Citigroup may have caused 1000 point drop, probing rumor of erroneous trade

The way that bid prices and baskets and whatnot turn into financial transactions of X stocks for Y dollars on the stock exchange is deterministic and publicly known. If you can look at these data as they come into the stock exchange, and calculate it faster than the stock exchange, you can effectively see about 5-10 milliseconds into the future. Using this information, you can put in a bid yourself and insert an additional transaction with you as a middleman between two parties that would have been paired up and traded, and skim a penny per stock by narrowing the spread between the bid price and the ask price.

Since the concept relies on predicting and performing a transaction while another nearly-instant transaction is being processed, it's not possible for this to function with human intervention. Even computers aren't fast enough unless the data centers are physically located very close to the stock exchange.

Previous HN story, now paywalled: http://news.ycombinator.com/item?id=1007726

ECNs make transmitting and execution of trade orders quick and easy.

Hedge funds and proprietary trading desks (basically hedge fund-like operations within investment banks) within banks often run "black box" models that have rules built into them which determine when to send a buy or sell order down to the exchanges (some larger funds even have their computers / algos co-located at exchanges to bring down latency).

All these different firms have different models, but they surprisingly have a lot in common, especially when things are going south quickly.

When a 6 stdev event (or whatever the hell today was) occurs, all those models spit out sell orders, which push prices down more, which results in more sell orders, etc. etc. and the race is on until we get to zero OR until someone with a stomach for risk comes in and starts to buy (or some other algos come in and pick up on "value stock" opportunities). Given the last year or two we've been through, there aren't too many of them around so the effect is magnified even more.