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.”
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.
Related articles by Zemanta
- ‘Flash Crash’: SEC Investigates Big Firms’ Role In Stock Plunge (huffingtonpost.com)
- Sen. Ted Kaufman: Unusual Market Activity: the SEC and High Frequency Trading (huffingtonpost.com)
- Single-Stock Circuit Breaker Introduction Is Postponed by SEC (businessweek.com)
- Another View: Market Makers Help Halt Crashes (dealbook.blogs.nytimes.com)
- SEC Looks at Market Makers in ‘Flash Crash’ (online.wsj.com)
- Are Goldman Sachs and the Megabanks Able to Wipe out an Entire Economy with a Keystroke? (alternet.org)
- Sethi on Hirschman (stat.columbia.edu)
- Maker’s Mark launching its first new product (seattletimes.nwsource.com)