The stock market has been having a bad week. Wednesday the market ended the day down over 300 points. I heard reports that this was the result of investors taking their profits. Happens all the time. Then within a few days, the prices on many great stocks is so low that the investors are buying the stocks right back up. Thursday, May 6th 2010 the market was again down over 300 points. This pullback was blamed on the worsening economic and political situations in Greece and the effect on the European Union.
At approximately, 2:40 PM on this same Thursday, the stock market began a free fall and plummeted over 1000 points in one hour. Is it Greece or is it a typographical error that saw Proctor and Gamble plummet within 60 seconds? Many other stocks fell dangerously low as well. There will be an investigation surrounding this time frame and adjustments might be made to the stock prices that were affected in these few minutes.
So this is what we know. No, this is what we are told, in some cases conflicting reports confounded the issues. We have no idea what was really going on. Why would a typographical error of a “B” instead of an “M” affect the stock market sending it spiraling into a deep selloff? And why did it happen near the end of the trading day?
Reported by Lucas Mearian for Computerworld, Chris Nagy, managing director of order routing strategy at TD Ameritrade, stated that they had warned the SEC regarding the effects of high-frequency trading (HFT) and the resulting damage to the stock market. Nagy continued to describe what he called “the algorithmic effect on the marketplace.” So now of course, we need to know what the algorithmic effects are that can broadly affect the entire stock market in less than one hour.
Clues to the algorithms can be found in the computerized programs designed by many different companies to use the algorithms to define trends in the market. The programs include variables such as trades of high-frequency, trades of millions or billions of dollars or possibly in every currency, as well as stock sectors such as financials, foreign markets, etc. in which the stocks themselves are weighted according to their potential impact on the economy. The stocks might be in mortgages, oil, banking, foreign countries and so on.
What occurs is that the orders are placed by the computer without human intervention being necessary. The computer uses factors such as timing, price and quantity to make the decision to trade up or down on trends forecast by the intelligent systems. Wikipedia describes the use of the algorithms for use in sell side trades versus buy side trades in high-frequency trading. “This information allows the computer to make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information that they observe……”
With all this in place is it any wonder that the market fell like a bomb plummeting to earth. But with the types of trading curbs put into place why wasn’t the free fall curbed? Trading Curbs described as circuit breakers will go into effect based on the percentage decline and the time of the day that the decline occurs. According to HL CAMP and Company, Program Trading Research, the New York Stock Exchange has determined the decline levels at 10,20, and 30 percent as well as a fall before 2:00PM, or before 2:30 PM, or between 2:30 and 4:00 PM.
These numbers correlated to the drop in the point percentage and the time describe why the curbs did not go into effect. The decline in points was ignored because the drop of 1,350 points did not occur before 2:00 pm. We were only at about an 850 point drop at that time. If it had fallen 1350 points, the market would have halted trading for 1 hour. Instead, at 2:30 the time frame changed and the new level that needed to be met was a 2700 point drop. This did not occur either so the 30 minute halt did not take place in the trading again.
Instead, according to the point levels and percentage drops determined by the DJIA, between 2:30 and 4PM there will be no halt of trading. There are no numbers that correlate to that time period and drop percentage. Although, if the Dow Jones Industrial Average (DJIA) falls to 4000 points at any point, trading would immediately be halted. Yesterday’s trading drop took place at 2:40PM, outside of the time-frame and percentage drop that would have called a halt to further trades. DJIA adjusts the point levels and the percentage levels on a quarterly basis.
I am not secure in knowing that computer error can cause chaos in our stock market. The extent of which was overturned by the increased buying signals that took place when the stock prices were so low. Even the computer recognized a good buy when they saw it. And I am sure that the buying will continue and the market will eventually return to it’s former glory. Although, there are investment risks, and stock market risks and now we have computer-generated high-frequency trading (HFT) risks to determine our trends. Be wise.
Editor’s Note: Also published here.
