According to one article I found (link here) there are at least 8 different possible explanations for yesterday’s mayhem. They are:
- A Bad Trade
- A Computer Glitch
- Cascading Stop Losses
- Hackers
- Cyberterrorism
- Fear of the European Debt Crisis Spreading
- Stop Hunting in the Forex
- A Real Panic
In reality, of the eight 8 scenarios given above, more than likely it was a combination of two or more. For example, we all know that there is a real panic over the European Debt Crisis, which makes the markets vulnerable and highly reactive to any number of things. That statement alone sums up all 8 in one broad stroke. However, you may notice, among the scenarios floated above 5 of them have to do with computers. That is no major insight considering that our entire modern society is built upon, and interwoven together, through an electronic infrastructure allowing for the transfer of information at lightning speeds. And, in terms of milliseconds (or, more specifically, 480 seconds or 8 minutes) this painfully translates into the Dow losing 125 points a minute.
“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,” said James Angel, a professor of finance at the McDonough School of Business at Georgetown University. (link here)
So, let’s get down to the nuts and bolts. Our current exchanges have evolved to a point where they are highly dependent upon electronic trading. Due to this fact and the most recent drop, a debate has developed between the operators of NYSE and NASDAQ (i.e. old-style trading vs. super-fast electronic trading) as to which system is better able to prevent such problems from occurring in the future. This morning on CNBC, charges were made by the CEO of NASDAQ, Bob Greifeld, regarding the operations at NYSE in precipitating yesterday’s drop. Here’s a portion of his comments as they appear here:
WAPNER: YOU ARE SAYING DEFINITIVELY THAT IT WAS NOT A PROBLEM WITH THE NASDAQ ELECTRONICS SYSTEM?
GREIFELD: NO IT DEFINITELY WAS NOT, OUR SYSTEM FUNCTIONED FLAWLESSLY. WE LOOKED AT OUR CUSTOMER ACTIVITY AND IT WAS IN THE NORMAL RANGE. WHAT WE SAW HAPPEN IN THAT NERVOUS PERIOD OF TIME WAS FUTURES ACTIVITY WAS CRESTING --
WAPNER: IN 16 MINUTES OF TIME WE SAW A TREMENDOUS SWING IN THIS MARKET.
GREIFELD: IT REALLY WAS SHOCKING WHAT HAPPENED. IN THIS NERVOUS PERIOD OF TIME WE SAW THAT THE NEW YORK STOCK EXCHANGE AND STOCKS THEY LISTED, THEY DID NOT CALL A HALT BUT THEY BASICALLY WALKED AWAY FROM THE STOCK. THAT LACK OF LIQUIDITY IN THE TRADING OF THEIR STOCKS IN SUCH AS P&G AND ACCENTURE THAT NERVOUS PERIOD OF TIME HAD A DISPROPORTIONATE AFFECT ON WHAT HAPPENED TO THE STOCK.
WAPNER: IT SOUNDS TO ME LIKE YOU ARE BLAMING THE NYSE AND THE SPECIALISTS DOWN THERE
GREIFELD: NO
Although Greifeld is reluctant to say that the NYSE is fully to blame, he does, however, make it clear that he holds NYSE responsible for having a “disproportionate affect”. On the surface, his words might appear mild but, behind the scenes, both the NASDAQ and NYSE have been in a fierce battle for some time over which system will win out. Literally, it comes down to who has the best technology in providing the most liquidity to the market. For some, this is really a difference between one millisecond or two and how much of a human element is needed to mediate the process. With NASDAQ, it is almost entirely electronic. In the case of NYSE, you still have human “specialists” on the floor directing orders, which is why Greifeld says in another interview on ABC that aside from panic over Greece, market fear, “the main listed market [i.e. NYSE] basically stepped away and [did] not answer the electronic phone calls.”
So, on the whole, what can we learn from all this? Situations like a possible debt meltdown, a collapsing currency, or any number of factors that lead to a large degree of fear in the markets will always be with us going forward; what’s important is how the various exchanges respond to the resulting volatility in such a way where billions of dollars aren’t wiped out in a matter of minutes. To do this—as the CEO of NASDAQ clearly believes—the level of human involvement needs to be minimized. Furthermore, relying upon human regulators (such as the SEC) to respond in real-time to events that may unfold within a space of seconds or minutes is also just as hopeless. In the end, given the inevitability of achieving greater rates of speed and, thus, greater interconnectedness across the globe, a fully automated electronic regulator that can work unrestrained across all markets and exchanges will provide the only solution to adequately managing liquidity flows. Maybe just for fun they’ll call it SkyNet?
Related Links:
8 Theories For Why The Stock Market Plunged Almost 1000 Points In A Matter Of Minutes On May 6th:
https://www.benzinga.com/266954/8-theories-for-why-the-stock-market-plun...
Surge of Computer Selling After Apparent Glitch Sends Stocks Plunging: https://www.nytimes.com/2010/05/07/business/economy/07trade.html
NYSE and NASDAQ Going to War Over the Glitch: https://www.businessinsider.com/nyse-and-nasdaq-going-to-war-over-the-gl...
CEO of Nasdaq: Drop Was Not a 'Terminator' Situation: https://blogs.abcnews.com/george/2010/05/ceo-of-nasdaq-drop-was-not-a-te...
Trading System May Have Dangerous Flaw: https://www.cnbc.com/id/37016611
