructs the broker to sell a stock or exchange-traded fund when the price falls below a certain level. But when the price level is breached, the order is automatically converted into a market-order, meaning the sale is executed at the best available price.
That’s fine if the market is liquid and orderly, but when volumes are thin and prices are bouncing around violently, the sale may end up being executed at a ridiculously low price if that’s the only bid on the books. .....
See also a comment from "olduser" at the end, he nailed it.
Thanks much. I don’t even trade. Just curious. I am going to your link to learn more about how the big guys clean out the little guys
short of outright sale there are usually better / safer or cheaper ways to protect it>>>>> You are going to tell me options not that I have ever used one
The important thing to remember is not to use stop loss (or similarly, "market" orders) especially in thinly traded stocks, because it's not a protection, it's practically an invitation to steal your money, at a price no higher but possibly much lower than your stop loss "limit".
In any case, this is another liquidity event, different in nature and not on the same scale that froze credit markets in 2008, but clearly a pipeline liquidity issue - something that markets have not been addressing because it's one of the ways for them to profit at the expense of amateurs, but it's obviously something that HFT computers have been programmed to take advantage of.
BTW, if you have an interest in the subject of "rational vs emotional" debate and how it affects the markets or financial and economic decisions, PBS NOVA recently ran an interesting (though not without bias or flaws) Mind Over Money program. You can catch it here http://video.pbs.org/video/1479100777/
Hey! I was born there.
Thanks for all that
HFT computers........ Do you think they ever defeat competitors HFT computers or are they just scalping the non-HFT players? HFT is like a toll or a tax on all stock trading. Not an original insight.
To me HFT is a constant buzz, static and background noise. It’s a layer of smog
Chicago + ‘fat fingers’ = ‘The Chicago Way’
War of the Algorithms, constantly adjusted and adapted to changing environment and competition, in part due to Heisenberg effect (Uncertainty Principle). The "scalping the suckers" algorithms are generally the easiest and non-controversial ones that are put in automatically, but this doesn't bring in a lot of profit. Large trading sums and frequency take care of that. Other than that, we shoudn't really care which one "wins" the trade at any given time, as long as there are many "machines" which are programmed to compete against each other and not to conspire together against us.
This article should be read in full - Algorithmic Trading: Somehow, It All Adds Up - WSTech, 2006 August 07, by Daniel Safarik
..... Meanwhile, algorithm innovation continues to offer returns for firms with the scale to absorb the costs and reap the benefits. There are indications that clients do respond to the bells and whistles - if they are well-suited to demand. More than 50 percent of JPMorgan's electronic flow, for example, is derived from its Trading Algorithmic Optimizer (TAO), released in November 2005, which manages trading at both the portfolio and single-stock levels, the company's Carrie notes. .....
This kind of knowledge is not unique, but very valuable. Remember Sergey Aleynikov, former Goldman Sachs' programmer who stole Goldman's HFT algorithms last year?
Goldman Sachs Punked? The Case of the Stolen Proprietary Algorithm
..... The algorithms fall under the category of “quantitative trading”, created by “quants” who are often Ph.D’s in the hard sciences or mathematics. Many of them are like Aleynikov, a Russian émigré and former student of applied mathematics in Moscow, who was earning $400,000 a year and left Goldman Sachs to take a job in Chicago that he described paid three times as much. .....
The Chicago company Aleynikov was going to work for is Teza Technologies LLC., was a newly formed small private HFT shop run by another former Russian and former Citadel Investment Group high-frequency trader Misha Malyshev. raising intellectual capital - Sergey and Misha
The Next Sergey Aleynikov? Employee Arrested For Stealing HFT Trading Algorithms From Soc Gen - Y, 2010 April 20, by Courtney Comstock
In an amazing case that could be bigger than Goldman's alleged algo-thief Sergey Aleynikov, it looks as though Agrawal tried to steal complex algos from Soc Gen and give them to a competing financial institution. HFT trading operations are very secretive about their algos. Everyone at a Mankoff Company HFT conference we were at recently jumped when someone mentioned the purpose of one particular algo he had learned of. None of the traders we later asked would give us any other examples of the algos they use. "It's proprietary information," we heard repeatedly. So it's a big deal that almost right after he was hired, Agrawal allegedly started stealing documents that recorded the complex algos. ..... Samarth Agrawal was arrested today for stealing high frequency trading (HFT) algorithms from Soc Gen, according to Courthouse News.
Ultimately, for most people and the normal funtion of the market system, speed is not as important as the liquidity, and HFTs do add liquidity to the market in general, and they operate on pretty slim margins (obviously, because of the competition with other systems). That's the good thing for market, the problem is to ensure that the liquidity is in the market, otherwise B/A spreads widen, order sizes shrink and the trading grinds to a halt, creating panic and feeding on itself.
When liquidity dries up you get things like run on the banks, and then everybody loses, big time.
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