Algorithmic Trading Broke, Then Fixed, the Market
Yesterday the stock market dropped almost 1,000 points intraday before rebounding almost as quickly. Algorithmic (computer-to-computer) trading is blamed, but it might be worth pointing out that algo trading also fixed the market, just about as fast as it “broke” the market in an anamoly.
Right now, securities exchanges are looking at particular equities that might have been affected by the abrupt drop and are going to cancel the trades. The other thing is that few actual human traders actually were able to react quickly enough, one way or ther other. It appears execution platforms became overloaded and wouldn’t place buy or sell orders in any case.
There also were liquidity issues. For every seller, there must be a buyer. It appears that in many cases there were no buyers to be had, so abrupt was the plunge. Liquidity, in other words, evaporated.
But algo traders apparently were able both to execute “sell” and then “buy” orders fast enough to clear about 600 points of movement within about 30 minutes. The conventional wisdom was that a misplaced large order triggered the abrupt declines, which triggered the other trading algorithms.
It might also be fair to note that those same automated trade programs also erased the anamoly within 30 minutes, which shell-shocked humand mostly gaped in awe at something most likely had never seen.
The sheer snapback of the price in such a short amount of time was not driven by fundamental traders (humans) who all of a sudden found “value” in the market with a trailing P/E. The only sort of quick analysis that provides that kind of price action are done by non-humans at quantitative firms, and they saved the market from something much, much worse.
http://www.investingwithoptions.com/2010/05/06/7-facts-noone-wants-to-hear-about-the-market-plunge/
Yesterday the stock market dropped almost 1,000 points intraday before rebounding almost as quickly. Algorithmic (computer-to-computer) trading is blamed, but it might be worth pointing out that algo trading also fixed the market, just about as fast as it “broke” the market in an anamoly.
Right now, securities exchanges are looking at particular equities that might have been affected by the abrupt drop and are going to cancel the trades. The other thing is that few actual human traders actually were able to react quickly enough, one way or ther other. It appears execution platforms became overloaded and wouldn’t place buy or sell orders in any case.
There also were liquidity issues. For every seller, there must be a buyer. It appears that in many cases there were no buyers to be had, so abrupt was the plunge. Liquidity, in other words, evaporated.
But algo traders apparently were able both to execute “sell” and then “buy” orders fast enough to clear about 600 points of movement within about 30 minutes. The conventional wisdom was that a misplaced large order triggered the abrupt declines, which triggered the other trading algorithms.
It might also be fair to note that those same automated trade programs also erased the anamoly within 30 minutes, which shell-shocked humand mostly gaped in awe at something most likely had never seen.
The sheer snapback of the price in such a short amount of time was not driven by fundamental traders (humans) who all of a sudden found “value” in the market with a trailing P/E. The only sort of quick analysis that provides that kind of price action are done by non-humans at quantitative firms, and they saved the market from something much, much worse.
http://www.investingwithoptions.com/2010/05/06/7-facts-noone-wants-to-hear-about-the-market-plunge/
Tags: algorithmic trading, low latency
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