Algorithmic Trading Briefly Makes Wall Street Its B*tch

By Deane Barker on May 6, 2010

US stock plunge raises alarm on algo trading: It’s looking like an error caused the crazy drop on Wall Street today.

Some technical problem caused Proctor and Gamble stock to appear to lose 37% of its value in a matter of minutes.  Since the vast majority of trades are automated these days, a million different algorithms triggered and computers around the world started selling like crazy.

A spine-chilling slide of nearly 1,000 points in the Dow Jones Industrial Average, its biggest intraday points drop ever, led to heightened calls for a crackdown on computer-driven high-frequency trading.

[…] the follow-through selling that pushed stocks of some highly regarded companies into tailspins exacerbated concerns that regulators can quickly lose control of the markets in a world of algorithmic trading.

The WSJ reports that they saved the day by suspending electronic trading briefly and making actual, real-life humans come together to buy and sell, at which point everyone figured out something was seriously amiss.

[…] because the stock fell below a key circuit-breaker level called the “liquidity replenishment point” or LRP on NYSE, the exchange stopped its own electronic trading in the stock briefly to go into “slow” mode. Under that mode, the designated market makers on the NYSE floor are given an opportunity to come in on the other side of an order at a price they have time to think about.

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Comments

  1. I think the key word in your title is “briefly”, as you noted in the second half of your post. In the end, this caused a lot of consternation but had little or no impact on where the market closed for the day. Yes, yesterday was a bad day, but it was already a bad day before this happened. I actually think that the market closed higher yesterday than it would have if this hadn’t happened. The market had been steadily sinking all day, but after the 2:45 crash/rebound, it levelled off, and the DJIA close was actually about 60 points above the pre-crash level.

    This is exactly why the market has a whole bunch of trading curbs of different kinds. Some stop all trading, either for 30 minutes, 60 minutes, 120 minutes, or the rest of the day, depending on the severity of the drop and the time of day. Others, as we saw in this case, just slow trading down, giving people more time to evaluate what is happening. In other words, the protections worked exactly the way they were supposed to.

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