Does anyone remember the high-frequency-trading outrage that erupted last summer?
Prepare yourself for a redux.
The blame for Thursday’s Dow Jones rout has swiftly shifted from a fat-fingered Citigroup trader to the rise of the machine-trading bots.That’s right, the bots took $1,000bn off the DJIA (at one point).
Here’s the COO of NYSE Euronext speaking to Bloomberg:
May 6 (Bloomberg) — Computerized trades sent to electronic networks turned an orderly stock market decline into a rout, according to Larry Leibowitz, the chief operating officer of NYSE Euronext. Nasdaq OMX Group Inc. canceled trades in 286 securities that rose or fell 60 percent or more.
While the first half of the Dow Jones Industrial Average’s 998.5-point intraday plunge probably reflected normal trading, the selloff snowballed because of orders sent to venues with no investors willing to match them, Leibowitz said in an interview on Bloomberg Television.
“If you look at the charts you can see fairly clearly where the trades came in,” he said from New York. “It’s that V-shaped drop where it came down and snapped right back up. You had some very high-cap stocks trading down 50 percent or large percentages in a split-instant because there really was no liquidity in electronic markets.”
The Wall Street Journal is also reporting that a few high-frequency firms, including Tradebot Systems, closed for business on Thursday. Their systems are designed to pull back when trading gets too volatile.
This is something we’ve heard before – most notably in a working paper from the Fed.
That paper studied the behaviour of FX trading bots as US payrolls were released — a key datapoint for currency traders. It found that in the first minute or so after the release, computers backed away from trading. Reasons given then were that algorithms simply weren’t designed to deal with sharp moves.
Considering that the defense of HFT and algorithimic trading often centres around the provision of liquidity — often in times of severe market stress — events like Thursday’s probably won’t help endear the trading bots to many.
Speaking of which, whatever happened to the SEC’s review of HFT?
And will NYSE Euronext swiftly be revising its stance on the the practice?
Here’s a graphic for you to look at while you ponder those questions:
Related links:
NYSE Euronext says there were ‘a number of erroneous trades’ - FT Alphaville
Emergency Markets Live session transcript – FT Alphaville