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Consider the true implications of the idea that an algorithm "set off" the market crash: - Traders were happily trading along at a market price they all had tr

Consider the true implications of the idea that an algorithm "set off" the market crash: - Traders were happily trading along at a market price they all had tremendous confidence in. - An algorithm decides to liquidate some shares, causing the market price to dip a bit b/c of extra supply. - Said traders immediately lose all confidence in the market price they'd been happily trading along at all day and start dumping their own shares. Conclusions: If the traders were confident in the initial market price (i.e, if they were "right" then they should have started buying when the price started dipping. This would have held the price up. That they didn't reveals a lot about their own strategies. If the fact that the order placed by the algoritm is "to blame" implies that a human wouldn't have placed that order. It sounds to me that the algorithm simply wanted to liquidate and wouldn't have placed such a large market order if it were overly concerned about getting top dollar for every share. This happens with human traders all the time. The bigger the order the more it will move the market. There are large trade desks that help minimize this but they take a big spread for the service. So ironically it was the algorithm that had a principled, deep view of the market and the human traders who were fickle and skittish... exactly the opposite of the typical impression of each. It's like if Kasparov were playing against Deep Blue and Deep Blue sacrificed a pawn and Kasparov knocked over the board.

DannoHung 16y ago
This discounts the other algorithms that don't think about price confidence and are only reactionary.
- grandalf 16y ago
  True... but as we have seen humans too can be overly reactionary.
chipsy 16y ago
Not necessarily. That hypothesis rests on the basis that the market is still majority human-traded. Quote the article: High frequency traders, devoid of any real demand from buyers of the futures contract, began to quickly buy and resell contracts "generating a 'hot-potato,'" the report said. So this is algorithms-against-algorithms. I would wager that in intraday trading, human minds play a relatively small role, because mechanical methods break through the emotional barriers that plague pure discretionary trading. Most good daytraders will develop a signal system to guide them, even if individual trades use manual entries and exits.
- grandalf 16y ago
  My understanding is that many algorithms float "test trades" to probe the other market participants (human and machine). It would be very costly for the algorithms to risk too much money on probing at an inaccurate price, so chances are the "hot potato" was not very deep at all. Nonetheless, your point stands that it could be an artifact of the traders expecting human-like decisions to underly the phenomena they saw. (it does seem implausible to me, but oh well)

DannoHung 16y ago

This discounts the other algorithms that don't think about price confidence and are only reactionary.

grandalf 16y ago
True... but as we have seen humans too can be overly reactionary.

chipsy 16y ago

Not necessarily. That hypothesis rests on the basis that the market is still majority human-traded. Quote the article: High frequency traders, devoid of any real demand from buyers of the futures contract, began to quickly buy and resell contracts "generating a 'hot-potato,'" the report said. So this is algorithms-against-algorithms. I would wager that in intraday trading, human minds play a relatively small role, because mechanical methods break through the emotional barriers that plague pure discretionary trading. Most good daytraders will develop a signal system to guide them, even if individual trades use manual entries and exits.

grandalf 16y ago
My understanding is that many algorithms float "test trades" to probe the other market participants (human and machine). It would be very costly for the algorithms to risk too much money on probing at an inaccurate price, so chances are the "hot potato" was not very deep at all. Nonetheless, your point stands that it could be an artifact of the traders expecting human-like decisions to underly the phenomena they saw. (it does seem implausible to me, but oh well)