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Finra Finds "Widespread Use Of High-Speed Algorithmic Trading" Was Likely Cause For Flash Crash

Tyler Durden's picture




 

Well, glad that is resolved. Now on to fixing it, which alas would mean killing a few hundred billion in annual revenue streams for the parasitic "liquidity providers" (a role they promptly abdicate when the market tends to drop just a little more than they are comfortable with; otherwise yes, the liquidity in Citi, FNM and FRE, as well as AAPL and GOOG options is phenomenal) and which also tend to double as systemic catastrophe factors. Look for many more appearances of "cash cows" on assorted status quo-defensive media venues, as they mount their last defense to preserve a way of life that does nothing to encourage investing within America's increasing skeptical of the capital markets population. From Reuters: "Regulators probing the mysterious May 6 "flash crash" in the stock market are unlikely to find a single cause, though the widespread use of high-speed algorithmic trading was in general likely behind it, the head of the Financial Industry Regulatory Authority said on Monday. "We won't stop until we finish the analysis. But I think the answer is there is unlikely to be a single cause," Finra CEO Rick Ketchum told Reuters on the sidelines of a conference here. "It is much more likely to be a proliferation of algorithmic trading that was all subject to the same triggers and didn't have the same controls."

 

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Mon, 06/07/2010 - 13:25 | 399971 schoolsout
schoolsout's picture

Ahhh, thank you for providing this tasty morsel

Mon, 06/07/2010 - 13:27 | 399976 unwashedmass
unwashedmass's picture

 

hmmmmm,,,,,

and now that they've flashtraded the market to the moon, it appears the peasantry is declining the honor of buying....

hmmmmmmmm

what to do, what to do, what to do.....

the last one holding gets the COOTIES!

Mon, 06/07/2010 - 13:35 | 399990 homersimpson
homersimpson's picture

Welp.. I guess this virtually guarantees we're more likely to see a 1000 point drop again than a 1000 point run-up..

Shorts armed and ready, sir!

http://www.youtube.com/watch?v=u19dt_-StZA&feature=related

Mon, 06/07/2010 - 13:37 | 399993 Cognitive Dissonance
Cognitive Dissonance's picture

"Look for many more appearances of "cash cows"

Um, do cash cows have horns? :>)

 

Mon, 06/07/2010 - 13:37 | 399994 knukles
knukles's picture

Well, isn't it a little late for all this, considering Apple has announced a new iPhone with an additional 100+ features, buttons, and apps? 
First things first, please. 

Mon, 06/07/2010 - 13:42 | 400015 BobPaulson
BobPaulson's picture

Love those experts who state the obvious

Mon, 06/07/2010 - 13:43 | 400017 Oh regional Indian
Oh regional Indian's picture

A little to knuckles point and more generally, technology is proving to be a real tough genie to control, now that it is firmly out of the bottle.

GOM is one facet of tech gone out of hand, Quant Jocking HFT machines is another, iPhone's meaningless sell side crap is another. War machines killing capabilities is yet another.

Very HAL. Very 1984.

Very ominous.

Of course, to play or not is a choice.

Mon, 06/07/2010 - 13:57 | 400047 LeBalance
Mon, 06/07/2010 - 14:26 | 400120 Oh regional Indian
Oh regional Indian's picture

:-)

Mon, 06/07/2010 - 14:17 | 400100 Caviar Emptor
Caviar Emptor's picture

I call Tech-Crap Over-Capacity. I always new that Moore's Law would lead here someday: the tipping point where the marginal propensity to consume available tech-crap capacity would level off thereby setting off a deflationary spiral in an economy way over-invested in lunar tech-crap expansion forever. Services in general, as a class of economic endeavor, are in way over-capacity mode relative to the propensity to consume them. 

If the 17-35 demographic goes green for real in the classic anti-tech, anti-corporate sense then the whole bubble will burst like a wad of BubbleYum on a wide-eyed face. BP's Deepwater Horizon may prove to have been the pin that burst the bubble. 

Mon, 06/07/2010 - 14:29 | 400126 Oh regional Indian
Oh regional Indian's picture

All hail the Emptor.

