The cause of the 'flash crash'



  • You'd think financial applications, just like any other critical applications like airplane autopilot software, medical devices, or nuclear monitoring software, would prevent stuff like this from happening by doing some fail safes and sanity checking the data. Hint: If something causes your software algorithm to automatically make a $4.1 billion trade all at once, you should consider having it go out of automatic mode and prompt a human to look at what's going on.



  • There were no mentioning of the trade beeing a mistake, so human verification might not have changed anythnig.




  • Who the hell put a computer in charge of the stock market anyway? Everyone knows that computers will go rogue unless they are frequently rebooted. The financial crisis would never have happened if those bloody robot freaks had stayed the hell out of a man's business.



  •  If I'm informed correctly, the majority of financial transactions are initiated by robots. There are several kinds of sophistication, the lowest being just barrier values being set for triggering a certain transaction, the highest being AI-like programs which autonomously invest in portfolios of their choice.



  • Now if only Adobe Flash would similarly crash...



  • @blakeyrat said:

    Now if only Adobe Flash would similarly crash...

    It does for me.



  • @tiller said:

    There were no mentioning of the trade beeing a mistake, so human verification might not have changed anythnig.


     

    It may have been what the trader said he wanted (and who is a programmer to query the choice of a professional?), but selling something for substantially less than the market value at the time you requested the trade is usually a bad deal. I'm sure Waddell & Reed have conducted their own enquiry into how a trade of this nature with no price limits fits with their investment strategy, though.



  •  Why would they care if the sell it for substantially less than market value?  They know the NYSE is going to deem it as accidental and cancel the trades.

     Now if they were to let the trades stand just once... I bet this problem would be solved in no time.



  • @RHuckster said:

    Hint: If something causes your software algorithm to automatically make a $4.1 billion trade all at once, you should consider having it go out of automatic mode and prompt a human to look at what's going on.

     

    Nice try. Unfortunately, this was part of a high frequency trading deal. The market opportunities that this algorithm was supposed to analyze might likely only exist for a few milliseconds. There is literally not enough time for a human to double-check that order if you still want to make profit.



  • @RHuckster said:

    You'd think financial applications, just like any other critical applications like airplane autopilot software, medical devices, or nuclear monitoring software, would prevent stuff like this from happening by doing some fail safes and sanity checking the data. Hint: If something causes your software algorithm to automatically make a $4.1 billion trade all at once, you should consider having it go out of automatic mode and prompt a human to look at what's going on.

    I haven't read anywhere that the software lost money on this specific trade.  Perhaps the software was designed to do exactly that in order to make the most financial gain out of a particular situation.

    Think about this:  If you can cause a selloff and be the first to sell (so you sell at the highest price), then you buy all your shares back after the crash, you win.  Even better, if it is published that this was a "computer glitch", then faith in the commodity isn't eroded and the price comes back up quicker.



  •  @Jaime said:

    Think about this:  If you can cause a selloff and be the first to sell (so you sell at the highest price), then you buy all your shares back after the crash, you win.  Even better, if it is published that this was a "computer glitch", then faith in the commodity isn't eroded and the price comes back up quicker.

    That kind of scam would be really easy to figure out and prosecute, though, wouldn't it? Even if you mark it as a "computer glitch" you would easily be able to see that the responsible parties gained greatly from that glitch and there would be possibility of a white collar minimum security resort in the future.



  • @RHuckster said:

     @Jaime said:

    Think about this:  If you can cause a selloff and be the first to sell (so you sell at the highest price), then you buy all your shares back after the crash, you win.  Even better, if it is published that this was a "computer glitch", then faith in the commodity isn't eroded and the price comes back up quicker.

    That kind of scam would be really easy to figure out and prosecute, though, wouldn't it? Even if you mark it as a "computer glitch" you would easily be able to see that the responsible parties gained greatly from that glitch and there would be possibility of a white collar minimum security resort in the future.

     

    Don't they do a system-restore-like roll back of the trades to a certain point when something like that happens, though? I seem to recall reading something about that in some contexts, at least.

    High frequency trading seems like something that's intrinsically gaming the system, though; it's hard to imagine a justification for it in terms of the market's supposed raison d'etre. At the very least, one assumes that the point of the stock market is to provide a means to interact with specific companies. High frequency trading is essentially a math game; the companies themselves are entirely arbitrary. I don't even know if high frequency trading even cares about which companies are which, or anything happening longer-term than a few minutes. I don't see how you can argue that it has anything to do with the performance of a company itself, and theoretically, isn't that the whole reason for HAVING a stock market?



