4 ms·
The near instantaneous drop of 700 points is exactly why you need market makers. In normal times, dozens of computer algorithms are posting bids to buy and off
by leelin 16y ago
The near instantaneous drop of 700 points is exactly why you need market makers. In normal times, dozens of computer algorithms are posting bids to buy and offers to sell stock, at slightly more profitable prices than what their algorithm determines is the fair value.
On the day in question, the algorithms' "oh crap" mode kicked in, the bots no longer felt they had a grasp on fair value, and decided to withdraw all their bids and offers. Now whoever was left trying to sell (like all the people with STOP orders) had to do so in an environment with very few counterparties.
The stock exchanges give these market maker bots a few special privileges in return for them providing liquidity regularly. It varies by exchange, but one example is a market maker must quote a spread of no greater than 10 cents, and provide both a bid and offer at least 99% of the time. In return, the market maker gets a special spot in line when orders come through (think of it as first dibbs on certain proposed orders).
So it sounds like we should either blame the guys who put in market stop orders, or we should blame the exchanges for not requiring more strict rules for their market makers (like 100% uptime). You can't blame the algorithms for wisely using the 1% of the time they are allowed to hide and wait for more opportune times.
- yummyfajitas 16y agoOn the day in question, the algorithms' "oh crap" mode kicked in, the bots no longer felt they had a grasp on fair value, and decided to withdraw all their bids and offers. The algorithms were not turned off because they didn't work. They algorithms were turned off because everyone knew the exchanges were going to break trades. If your smart algorithm finds the bottom at 10, buys, sells at 20, and the market goes up to 30, you just made $10, right ($20-$10)? If the exchanges break your trade at 10, you are now short the stock at $20, and the current price is $30! Unfortunately, it's impossible to predict whether the trade will be broken; it's a human making that decision. Incidentally, most high frequency traders get no special privileges. There are a few that do (the ones you describe), but they are special cases rather than the general circumstance.
- leelin 16y agoI agree with you, and in cases where the HFT bot gets no special privileges, then they are under absolutely no obligation to be there when hell is breaking loose. Why is everyone so mad at the bots for playing it safe and deciding not to trade?
- djb_hackernews 16y agoI've seen that explanation that people ended up short and deep in the hole after the trade is broken but it just doesn't make sense. Got any links where I can read more?
- yummyfajitas 16y agohttp://tinyurl.com/39ncl9n http://tinyurl.com/39ncl9n
- djb_hackernews 16y agoSo basically you have nothing to back your statements up. It appears that when the exchanges break the trade, its completely unwound, as if it never happened. Shares go back to the seller, money goes back to the buyer. No one ends up short.
- yummyfajitas 16y agoNothing you said contradicts what I said. The scenario is that you make two trades - a buy at $10 and a sell at $20. The buy is broken but the sell is not. Now it's as if you sold but the buy never happened (i.e., you sold stocks you didn't own). That's a short.