Aftermath: Don't Lose Faith in Markets - Lose Faith in Market Orders | Hacker News Reader

Aftermath: Don't Lose Faith in Markets - Lose Faith in Market Orders

fridayinvegas.blogspot.com

11 pointsmhb6 comments

"If there are crazy computer algorithms in the market doing crazy things, guess what, that makes it much easier to make money! We rational humans can outsmart algo's gone wild with ease, right?"

Wrong. I'm sure the dive in Accenture, et. al, happened so quickly that no human had time to react. Here's the graph:

http://www.google.com/finance?chdnp=1&chdd=1&chds=1&...

And I'm sure even that misrepresents to some degree the speed with which the blip happened.

That's the lesson I took away from this. Don't even think of trying to out-react a Wall Street supercomputer. If I was a day trader, I'd hang it up.

Are we going to get to see the logs for the Accenture trades on that day? I'm guessing that it was a handful of algorithmic trading systems belonging major institutional investors -- or a couple trading bots belonging to the same house! -- that got into some weird feedback loop that drove it down and then right back up.

What's interesting to note on the graph above: there's a major spike in trade volume, but it appears to come about an hour before the drop.

It's worse than even that. Because top-tier hedge funds and investment banks can afford the genuinely insane fees to put their gear as physically close to the exchange as possible they can effectively front-run everyone else including other algo systems, which in situations like this it is particularly advantageous. The nature of the inequal playing field, combined with warring algos mean there is now no real connection whatsoever between an instrument's price and reality below a certain time period. Insane doesn't begin to cover what we've created and the power it wields.

Part of me thinks the the same math geniuses that invented the credit default swap financial derivatives figured out an even better way to beat the market. All they had to do was get someone to fat finger an order for P&G.

Regardless of the truth to that theory, the article makes a great point. Does anyone know if only the NASDAQ is cancelling orders? What about the NYSE?

credit default swap is not that complex. it's just insurance against a bond default. anyone with basic arithmitic can price one.

actually, a credit default swap is not insurance at all. thats how we got into the whole sub-prime crisis of 2008.

It was the excess underpriced leverage that got us into the whole subprime crisis of 2008. CDS's are financial tools that allow buyers and sellers to expose themselves to certain risks. Whether this is used for insurance/hedge or as a bet on a certain outcome is and should be at the discretion of the buyer/seller.

Reply on news.ycombinator.com