Black Swan in Computer Trading? Nasdaq to Cancel Some Trades; Plunge Raises Alarm on Computerized Trading

Larry Leibowitz, the chief operating officer of NYSE Euronext says Electronic Trading to Blame for Plunge

Computerized trades sent to electronic networks turned an orderly stock market decline into a rout today, according to Larry Leibowitz, the chief operating officer of NYSE Euronext.

While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the selloff snowballed because of orders sent to venues with no investors willing to match them, Leibowitz said in an interview on Bloomberg Television.

Plunge Raises Alarm on Computerized Trading

Inquiring minds are reading Stock plunge raises alarm on algo trading

A spine-chilling slide of nearly 1,000 points in the Dow Jones Industrial Average, its biggest intraday points drop ever, led to heightened calls for a crackdown on computer-driven high-frequency trading.

The slide, which in one 10-minute stretch knocked the index down nearly 700 points, may have been triggered by a trading error. Major stock indexes eventually recovered from their 9 percent drops to close down a little more than 3 percent.

But the follow-through selling that pushed stocks of some highly regarded companies into tailspins exacerbated concerns that regulators can quickly lose control of the markets in a world of algorithmic trading.

"The potential for giant high-speed computers to generate false trades and create market chaos reared its head again today," Senator Edward Kaufman said in a statement.

"The battle of the algorithms -- not understood by nor even remotely transparent to the Securities and Exchange Commission -- simply must be carefully reviewed and placed within a meaningful regulatory framework soon."

Computers vs. Computers

In essence computers trading against computers decided at some point today to throw in the towel and not bid.

At some point (manual intervention?) they all decided to bid again, driving stock prices back up. This is what our stock market casino has become.

Lovely, isn't it?

I have been waiting for this to happen and today it did. Supposedly, computer trading lowers volatility and bid/ask spreads for traders. Today we see that works until it doesn't.

Most of the day Citigroup was erroneously blamed for the plunge. Citigroup was not to blame, flash-trading computers vs. computers with fake orders appears to be the culprit.

Who benefits from that? In general, Goldman Sachs. Perhaps I am wrong but I bet they had a great day.

Nasdaq to Cancel Trades Certain Trades

Reuters reports Nasdaq to cancel trades

Nasdaq Operations said it will cancel all trades executed between 2:40 p.m. to 3 p.m. showing a rise or fall of more than 60 percent from the last trade in that security at 2:40 p.m or immediately prior.

Nasdaq said the stocks affected and break points will be disseminated soon.

Nasdaq has set the screw-job limit at a whopping 60% threshold. If you lost 45% today with a stop loss in the wrong spot you just may be out of luck.

It's just what we need to inspire confidence.

Black Swan Event?

By the way, this was not really a "black-swan" event. This was perfectly predictable although timing it was not. I have been discussing this scenario with a few friends for months.

I have one question for the computers: Did someone manually intervene triggering your huge afternoon buy program or did you simply figure out on your own accord there were no more stops to run?

Regardless, a whole bunch of people with "far away" sell stops got taken to the cleaners today.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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