  • @PeriSoft said:

    @RHuckster said:

     @Jaime said:

    Think about this:  If you can cause a selloff and be the first to sell (so you sell at the highest price), then you buy all your shares back after the crash, you win.  Even better, if it is published that this was a "computer glitch", then faith in the commodity isn't eroded and the price comes back up quicker.

    That kind of scam would be really easy to figure out and prosecute, though, wouldn't it? Even if you mark it as a "computer glitch" you would easily be able to see that the responsible parties gained greatly from that glitch and there would be possibility of a white collar minimum security resort in the future.

     

    Don't they do a system-restore-like roll back of the trades to a certain point when something like that happens, though? I seem to recall reading something about that in some contexts, at least.

    High frequency trading seems like something that's intrinsically gaming the system, though; it's hard to imagine a justification for it in terms of the market's supposed raison d'etre. At the very least, one assumes that the point of the stock market is to provide a means to interact with specific companies. High frequency trading is essentially a math game; the companies themselves are entirely arbitrary. I don't even know if high frequency trading even cares about which companies are which, or anything happening longer-term than a few minutes. I don't see how you can argue that it has anything to do with the performance of a company itself, and theoretically, isn't that the whole reason for HAVING a stock market?

    You are correct in your assumptions on the legitimate reasons for the stock markets, however such high speed trading (and "Day trading") exists in direct opposition to those assumptions.  They take advantage of the fact that such transactions can be made in order to maximize short term, individual profits with no regard for the long or short term stability of the market.  It's all about greed.



  • @PeriSoft said:


    @RHuckster said:

     @Jaime said:

    Think about this:  If you can cause a selloff and be the first to sell (so you sell at the highest price), then you buy all your shares back after the crash, you win.  Even better, if it is published that this was a "computer glitch", then faith in the commodity isn't eroded and the price comes back up quicker.

    That kind of scam would be really easy to figure out and prosecute, though, wouldn't it? Even if you mark it as a "computer glitch" you would easily be able to see that the responsible parties gained greatly from that glitch and there would be possibility of a white collar minimum security resort in the future.

     

    Don't they do a system-restore-like roll back of the trades to a certain point when something like that happens, though? I seem to recall reading something about that in some contexts, at least.

    High frequency trading seems like something that's intrinsically gaming the system, though; it's hard to imagine a justification for it in terms of the market's supposed raison d'etre. At the very least, one assumes that the point of the stock market is to provide a means to interact with specific companies. High frequency trading is essentially a math game; the companies themselves are entirely arbitrary. I don't even know if high frequency trading even cares about which companies are which, or anything happening longer-term than a few minutes. I don't see how you can argue that it has anything to do with the performance of a company itself, and theoretically, isn't that the whole reason for HAVING a stock market?

     Yes, they do roll back the trades.  I would argue that they shouldn't roll them back, however. The best way to insure that this never happens again is to have these high-frequency traders be stuck with a several billion dollar loss.  

    There's nothing more than letting them game the system when it's advantageous for them, and then cancelling the deals when they screw up and make a bad trade.

     Consider this scenario:

    • Computer sells shares for 5% below market value
    • You buy these shares
    • You sell said shares for original market value, a few minutes after the flash crashck
    • Later in the day, NYSE reverses your original trade (the buy)
    • You are now illegally short, and may take a huge loss to cover your short
     So, in short, the exchanges do "roll back," but rolling back is just a bailout for the high frequency traders.  Force them to eat the loss once, and the problem will be fixed immediately.



  • You keep referring to "the problem" as if there is only one error in one program responsible for every such incident that ever has and ever will occur. I don't think any company is going to want to leave the bugs in their software causing problems like this either way, but giving them more incentive to fix it doesn't mean this is never going to happen again.



  • @lolwtf said:

    You keep referring to "the problem" as if there is only one error in one program responsible for every such incident that ever has and ever will occur. I don't think any company is going to want to leave the bugs in their software causing problems like this either way, but giving them more incentive to fix it doesn't mean this is never going to happen again.
     

    Doesn't matter how many errors there are.  If being involved in a flash crash can cost you billions, you're going to make damn sure you don't have ANY bugs that can cause one.  At the very least, you'd have your own software shut down before the exchange has an opportunity to halt the stock.  And you seem to have missed my whole point about the collateral damage cancelling the trades can cause to completely innocent parties.  Letting the trades stand is the only fair thing to do, plain and simple.


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