Folks, I received several responses to my angry column about the “flash crash” (its latest moniker) – some supportive, and others, such as the one here today, not. But I like a challenge, and this gentleman threw one out. Here is his thrust and my parry.
- You said: “One computer glitch and the whole system spins out of control.” Are you serious?
First of all, everyone needs to understand, I am very serious. I do not take my responsibility here lightly. I have been busted enough in my economic life to know that making and losing money is a serious business, so trust me when I tell you that I am very serious about what I write and don’t write in this column. I will grant you, however, that my use of the term “computer glitch” was not wise. Using it implied I agreed with the initial “breathless” conclusion of the wild-eyed financial media.
- There was no computer glitch. The meltdown was caused by a major fund liquidation and dumping their position in the ES which took a little while to absorb – but did.
Okay, so how do you know this when the rest of the thinking world still has not rendered a conclusion on the cause of this fiasco. Yes, there are theories, such as the one you are following in the paper you read at the CME Group website you mention below. Why is this one right? I would like to know. Even the web site you reference has this to say …
While inconclusive at this point, we believe that the stock market incident of May 6th might be traced to divergent trade practices and price protection mechanisms amongst the various stock trading venues on which domestic equities are traded and which comprise the National Market System (NMS).
I applaud the CME Group for its wise approach to it own “conclusion.”
- Imagine you wanted to short a stock. What is the first thing you need to do? Borrow it. You arrange to borrow … say 1 million shares of P&G intending to short. Once you have the ok, you can’t then go ooopsss … and short 1 Billion.
My friend, there are two problems with this statement. The first is that it is naïve to believe that computers cannot screw up an order execution. Yes, it is highly unlikely, but not impossible. Second, you seem to have missed the point of the original “fat finger” theory thrown out immediately after the flash crash – a trader made an order-execution error, not the computer.
- Get real.
Reality is a subjective thing, no doubt, but, once again, my serious approach to this column creates a reality I cannot ignore. Accuse of me of this or that, but be assured, when it comes to trading, I am about as real as it gets.
- And, by the way – we have regulations. Check out www.cme.com for the halting trading rules.
I did check out this site. The article you read cites rule 80b, which is a New York Stock Exchange rule that restricts trading for specified periods in the event the Dow Jones Industrial Average experiences one of three specified percentage declines – 10%, 20%, or 30%. The issue, my friend, is not what the NYSE did. In fact, it did follow the rule (See below.). The problem arose when other exchanges did not follow the rule.
Exchange Rules allow for a review and possible adjustment or cancellation (“busting”) of trades when necessary to mitigate disruptive market events caused by improper or erroneous use of the electronic trading system or by system defects; or, where it is determined that a trade may have a material, adverse effect on market integrity …
You see, the rule is voluntary. Implementing it, or not, is at the discretion of each exchange. This is the reason for an overarching SEC rule that requires all the exchanges to act in concert when this type of activity occurs. I would also argue we need a rule that limits or eliminates high-frequency trading, which is at the heart of this whole mess.
Trade in the day; invest in your life …
