Friday, May 7, 2010

The problem with the sell off is no one can tell us what happened

Every trade is captured. It all goes through computers. Its all logged, and all of the data is available for analysis. So my question is, why is it, a day after the massive sell-off, that no one can tell us anything more than vague speculation about what actually happend.

I know nothing about trading systems. But what I do know is that if all the information is not there to tell us what happened, it should be. Is this a regulatory problem, or a software problem, or something else?

Amazingly, as stocks were diving downward, willing buyers were locked out of purchasing. Obviously if sellers can sell but buyers can't buy, you have a problem. There has to be some explanation, and I can't imagine why it would take days, or even hours to figure out how a $50 stock could get to a price of $0 with no one able to purchase as that price is dropping.

So I am not a wall street guy. I am a software guy.  But honestly, this sounds to me like a software problem. Based on my 10,000 foot view, it seems obvious to me that if the wall street guys aren't running systems that can't provide quick answers to these questions, we have a serious problem. For months we have been talking about the impact of things like greed, too big to fail, and systemic risk on main street. But given what happened yesterday, I think we need to add something critical and new to that list: incompetence.

6 comments:

  1. they may know but not tell!

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  2. My understanding is that people *did* buy it up. Only they weren't people, they were HFT algorithms. So people were seeing the "latest buy price" of $0.01 way after it had bounced back up to within $2 of its original price or what have you.

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  3. i remeber a pretty similar parabolic event around march or april of 2000, a few weeks after NASDAQ 5,100

    even algorithms, or the firms running them will step aside when volatility is too great - maybe your code acts a traditional market maker adding to liquidity and working fraction-of-a-penny spreads. cathching a knife is hard enough for a human, i can totaly see how bidders just went on hiatus for a bit

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  4. it appears Carmen is right. Algos step back when volatility thresholds are hit and the latest news suggests it was a "genuine" hedge that drove the market down. Blaming the the algos or fat fingers or speculators is like blamibg the last truck that crossed the bridge before it collapsed. It's a structural problem!

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  5. So you want to capture intent? We know what stocks were sold when, to whom, for what price. What we don't know is why they were sold, nor why they were bought. It seems completely unreasonable to expect that this information to be captured, nor does it seem even remotely possible to do so even if we created the law demanding that we do so.

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  6. > Obviously if sellers can sell but buyers can't buy, you have a problem.

    To whom are they selling then? For every trade, there is a buyer and a seller.

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