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To protect against an unexpected market crash, traders have stop-loss orders that can be executed automatically if the market starts to tank. Trader 1 puts i
by fredmg 16y ago
To protect against an unexpected market crash, traders have stop-loss orders that can be executed automatically if the market starts to tank.
Trader 1 puts in a order to sell everything if the market goes down by 4% in 1 hour.
Trader 2 knows that and wants to get out of the market before trader 1 does in a crash, so he puts in a order to sell everything if the market goes down by 3.9% in 1 hour.
Trader 3, Trader 4, etc. continue this process.
Then you have a day like yesterday when the market goes down by 2 percent and there is a lot of uncertainty about Europe, causing more people to put in stop-loss orders. The one automatic order triggers hundreds more.
Now they are going to rollback some of these trades because it was an "Trading Error". When Investors on Wall St. have trades that make money it is because of their skill and they get bonuses. But when their own stop-loss program sells for a 70% loss they get a do over.
- rbanffy 16y ago> But when their own stop-loss program sells for a 70% loss they get a do over. There has to be a mechanism to undo cascade mistakes because, if someone figures out a way (and that's rather easy) to induce mistakes and to profit from them, it will shortly become the prevalent form of trading. We want exchanges to foster investment on productive companies.
- e40 16y agoI was about to agree with the GPP, but you have a really good point. This would be the sort of loophole that would be exploited.
- khafra 16y agoIt's a market for intangibles; over the short term it's zero-sum. The only way to profit is to induce mistakes; to get someone on the other side of a trade that's profitable to you and damaging to them. If algorithmic trading causes vulnerability to mistakes, they need to revise their algorithms or factor in the risk of this type of loss; that's the way free markets work. The externalities of a sudden crash suck, but other than as a one-time emergency measure, rolling back all the trades isn't a good solution. Wall Street firms should've learned something since 1987.
- rbanffy 16y agoThis is the normal operation. The "undo" key is not supposed to be used unless something abnormal happens.
- ams6110 16y agoMy guess is that the algorithms are already being adjusted. My fear is that a bunch of politicians who are as clueless as most everyone else are going to try use this as yet another opportunity to grab the spotlight. Expect congressional hearings.
- codexon 16y agoif someone figures out a way (and that's rather easy) to induce mistakes and to profit from them, it will shortly become the prevalent form of trading That sounds contrary to what Goldman Sachs is saying why they shouldn't be sued. They are using the "big boys" defense. http://www.cbsnews.com/stories/2010/04/21/politics/washingtonpost/main6417643.shtml http://www.cbsnews.com/stories/2010/04/21/politics/washingto...
- rbanffy 16y agoNobody sane would trust them to write the rules on which the market operates.