Dow Freefall Shows We Have a Quant Problem

[Horn]

That was way too much as the Dow plunged near 1,000 points in minutes.

We have a quant problem in this market; to say we don’t is ignorance. The S&P’s and Treasuries were moving so fast it was tough to see with the human eye. These programs make the very necessary function of “market making “ obsolete.

While today may have been a market error, moving the world’s largest economy 10% in minutes is way too much. Traders can recover, but such moves have real consequences for many. Fat Finger or not, the quants trade one instrument against another at the speed of light, not based on any fundamentals, but numbers only. The big error is in the system itself, the way it’s regulated, and the way exchanges cater to algorithmic clients to the detriment of the greater market population. Electronic trading has served many well and allowed equal access to markets by many. It’s the type of electronic trading that is allowed that is a major problem. Allowing front-end software firms to have traders write these algorithmic programs that access exchange trading systems is an issue that needs to be examined, as we saw today.

That was freaky! And it could happen again, and it could have been worse!

Link (http://www.minyanville.com/businessmarkets/articles/quants-market-access-dow-1000-algorithms/5/6/2010/id/28158?camp=syndication&from=yahoo)

[Book]

The big error is in the system itself, the way it’s regulated...

http://ugandaninsomniac.files.wordpress.com/2008/05/roulette.jpg

Regulated?

:oo-->

[AOW]

Thursday, May 6, 2010
Redux from June 2009: Joe Saluzzi on HAL9000
Posted by TraderMark at 3:30 PM TweetThis

I wrote a few times in the blog I believe circa 2008 that due to the quants, we will one day have Oct 19, 1987 repeat... but instead it will happen in 15 minutes. I think today was a preview of that. When you have a market dominated by a handful of players, who control 70% of the volume ... and all basically mimic each other. Well that sings Black Swan event. About a year ago I wrote this:

I will repeat what I said last year - this might keep working for a year, 2 years, 5 - even 10. But eventually this will turn on itself and cause a another Black Swan. Just as humans are apt to do, although I expect the speed of this Black Swan event caused by HAL9000s to be extraordinary. I could see October 19, 1987 literally happening within a 10 minute time frame especially if we continue down this path and even more money goes into these strategies. But until that day, certainly incredible wealth will be created by a small subset of firms while the rest of the investing class just looks like a 1910 Model T trying to buy stocks on... fundamentals (chortle). As we now know everything in financial America is about exploiting narrow windows, even if it breeds massive instability down the road - and then have the taxpayer clean up the mess. So we're on track here.


Long time readers will know I've been using HAL9000 for years to reference the quants... the algos...the machines. No one in position of power will question the owners of HAL9000 until something very bad happens. Because said owners are among the greatest lobbyists and want thing to keep going as they are. We are in a locust society...

I want to bring over a piece from Joe Saluzzi from Jun 2009 on the blog; [Joe Saluzzi Comments on HAL9000] Joe being one of the only mainstream guys allowed on financial TV to talk about it. In a truthful manner.

A few quotes:


•Over 60% of equity volume comes from the high frequency traders (HFT). Basically, HFT’s are computers that execute trades with extremely low latency.
•Our equity market is being controlled by machines that are nothing more than two bit, SOES bandits. They cloak themselves under the mantra of liquidity providers but they are really just locusts and are feeding off the equity market until it doesn’t suit them anymore.
•what damage would they have done? We will be left with a shell of a market that is used to being led around by computers. Real people and real capital are a scarce resource in today’s market.
------------

But don't worry - you'll be assured today's festivities were all just part of "the normal market" and just a fat finger or a computer error. Remember these are a benign class of computer who are only here to "provide liquidity" and skim a little bit off the top for themselves. Just ask them.

Just remember that Russian guy who dared steal Goldman's algo code and had the full force of the FBI borne on him within days. Who knew some computer code could be so important to national security. Investigate Madoff even when handed to the SEC on a silver platter? Give us a decade or two. Goldman quant code on the other hand? Bring every government agency to bear - we must fix this in 3 days or less. Justice *will* be served.

All part of your natural "free market".




http://www.fundmymutualfund.com/2010/05/redux-from-june-2009-joe-saluzzi-on.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+FundMyMutualFund+%28Fund+my+M utual+Fund%29

[Horn]

I expect the speed of this Black Swan event caused by HAL9000s to be extraordinary.

We better be careful here, I think he's listening, let's go into the pod to talk about it.

http://www.youtube.com/watch?v=h_9cc81WFpc

[FreeEnergy]

Regulated? ::)

http://6guncasino.com/i/help/gangsters-party.png


no, MARKET was NOT moved. Here, fixed it for ya:


moving the world’s largest casino 10% in minutes is way too much.

[Horn]

As everyone searches for a culprit, the fingers are easy to point: quants, fat fingers, or whatever. Could quants have exacerbated the move? Perhaps, and time will tell. But for those out there who are quick to come to conclusions, I’d like to express some caution. Quants take on risk in one way, shape, or form, and in many markets provide liquidity on the scale never before experienced, including compressed bid/ask spreads, execution liquidity, etc. Additionally, not all quants are the same (with some programs being purely momentum driven, others going into action on extended moves and being contrarian, others placing orders on both sides of the market). Lastly, speaking to some quants around the Street, executions were problematic for everyone, so while a lucky few were able to get hit on insane bids, most faced the same liquidity and execution issues discussed on this forum, the Buzz & Banter, and others.

This is not to say that quants shouldn’t be held responsible if there was indeed some foul play. However, to blame the entire group, which is pretty loosely defined anyway, seems reactionary. A Minyanville writer earlier noted that to say we don’t have a quant problem “is ignorance.” I think to say that we have a quant problem without evidence of such is premature at best, emotional at worst.


Link (http://www.minyanville.com/businessmarkets/articles/dow-1000-stock-market-plunge-points/5/6/2010/id/28161)

[Horn]

Siding with Gold, and where that goes Silver slingshots. 8)

[Ponce]

I was very happy to part of this historical day.........if for nothing else to actually see it happening.

[Horn]

Where's Dave Thomas?

We need him to get in there and shut down Hal before black Friday arrives.

[mick silver]

today i heard this was one of the biggest drops in the history of the stock market ... could this be a test run for what could be comming