Another Fine Mess

High speed trading ran amok on Thursday, May 6.  It sounds like exactly the same thing that lead to the 1987 market crash.  There never was an explanation in 1987 and there most likely will not be one now.

Why not?  Because it is not in the interest of the people who are in a position to know the answer to tell anyone.

Look, the news says that this high speed trading is 75% of the volume of trading on the exchanges. That means that it is probably close to 75% of the exchanges revenue.

Most likely, the answer is that this sort of crash has always been possible at any time of any day with computers sending in orders by the thousands per minute. The people who programmed the computers just do not have enough imagination to anticipate the possibility that no one would want to take the other side of their trade.

Of course this is much less likely if someone actually looked at what was going on, but that would eliminate 90% of that volume.  Back before we handed all of the work to computers, the floor brokers who were the market makers would take care of these situations.

The exchange, that is benefiting from all of this volume, should perhaps be responsible to take some responsibility to maintain an orderly market.  Or else someone else should.  The problem is that there needs to be someone with deep pockets and the ability to discern the difference between a temporary lack of buyers or sellers and a real market route.

Oh, that was the definition of the old market makers – perhaps we eliminated that job too soon.  But people resented paying anything to those folks during the vast majority of the time when their services were not needed.

The problem most likely is that there is not a solution that will maintain the revenue to the exchanges.   Because if you brought back the market makers and then they got paid enough to make the very high risk that they were taking worth their while, that would cut into the margins of both the exchanges and the high speed traders.

Just one more practice that is beneficial to the financial sector but destructive to the economy.  After the 1929 crash, many regular people stayed out of the markets for almost 50 years.  It seems that every year, we are learning one more way that the deck is stacked against the common man.

In poker, when you sit down at the table, it is said that you should look around and determine who is the chump at the table.  If you cannot tell, then you are the chump.

As we learn about more and more of these practices that are employed in the financial markets to extract extra returns for someone, it seems more and more likely that those of us who are not involved in those activities are the chumps.

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One Comment on “Another Fine Mess”

  1. Max Rudolph Says:

    I agree with these comments except I would modify the one about us always being the chumps. There is a herd mentality on Wall Street. No one gets fired for losing when everyone else is losing, and this gives the little guy an advantage. Since most of us are dealing with relatively small amounts of money we can “pick our spots” when we do our own analysis. It takes time, but the skill set that makes a good risk manager comes in handy!


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