My sentiments exactly.

Please see my spelt out vision, the anti-done to tech as we know it

at www.squareandc.net

Rough site, but you gotta dig for gold ya know.

:-)

Mon, 06/07/2010 - 14:41 | 400152 Caviar Emptor
Caviar Emptor's picture

Nice riff, Oh. I think you're on the right track. Things tend to turn on emotional events like the painful spectacle of the everlasting oil spill which could be solved in an instant if BP (and government minions) agreed to sacrifice potential profits. As it is they're sitting on a "gold mine" that they're heavily invested in while their competition is being shut out by the drilling ban. Nice. Cozy. 

Americans may reach for the siren song of anti-globalism, anti-corporatism which of course melds with the larger socio-economic picture. They won't endorse endless overcapacity anymore. They'll rebel against the interlinked themes of technocracy, big brother, corporatism, globalization and disregard for the environment.

Mon, 06/07/2010 - 22:54 | 400882 Oh regional Indian
Oh regional Indian's picture

Precisely Cav. I hope your personal choices reflect your views.

We are a good place to start, eh? One consumer at a time.

Mon, 06/07/2010 - 13:45 | 400024 marketdick
marketdick's picture

I don't know... I think there is pretty good evidence that the sell off in one stock played a significant role in the crash.  http://bit.ly/byRKQF

Mon, 06/07/2010 - 13:57 | 400049 Cognitive Dissonance
Cognitive Dissonance's picture

It's pretty obvious the "authorities" have no interest in finding out what really happened that day. The article you highlight was very good but even the author was surprised to discover that some "interesting" information in the "official" preliminary report wasn't highlighted or that more attention wasn't focused on it.

I wonder why?

Mon, 06/07/2010 - 14:08 | 400077 Equity Research Rex
Equity Research Rex's picture

Its my understanding that many money managers were unable to excute buy orders during the crash.  So if no one can buy, then the point of the flash crash was to find where key levels of support are at.  Attempts to wash out players and find bottoms, like the one they found for ACN.

Mon, 06/07/2010 - 14:30 | 400130 Caviar Emptor
Caviar Emptor's picture

Respectfully: bunk. Market was selling off all afternoon and was accelerating. Then volume picked up across the board without a bid anywhere.

Mon, 06/07/2010 - 15:20 | 400244 Equity Research Rex
Equity Research Rex's picture

so if you are unable to bid, then would there be an issue?  would there have even been a crash?  No bidders helps root out all weak hands or at least where bottom limits are.

Mon, 06/07/2010 - 13:55 | 400042 Rider
Rider's picture

"liquidity provider" = Front running "punk-thieve"

Mon, 06/07/2010 - 14:02 | 400062 TexDenim
TexDenim's picture

"No single cause....."

Like cockroaches in a kitchen, there is rarely just one.

 

Mon, 06/07/2010 - 14:05 | 400066 firstdivision
firstdivision's picture

So they question of the day is it going to be a late day sell off or melt up?

Mon, 06/07/2010 - 14:07 | 400075 ApplesConspiracy
ApplesConspiracy's picture

In local news, water was discovered to be the cause of recent flooding.

Mon, 06/07/2010 - 14:13 | 400085 williambanzai7
williambanzai7's picture

My Daddy's a high frequency trader. He uses high speed computers to skim money off order traffic in the stock markets. He calls himself a supplemental liquidity provider which is another way of saying ticket scalper.

Mon, 06/07/2010 - 14:13 | 400087 King_of_simpletons
King_of_simpletons's picture

Madoff: "Fuck my victims" to a fellow prisoner

FINRA, SEC: "Fuck main street" 

Mon, 06/07/2010 - 14:22 | 400110 Caviar Emptor
Caviar Emptor's picture

Flash crash conspiracy theorists are missing the obvious. It was a classic crash, same as it always was. And there's always a conspiracy theory during the aftermath: speculators, short-sellers, Republicans, Maoists. There just was no bid to be found anywhere and a crush of massive selling near the top of a bloated market.

