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The long anticipated joint SEC and CTFC report on the 6 May 2010 flash-crash came out last Friday.
much of the report and commentary around it, I'm feeling rather underwhelmed.
cause of the flash-crash, the most talked about event in the markets this year,
was a boring old "percentage-by-volume" execution algorithm used by a
mutual fund to sell stock market index futures. How banal.
itself was simple. It just took into account volume, not price, and it didn't time
orders into the market. Many commentators have pejoratively described this
algorithm as "dumb". It may be simple, but it's one of the most
common ways that orders are worked - buy or sell a certain amount of an
instrument as quickly as possible but only take a certain percentage of the
volume available so the market isn't impacted too much. The problem was the
scale. It was the third largest intra-day order in the E-mini future in the
previous 12 months - worth $4.1Bn. The two previous big orders were worked
taking into account price and time and executed over 5 hours. The flash-crash
order took only 20 minutes to execute 75,000 lots.
It wasn't this
order on its own of course. Fear in the markets created by the risk of Greece
defaulting was already causing volatility. Stub quotes (extreme value quotes
put in by market makers to fulfill their market making responsibilities) appear
to have contributed. There was the inter-linking between the futures market and
equity markets. There was the very rapid throwing around of orders - described
as the "hot potato" effect, certainly exacerbated by the many
high-frequency traders in the market. There was the lack of coordinated circuit
breakers in the many US equity markets. There was the lack of any real-time
monitoring of markets to help regulators identify issues quickly.
and algorithmic trading have been vilified in many quarters over the last
months. I think many were expecting that the flash-crash cause would be a
malignant algo, designed by geeks working in a predatory and irresponsible
hedge fund, wanting to speculate and make profits from "mom and pop"
pension funds. It just wasn't anything of the kind.
crash has raised important issues about the structure of multi-exchange
markets, the role of market makers, the lack of real-time surveillance and how a simple execution strategy could precipitate such events. I do
hope that the findings in the flash-crash report will ensure a more balanced
view on the role of high-frequency and algo trading in the future.
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