The Day the Machines Broke … or Something
By Chris ClairSo I’m sitting at my desk, absent-mindedly glancing now and then at CNBC’s “Street Signs” broadcast, when the Greek police decided for some reason to move the line of people protesting austerity measures that had formed outside the Greek parliament building back a hundred yards or so. As that video played at about 2:40 p.m. ET, equity markets entered a nose dive.
At one point I was on the phone reading off the changes in the Dow Jones Industrial Average as they were shown on CNBC. In a roughly three-minute span, the Dow went from being down about 700 points to being down close to 1,000 points – 998 and change, actually. Proctor & Gamble went from trading at around $62 per share to about $48 per share, a drop of about 22%. Apple Inc. dropped from the mid-$200 per share range to below $200, also a drop of about 22%. Accenture plc was trading at about $40 before dropping to 1 cent.
Just before 3 p.m. ET, equity markets—those individual stocks and others that dropped precipitously included—appeared to quickly rebound. This led CNBC’s Jim Cramer to declare that there had been a computer glitch or software problem of some sort. By the time Maria Bartiromo and the Closing Bell show started, there was speculation that someone had made giant trading error.
It seemed to me to be clear as the market dropped like a stone before our eyes that computers were at work in some way. It reminded me of the Black Monday crash of October 19, 1987, when computerized trading programs designed to mitigate portfolio losses actually exacerbated them, causing the Dow to drop 508 points, or—wait for it—about 22%.
Meanwhile the euro tested fresh lows against the dollar, oil prices fell below $77 per barrel, gold blew through $1,200 an ounce, 2-year Treasuries got to 60 basis points and 10-year Treasuries reached about 3.25%. The CBOE’s VIX, which measures the implied volatility of the Standard & Poor’s 500 stock index, shot up from about 26 to more than 38 in about 90 minutes. Its previous 52-week high was 34.57.
After the pre-3 p.m. panic, equity markets recovered, if not stabilized. The Dow wandered between down 300 points and down 500 points for the rest of the trading day, suggesting a one of those clown punching bags with the sand in the bottom seeking to find its straight up-and-down position after taking a strong right.
About an hour after the bottom fell out, reports began appearing that a human-caused trading error at a “major firm” caused the massive sell-off, likely tripping algorithmic, high-frequency trading systems and causing them to sell automatically. Last year it was estimated that algo trading firm accounted for close to three-quarters of U.S. equity trading volume.
Is this right? I mean, what kind of system is this when a “fat-finger trade” can set off worldwide market panic and cause the broader U.S. equity markets to plunge close to 10 percent in a matter of minutes?
Regardless of what kind of error it was—human or programmatic—questions need to be raised about whether the system we have allowed to evolve is safe. Or useful.
May 7th, 2010 at 8:16 am
This was no “fat finger” error. This was HAL9000 taking over and killing everyone on the ship.
Its not man vs machine anymore. Man is irrelevent, except that Man is managing risk, and when the machine vs machine crushes a market, Man is left trying to decide if his is going to responsibly manage his risk.
However- there’s a problem- after Man is closed out of is carefully calculated investments, he can’t get back into all those positions quick enough to not feel the pain of the forced execution.
John Q Public got raped yesterday. His 401k took a beating. Far worse than necessary or caused by the genuine economic problems in the market.
HFT must be stopped. Algorithms must not be allowed to wire in and trade for themselves. Or before long- you’ll have zero long term players in this market.