…
Irene A. Majchrzak helps people retire debt-free with a sense of well-being and the freedom to have the things they want. Get her free ebook, Debt Free to Retire, by going to http://debtfreetoretire.com/
Read more articles written by Irene A. Majchrzak
Related posts:
- Taking Advantage of the Stock Market
Is the market rebounding? The Dow, leveling out each week because it gets a rise in the market one day and a pullback the next day, comes from investors’ taking their profits. This will probably continue for a year or so until the really large investors such as Hedge Fund... - Buyer’s Market, Seller’s Market? A Market in Transition
With a few exceptions, most of the nation is either in transition or has already made the transition from a sellers market to a buyers market. What this means exactly is that now may be the best time in years to purchase a first home. Because inventories are increasing in... - Type of Orders In Forex Market
There are many kinds of orders which traders can place to transact in the Forex market, for making profit out of it. Market Order The market order is the most simple and common kind or order. Here, the trader buys and sells the currency at the rate prevailing in the... - How to Profit in Forex Market
Understanding expense trends of Forex is not easy at all. Businessmen often get wrong ideas and make agendas based on them and suffer losses. The following can help you understand the trends: You predict the Forex expense trends Businessmen observe a certain level and jumps on to it thinking that... - The Step-by-Step Secrets to Win In Forex Market
When 95% of traders lose money, what makes you think you can win? To see your chances of succeeding as a forex trader, here is a checklist for you to see and become one of the elite traders, who make tremendous long term profits. Following are a few ways to... - Market Penetration Pricing
A quick-entry price strategy that presumes that sales volume rise when an object is priced low which in turn reduces the overall costs is called market penetration pricing. This is a useful strategy that can be used in price sensitive markets. For example, consider the market for DVD players; this... - Expired Domain Market – Realities and Perceptions (Part I)
Expired domain market offers you several advantages and benefits of making money out of expired or expiring domain names. This business is unique in a sense that it originates from using something that is considered dead and wastage by a number of people. It is almost like a product recycling... - Marketing Tip: Connecting With Your Target Market
There are four types of people in the world… There are dog people and cat people… And, there are people who would own neither and people who own both… My wife and I have always been dog people… Our neighbor is a cat person… My wife is fond of saying... - Expired Domain Market – Realities and Perceptions (Part II)
Expired domain market can make you immensely rich when you strike it right. Many newbie traders think that this business is all about buying a domain at very cheap price and later selling it at very high prices. However, the actual reality is something else! Your domain is actually useless... - Find Your Market On The Internet
An All-Too-Common Perspective I was interviewing a new client recently and was running through the usual qualifying questions with him – the first of which was: “Can you tell me which market your products are targeting?” His response startled me. He said: “well that’s easy, it’s the Internet!” I paused,... - Home Financing in a Foreclosure-Heavy Market
In today’s housing market, foreclosures are at a high that hasn’t been seen since 1979. Seven percent, or roughly one of every 11 homes, is currently in foreclosure. According to the Mortgage Bankers’ Association, 6.35 percent of homes are in delinquency but not yet in foreclosure. The housing crisis is... - How Does the Law of Attraction Compare with Other Subliminal Programs on the Market?
As the power of positive thinking has grown there have been many which have attempted to make a profit from this incredible discovery. This has spawned a new era of “subliminal products”, which retailers then proceed to sell on the market for a ridiculous price and reap the profits. The... - Article Marketing Secret: How To Identify and Write For Your Target Market
Many people question as to what topic they should choose to write their articles… Fortunately, the short answer is simple… Write articles that appeal to your target market. But what does that mean exactly? I always pose this set of three questions, when I am talking to clients about what... - Your Good Reputation and How to Market It
To make your business grow in the right way, many things have to be taken into consideration. Marketing and advertising your products and services are the most important. Without developing and implementing intelligent brand marketing and promotional strategies, it will be impossible to see an increase in you customer base.... - Developing a 401k Strategy In The Modern Employment Market
What is the biggest pain that comes with every job search? I’m not talking about the job search itself, I’m talking about some of the typical “housekeeping” that you have to do. Is it file for unemployment? Is it refigure your budget? Is it developing a new schedule? For me,...