The stock market has been having a bad week. Wednesday the market
ended the day down over 300 points. I heard reports that this was
the result of investors taking their profits. Happens all the
time. Then within a few days, the prices on many great stocks is
so low that the investors are buying the stocks right back up.
Thursday, May 6th 2010 the market was again down over 300 points.
This pullback was blamed on the worsening economic and political
situations in Greece and the effect on the European Union.
At approximately, 2:40 PM on this same Thursday, the stock market
began a free fall and plummeted over 1000 points in one hour. Is
it Greece or is it a typographical error that saw Proctor and
Gamble plummet within 60 seconds? Many other stocks fell
dangerously low as well. There will be an investigation
surrounding this time frame and adjustments might be made to the
stock prices that were affected in these few minutes.
So this is what we know. No, this is what we are told, in some
cases conflicting reports confounded the issues. We have no idea
what was really going on. Why would a typographical error of a "B" instead of an "M" affect the stock market sending it
spiraling into a deep selloff? And why did it happen near the end
of the trading day?
Reported by Lucas Mearian for Computerworld, Chris Nagy, managing
director of order routing strategy at TD Ameritrade, stated that
they had warned the SEC regarding the effects of high-frequency
trading (HFT) and the resulting damage to the stock market. Nagy
continued to describe what he called "the algorithmic effect on
the marketplace." So now of course, we need to know what the
algorithmic effects are that can broadly affect the entire stock
market in less than one hour.
Clues to the algorithms can be found in the computerized programs
designed by many different companies to use the algorithms to
define trends in the market. The programs include variables such
as trades of high-frequency, trades of millions or billions of
dollars or possibly in every currency, as well as stock sectors
such as financials, foreign markets, etc. in which the stocks
themselves are weighted according to their potential impact on
the economy. The stocks might be in mortgages, oil, banking,
foreign countries and so on.
What occurs is that the orders are placed by the computer without
human intervention being necessary. The computer uses factors
such as timing, price and quantity to make the decision to trade
up or down on trends forecast by the intelligent systems.
Wikipedia describes the use of the algorithms for use in sell
side trades versus buy side trades in high-frequency trading. "This information allows the computer to make elaborate
decisions to initiate orders based on information that is
received electronically, before human traders are capable of
processing the information that they observe......"
With all this in place is it any wonder that the market fell like
a bomb plummeting to earth. But with the types of trading curbs
put into place why wasn't the free fall curbed? Trading Curbs
described as circuit breakers will go into effect based on the
percentage decline and the time of the day that the decline
occurs. According to HL CAMP and Company, Program Trading
Research, the New York Stock Exchange has determined the decline
levels at 10,20, and 30 percent as well as a fall before 2:00PM,
or before 2:30 PM, or between 2:30 and 4:00 PM.
These numbers correlated to the drop in the point percentage and
the time describe why the curbs did not go into effect. The
decline in points was ignored because the drop of 1,350 points
did not occur before 2:00 pm. We were only at about an 850 point
drop at that time. If it had fallen 1350 points, the market would
have halted trading for 1 hour. Instead, at 2:30 the time frame
changed and the new level that needed to be met was a 2700 point
drop. This did not occur either so the 30 minute halt did not
take place in the trading again.
Instead, according to the point levels and percentage drops
determined by the DJIA, between 2:30 and 4PM there will be no
halt of trading. There are no numbers that correlate to that time
period and drop percentage. Although, if the Dow Jones Industrial
Average (DJIA) falls to 4000 points at any point, trading would
immediately be halted. Yesterday's trading drop took place at
2:40PM, outside of the time-frame and percentage drop that would
have called a halt to further trades. DJIA adjusts the point
levels and the percentage levels on a quarterly basis.
I am not secure in knowing that computer error can cause chaos in
our stock market. The extent of which was overturned by the
increased buying signals that took place when the stock prices
were so low. Even the computer recognized a good buy when they
saw it. And I am sure that the buying will continue and the
market will eventually return to it's former glory. Although,
there are investment risks, and stock market risks and now we
have computer-generated high-frequency trading (HFT) risks to
determine our trends. Be wise.
Irene A. Majchrzak helps people retire debt-free with a sense
of well-being and the freedom to have the things they want.
Get her free ebook, Debt Free to Retire, by going to http://debtfreetoretire.com/.