Computer Trading Is Eyed | Hacker News Reader

Computer Trading Is Eyed

online.wsj.com

8 pointsjaxc15 comments

"There's no mechanism in the current system to stop an error from crushing a stock," said Dan Mathisson, head of electronic trading at Credit Suisse.

Yes there is -- the underlying value of the security. If an algorithm bug pushes a stock to 1 cent a share, someone will probably buy it. And if the share has any value, someone will probably offer 2 cents. And so on. (If nobody buys it, maybe it never really had any value.)

Someone will lose money, but they should have tested their software more carefully.

What nobody seems to mention is that the market recovered just fine after the accidental sell-off. Sure, it was a down day, but it was going to be anyway.

Up or down does not matter. "Something" makes money when the stock moves, and it moved a lot. (Everyone refers to "Someone" in the stock market. Give it up. It is "Something" now.)

Whoever figures out a way to controlledly repeat this little freefall will get insanely rich. If you knew the DJIA or ACN were going to take these dives, shorting the market for this period would have made scads of money.

It pains me to think that there are firms on Wall Street right now trying to figure out how to cause another 1000-point fluctuation and achieve the above. When so many traders make their money off of volatility, I can't help but imagine that this entire system will careen towards total collapse as the trading and the algorithms get faster and more impossible to regulate.

Or, everyone will just put their money in volatility options:

http://www.cboe.com/DelayedQuote/DQBeta.aspx?content=http%3A...

But, keep in mind that when people cause an event like this to go short, people that go long while it's happening will also make money. And, the people taking long positions will create demand for the security, raising the price. The demand will increase as the price decreases (unless the stock is actually worthless), and this has a buffering effect on whatever's causing the short.

Now, if you do 9/11 or something to make the market crash, that might work.

Someone would foil your 9/11 scheme, and then you would have to resort to playing high-stakes poker to make up your losses. Add some explosions and you might have a good movie.

    It pains me to think that there are firms on Wall
    Street right now trying to figure out how to cause
    another 1000-point fluctuation and achieve the above

What you describe is not a sustainable business model. Not any more than spreading false rumours about companies and shorting them, or insider-trading in jurisdictions where it's outlawed.

The guys at the SEC are not stupid. If the regulators had an idea that you were doing this they'd first try to find the evidence and jail you. And if they that doesn't work, they can just sit on you until they find something else - even if it's something they've dug up in an unrelated business unit in your group.

Selling insurance against massive fluctuations would be a sustainable business. You would solve the problem you created and profit both ways.

If there's a high chance of you going to jail each time you do it, that makes it non-sustainable.

Let me repeat brisance's question:

Any of the directors involved in the mortgage bust served any jail time?

Brisance's question wasn't relevant to what I'd said, or this thread, and that's why I didn't respond.

How is his question not relevant?

You claim that there is a significant risk of going to jail for "Selling insurance against massive fluctuations".

That's a bit strange because these insurances (CDS) have been sold on a massive scale over the past years and are considered to be one of the main reasons for the crash. I did not hear about anyone going to jail for it, or did I just miss that part?

No, my claim was that the following would put you in jail: (1) shorting markets and then (2) deliberately creating the sort of fluctuation we saw in the last week.

That's all I was commenting on in this thread.

(Selling "insurance" and it was wrongly labelled above wouldn't be profitable even if there weren't jail problems. The sell side loses money on a CDS when the market goes down. You'd want to buy CDSs for that eventuality, and CDSs are not insurance.)

What if there is a close to zero chance of you going to jail everytime you do it? When the government and the banks are in collusion, that's what you get.

We're talking about the stock market blip from this week. If you can demonstrate that this happened due to collusion between government and banks, please do.

That seems too naive. We all know that Wall Street are full of crooks and are colluding with the government. Any of the directors involved in the mortgage bust served any jail time?

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