The Rise Of The New Market Makers

Should certain algorithmic trading strategies be banned? The question have been raised after the so-called “flash crash” in the U.S. stock market on May 6.  Two strategies in particular – momentum ignition and order anticipation – were explicitly mentioned as potentially destabilizing forces in the SEC’s January Concept Release on Equity Market Structure. Professor Rajiv Sethi at Columbia University, however, don’t think it’s a good idea.

“If too great a proportion of total volume is driven by strategies that try to extract information from market data, the data itself becomes less informative over time and severe disruptions can arise.”

Rajiv Sethi

In an earlier post I noted that according to the SEC’s preliminary report on the flash crash of May 6, the vast majority of executions against stub quotes of five cents or less were short sales. This, together with the fact that there was also significant “aberrant behavior” on the upside (with Sotheby’s trading for almost a hundred thousand dollars a share, for instance) led me to believe that most of this activity was caused by algorithmic trading strategies placing directional bets based on rapid responses to incoming market data.

Two strategies in particular — momentum ignition and order anticipation — were explicitly mentioned as potentially destabilizing forces in the SEC’s January Concept Release on Equity Market Structure.

The SEC invited comments on the release, and dozens of these have been posted to date.

There is one in particular, submitted by R.T. Leuchtkafer about three weeks before the crash, that I think is especially informative and analytically compelling.

Read the full post at The  Swapper.

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12 Comments

Filed under International Econnomic Politics, National Economic Politics

12 responses to “The Rise Of The New Market Makers

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    • econotwist

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  9. illness

    Hehe, don’t get me wrong, but it sounds a lot like all economists are whiny idiots.

    Buhuu, there are algorithms which outperform human traders most of the time, and create trouble sometimes. You know, much like automated factories. But those algorithms work by trading fiat money. They don’t produce Fiats.

    So they have to be evil. We have a scapegoat that isn’t human. So it’s clear what to do. We just prohibit them to protect our allmighty economists. Never ever mention, most of them were idiots (Keynes and Krugman definitly were/are). Not to mention, most of them change their mind faster than a child when offered some candy.

    Times are changing, but never for the people in power.

    • econotwist

      Don’t worry, I get you perfectly 😉
      And I agree with most of what you’re saying, except for the last remark about people in power; history shows very clear that if rulers overstep certain boundaries in relation to their own people, they will be taken down.

      Thanks for visiting !

      econotwist

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