When Markets Go Awry: The Need for Humans


Last Thursday’s short lived intraday 1000+ point market dive and subsequent recovery, a “Flash Crash”,  raises some big questions on the stability and quality of our electronic market system.

The new age of technology and computers was heralded on Wall Street with the computerization of the market exchanges. Conversely, the NYSE was seen as being antiquated with their manually managed open call system where a human market maker determined the prices of the bid and ask of stocks.

Yet, the May 6 debacle showed that we may have gone too far too fast. The 20 minute cliff dive seen is still being investigated as to what caused it. So far it is believed to have been triggered by a CitiBank trader who mistakenly executed a billion dollar sale over the intended million dollar execution. This allegedly triggered a chain reaction among all the automated trading systems who read the market activity as a big sale trigger.

Now CitiBank is denying that they had anything to do with it, and the other problems that occurred certainly can’t be blamed on them. For all we know, someone could have hacked into the system like in the movie WarGames and played “Stock Market Crash” instead of Global Thermal Nuclear War.

The market dive was interesting in that it was done on low volume- not a big volume dump that would truly indicate widespread panic selling. Other big problems was stocks were being mispriced at either pennies or over a hundred thousand dollars. Regardless of what triggered it, there was a definite error in the system as the markets went haywire.

There was one market that didn’t go haywire – it was the believed “antiquated” NYSE who still has humans setting the market prices for their stocks. They saw the aberrant pricing and decided to slow down the trading action while the they checked the validity of the stock prices. The meant that trades were not being executed instantly, but had a delay of 30 seconds or so. The other electronic markets traded past the NYSE and ran with the given prices. This resulted in the NYSE being the only market that was still open during that time that maintained sanity in their stock pricing. They were also the first to decide to cancel any automated orders that were part of NYSE (ARCA) that happened with the erroneous pricing.

The news may be playing it down, but what happened that day was a SERIOUS malfunction of the US automated trading market, and could have had grave consequences on the worlds economies. During that time, it looked like the market was on its way to completely collapsing, and any one witnessing that would be inspired to sell and keep selling. There were also stop loss orders that would have been triggered taking people out of their positions at the lows of the day. This unfortunately adds more tarnish to the US financial system, which already has a black eye from the dubious actions of the major investment banks which are being blamed as the primary cause of the current Great Recession. If our market stability comes into question, it would gravely impact international money coming into America, not to mention our own security and peace of mind.

Canceling all the trades that occurred with crazy pricing was the right thing to do, as this wasn’t triggered by real world events, but an error in the system. If the trades were allowed to stand, that would mean that people would have lost and made money based on a computer error which would seriously undermine the security and safety of our markets. It would be like a bank making an error with their accounts giving some people more money and taking away money from others, and then saying it was going to let those errors stand. That bank wouldn’t be in business much longer if they went that route.

It also shows you the limitations of our current computer technology. Without a human mind in the system to evaluate the validity of the trade during volatile times, the market was more than willing to trade at whatever prices it received. With the myriad of worldwide financial news being taken into consideration, there are just too many factors to consider to think a computer can be programmed to take all of these into account and come up with a sound judgment – our technology is no where close to that.

You can be sure that more regulations are on the way to bring more stability to the markets, which is a good thing. An error like the one we experienced will most likely be triggered again on perhaps an even bigger scale unless proper checks are put into place. The current checks are not enough- the first built in market slow down is only triggered at a 10% intraday market drop. We were close to that, but didn’t hit that number. Perhaps that number should be reduced to a lower number like 5% or 7%. Our current checks are now only meant to slow down a falling market, so there is nothing stopping the market from being bid up to the moon in one day with no forced time outs- this doesn’t sound very safe either.

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