Saturday, October 2, 2010
How a Trading Algorithm Went Awry
Everyone remembers the infamous glitch of 6th May when the whole stock market tanked for 20 minutes and no one knew what was going on. It was later found out that a technical error from the part of Waddell and Reed- a mid size financial and asset management firm, caused the chaos. There were few lucky investors who made use of the opportunity but there were many who thought that this was a repeat of the 2008 crash. So is the US stock market as technologically advanced as it seems to be? Does it still need certain regulations to prevent these events from happening? Thoughts?
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3 comments:
If a small glitch or technical error can possibly cause our stock market to crash, then that is troubling. But, it seems like 'cooler heads prevailed' in this instance and nothing went enormously wrong. This article brings to mind the real power that speculators have in our economy... if they are convinced that things are going well or poorly, they can really change the economy. It brings a perception concept into our studies that is hard to quantify but very important.
Quite frankly, the way stock market trading is done nowadays is scary. High-frequency trading makes up about 70% of all equity trading in the current market. Computers with complicated algorithms decide to buy or sell and they were a direct cause of the May 6th fiasco. I think it would benefit the stability of equity markets to decrease the amount of high-frequency trading.
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