Monday, July 8, 2013

You Better Trade, Baby, Trade, Faster Than My Server

Do you remember the 'flash crash' back in 2010? On May 6, the Dow Jones, for seemingly inexplicable reasons, suddenly went down about 1,000 points and recovered those losses about 20 minutes later. The market took a huge hit in credibility. People knew that the market could go down that far in a couple days. They weren't ready, or willing, to accept that it could happen in minutes or even seconds. When the inevitable investigation concluded, it found that the cause of the crash was an algorithmic trade, specifically a trade made by mutual-fund group Waddell and Reed unloading $4.1 billion in e-mini futures.

Algorithmic trading is, quite simply, when the computers do the trading with pre-programmed trading instructions. Computers do trading really really quickly. How quickly? A single share of stock can change hands hundreds of times per second. Places known as high-frequency trading firms specialize in this, and in so doing have taken criticism for undermining market stability. When Waddell and Reed made their trade, it triggered other trading orders throughout the market, the wave took place almost instantaneously, and it got so bad the New York Stock Exchange temporarily halted trading to figure out what the hell was going on.

Knowing this, one thing that has particularly rankled observers is that the high-frequency firms, who can make, again, hundreds of trades of a single share of stock per second, have been getting the results of consumer surveys two seconds prior to the rest of the market, as reported in March by the Wall Street Journal. Thomson Reuters, who provides this data, has been made to understand by the office of the New York Attorney General how spectacularly bad of an idea this is, and will stop doing it while a probe is opened.

So now all you have to do is beat the computer that can trade at bewildering speeds in a straight race, as opposed to starting out behind it.

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