Mon, 06/07/2010 - 14:41 | 400148 if
if's picture

Agreed.  The FC was nothing more than an early warning.  The machines played their part but the markets had been running on fumes and a correction was overdue given the weak macro trend.

Mon, 06/07/2010 - 14:26 | 400119 Ted K
Ted K's picture

Beings that FINRA is a self-regulating anus sucker of the financial advisory industry (a fact Tyler forgets to mention above) I'll take any press releases or publications FINRA puts out and save them for those times when I am short on time to make a jaunt to Wal-Mart for toilet paper.  We now have FINRA policing NYSE trades, and you can guess how long that will take before the huge corruption scandal of incestuous relationships and kickbacks explodes from there, Enron--Phil Gramm style.  You can read more here.  http://www.businessweek.com/news/2010-05-04/finra-to-take-over-surveilla...

http://www.reuters.com/article/idUSLDE64305H20100504?type=marketsNews

Mon, 06/07/2010 - 14:34 | 400134 if
if's picture

Algorithmic trading is not necessarily HFT.  Almost anyone with DA can utilize algorithmic trading these days.  Unfortunately, given the disparate topology of the markets some forms of HFT will be difficult to eliminate.

Mon, 06/07/2010 - 16:04 | 400298 jkruffin
jkruffin's picture

Wonder why it takes these retards at FINRA and the SEC so long to investigate what people already know and have been saying for years?  Everyone knows it was computer trading that caused the flash crash, and they reversed the trades illegally.  If I were one of the people who had low bids in that got filled and they canceled my trades, I would file lawsuits against the brokers, GS and JPM, and the stock exchange.  It wasn't a glitch, it was the fact that all the bids disappeared because no one wanted to play the ponzi scam anymore.

Mon, 06/07/2010 - 17:55 | 400559 Ted K
Ted K's picture

The reason why the SEC is late to act (if it acts at all) is debatable.  I would argue it is due to Republicans like Phil Gramm threatening (and sometimes activating the threat) to take away SEC resources and funding whenever they actually did their job.  With FINRA the answer is incredibly obvious---FINRA is an SRO, self-regulatory organization. Self-regulation never works.  It will be only a matter of time before the relationship between the NYSE and FINRA is exposed as a incestuous relationship and scandal with kickbacks galore.  Sadly it will probably become public because of self-implosion, by making their corruption so obvious retail traders will no longer trust the NYSE, and not because the SEC or other regulators actually did their jobs. 

Mon, 06/07/2010 - 18:52 | 400576 Dr. Acula
Dr. Acula's picture

We already have a court system to remedy violations of property rights (e.g. theft, breach of contract, etc.). Profit and loss signals and the threat of court judgements should be enough regulation for anyone.

SEC and FINRA should be jettisoned - either liquidated or sold on the market where they can sink or swim based on their own ability to satisfy consumer demands. These socialist monopolies shouldn't be propped up through government subsidies. The market demand I can see is that some companies might want to advertise that they are complaint with SEC or FINRA policies and would pay for audits. Others may hire them for independent research. No one knows what clever solutions and competitors could evolve in a free market.

PS. as a last resort, the SEC could probably get paid to evaluate pornography.

 

Mon, 06/07/2010 - 17:58 | 400566 Dr. Acula
Dr. Acula's picture

I'd love to compete with flawed algos that cause crashes. These crashes are great buying opportunities for speculators who can make better judgements and who want to be rewarded for speeding the market to equilibrium.

The owners of the flawed algos should be punished with heavy losses. With enough capital losses, the owners will be put in a position where they can't hurt other people with their poor judgement.

Reversing the trades is an unjustified intervention that rewards failure. How come I can't have my trades reversed when I make a bad decision? I don't see how anyone can have confidence in these markets when the deck is clearly stacked against you.

 

Tue, 06/08/2010 - 06:40 | 401164 mephisto
mephisto's picture

If you were a market maker on that day, running HFT algos, your low sells should have been allowed, your low buys should have been cancelled.

Instant significant loss.

Instant unwanted short position -> instant short squeeze, more losses.

That's how I'd regulate.

Thu, 06/09/2011 - 16:50 | 1355649 sun1
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