Thursday, August 29, 2013

 

Every day, another flash crash

The bad news: By one count, we are seeing three mini flash crashes in individual stocks every day, meaning an unusual 3% or greater price move that reverses within seconds. Sometimes the mispriced trades that result are voided; other times, investors on the wrong side of those trades get burned. 
And with somewhere between 40% and 60% of all stock trades now executed by high-speed computers, the reality is that "Flash Crash II" could happen at any moment. "The conditions that were behind the flash crash have not changed, and we're just as vulnerable to that happening again," says Michael Wellman, an HFT expert and computer science professor at the University of Michigan. 
High frequency trading, though, isn't just about computer systems working quickly. HFT traders, the experts say, can also use their systems to manipulate stocks – for example, flooding the market with orders to create a price move that helps them and hurts the person on the other side of that trade. 
That person could be you.  [Emphasis added.]
... 
On May 17, in the final seconds of the trading day, a big sell order hit the market for Anadarko Petroleum(APC). 
Back in the old days, a market "specialist" on the floor of the New York Stock Exchange might have worked the sale into his standing order book, with a slow and contained price decline. Now, though, HFT traders often are "the market." And they don't hang around long when there's a sign of potential trouble, such as a big sell order hitting the market. 
So when the large Anadarko Petroleum sell order hit, HFT traders bolted, bids for the stock dried up, and shares fell from $90 each to a penny in 45 milliseconds, says Hunsader of Nanex. 
"This is what's going on all the time in the market," he says. "We've lost the diversity in the market and ended up with machines that only care about speed. They don't care about being smart. They all kind of react the same way, which sets us up for sudden flash crash events." 

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