By John Kemp
ANATOMY OF A FLASH CRASH
In their report on the 2010 equity market crash, the SEC and CFTC staff found that “against a backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E-mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position”.
“This large fundamental trader chose to execute this sell program via an automated execution algorithm (“Sell Algorithm”) that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time,” the report noted. “On May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes”…………..
via When Oil Prices Drop in a ‘Flash’: Is It Real?.
Stock markets are impacted by distortions arising from high-frequency trading algorithms as this article by SUZANNE MCGEE discusses. We really need to consider the benefits versus the costs of HFT. Benefits of HFT liquidity are vastly overstated: what use is an umbrella if withdrawn at the first sign of rain? The costs are far more than the additional +/- $2.5 billion — profits from HFT trading — that institutional and private investors pay for stocks each year. By far the greatest cost is the damage done to market efficiency and to investor trust. An efficient market requires accurate communication of pricing information to market participants. My belief is that HFT distorts this function. And the only reason it is encouraged by exchanges is the huge profits they make from it.
Even if Knight’s [Knight Capital] losses are as large as $300 million, that’s a drop in the bucket when set beside the $862 billion that was temporarily wiped off the value of the U.S. stock market in 2010. High-frequency trading systems and the algorithms they use, these advocates argue, add liquidity to the market, which is a Good Thing.
Well, not really. Not it results in a major crisis of the kind we saw two years ago and a slew of smaller trading anomalies, day after day, week after week, month after month on top of that. Less than two weeks ago for instance, traders reported seeing a bizarre “sawtooth” pattern of trading in a handful of large-cap stocks, including Coca-Cola KO and Apple AAPL. Their prices swung higher and lower with an uncanny degree of synchronicity, zooming higher every hour on the half-hour, and lower once more thirty minutes later. More algorithms, traders muttered gloomily to one another.
via Electronic Trading Glitches Shake Market Confidence.