Thursday, May 6, 2010

The Complexities of Computerized Stock Trading: We Told You So

Life gives you very few chances to say "we told you so." So you take the opportunities you get. It appears that today's abrupt 998 intraday point plunge in the Dow (which partially recovered to close down 347) was the result of computerized stock trading programs selling so fast they tripped over each other, and then interpreted the resulting mess as a signal to sell more. Things snowballed. See the explanation from the New York Stock Exchange.

This is a problem we predicted last fall. Nothing's been done since then, by the exchanges and other markets, big banks and other securities firms, FINRA, or the SEC. The NYSE announced it will cancel trades that were more than 60% above or below the 2:40 p.m. Eastern Time price. It appears that if you make a truly big mistake in the stock markets, you get a second chance. And when you buy stocks at a really cheap price, you can be punished for being astute. When computer programs are inadequate to spot a pile of dog doo on the sidewalk and rush to buy it, they (and the well-capitalized hedge funds and broker-dealers that use them) shouldn't be let off the hook. Make them pay the price of their mistakes and they'll fix their computer programs. Give them a bailout, and what incentive would they have to prevent this from happening in the future?

Too bad all those millions of folks whose 401(k) accounts got clobbered in 2008 didn't get a second chance.

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