Tags: High-Speed Trading Glitch Costs Investors Billions

High-Speed Trading Glitch Costs Investors Billions

Friday, 07 May 2010 10:49 AM

The electronic glitch that caused yesterday’s market crash was the offspring of the high-speed computers that have transformed stock trading during the past 20 years, supplanting the old system of floor traders matching buyers and sellers.

“We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime,” James Angel, a professor of finance at the McDonough School of Business at Georgetown University, told The New York Times.

Yesterday’s market crash was especially shocking because hundreds of stocks — many of them blue chips that form the foundation of individual investors portfolios as well as major indexes like the Dow and the Standard & Poor’s 500-stock index — moved sharply at the same time.

Machines today process trades automatically, which speeds trading flow of buy and sell orders but also sometimes facilitates otherwise unexplained volatility of the kind that roiled markets yesterday.

Such high-frequency trading now accounts for 50 to 75 percent of daily trading volume.

At the same time, new electronic exchanges have taken over much of the volume that used to be handled by the New York Stock Exchange.

In fact, more than 60 percent of trading in stocks listed on the New York Stock Exchange takes place on separate computerized exchanges.

Many firms have computers that are programmed to automatically place buy or sell orders based on a variety of things that happen in the markets.

Some of the simplest triggers are set off when a stock drops or rises a certain percent in the trading day, or when an index moves a specific amount.

The Nasdaq Stock Market had no technology or system issues associated with the trading that occurred between 2 p.m. and 3 p.m. EDT yesterday, MarketWatch reports, and operated continuously with a successful close process.

Nasdaq will cancel all trades executed between 2:40 p.m. and 3 p.m. greater than or less than 60 percent away from the consolidated last price at 2:40 p.m. or just before.

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