At the end of Thursday, Wall Street breathed a little easier. The Dow Jones Industrial Average was only down 348 points. Earlier in the day the stock market had dropped a lot — 1,000 points and nearly 700 points during one panic-stricken stretch. On Friday Nasdaq canceled the trades of 296 stocks that fluctuated most. It turns out that a toxic combination of algorithmic, or high speed, trading and fearful investors may be the culprit.
High speed panic on Wall Street
Thanks to high speed trading, a Wall Street system to prevent what happened to the stock market Thursday may have actually caused it. When a stock price falls quickly, the number will trigger a “circuit-breaker” that briefly halts New York stock exchange trades with it. CNN Money.com reports that at about 2:45 p.m. on Wall Street, shares of Procter and Gamble fell 10 percent. The circuit-breaker stopped NYSE trading on it for 80 seconds. The stock was in high speed play on other exchanges in the meantime.
How does high-speed trading work?
Down about 400 points, the NYSE took a breather on P and G, Accenture, Boston Beer Co. and others. There were investors in the meantime that were afraid the Greek debt crisis would need them in need of faxless payday loans and were trying desperately to sell them. How does high-speed trading work? There are automatic programs in some people’s computers that began issuing tiny orders every millisecond. The computers found no offers to buy for the stocks that hit the NYSE circuit breaker. High speed trading ended up seeing the bid at $ 0. The high-speed trading computers, with greed in mind, are designed to add a penny to each trade to make a commission on every deal. The high-speed trading software placed millions of bets at 1 cent. A massive sell off was triggered by stocks that were traded all the way down.
High speed trading rules?
After the panic on Wall Street Thursday, people are calling for a crackdown on high speed trading. Reuters reports that the massive sell-off that pushed the stock of highly regarded companies into a tailspin highlighted concerns that regulators can lose control of the markets easily in the world of high speed trading. Democratic senators Edward Kaufman and Mark Warner said Congress needs to investigate the causes of the market plunge, which at its deepest point wiped nearly $ 1 trillion off equity values.
What is this high speed trading?
On Wall Street, high speed trading has caused average daily volume on the Stock Market to explode. The New York Times reports that there are powerful computers that enable high-speed traders to transmit millions of orders at lightning speed and reap billions at everyone else’s expense. Stock exchanges say that high speed traders are more than half of all trades that are done. What is high speed trading really? They are computers that outsmart man, investors, and other machines. It also appears they can outsmart and outrun themselves.
Resources for the article
CNN Money.com
http://money.cnn.com/2010/05/07/markets/explaining_wall_street_turmoil/?npt=NP1
Reuters reports
http://www.reuters.com/article/idUSTRE6455ZG20100506?loomia_ow=t0:s0:a49:g43:r2:c0.099358:b33744350:z0
New York times reports
http://www.nytimes.com/2009/07/24/business/24trading.html
Leave a Reply