Sunday 2012-12-16

The Speed Traders by Edgar Perez

Perez included a several extended timelines, which serve as a rough introduction to the material, since it introduces a bunch of the players (by no means a complete list).

Lehtis thinks that fear of high-frequency trading derives from ignorance.
-- The Real Story Behind the 'Flash Crash'

lol. All fear derives from ignorance. Quick thought experiment: Say you are afraid of tigers. Enumerate all tigers on the planet and their locations. Find out how fast a tiger can possibly move. Find out what kills tigers. Are you still afraid of tigers? Only when you go close enough to them that they can pounce before you can summon a force capable of killing them.

Wow! Who puts in a $4.1 billion order without a limit price? The trader at Waddell & Reed showed historic incompetence. However, on May 6, when markets were already under stress, the sell algorithm chosen by the large trader and set to target only trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes. The execution of this sell program resulted in the largest net change in daily position of any trader in E-Minis since the beginning of the year.

This was a human mistake. The trader easily could have put a price limit on the order but recklessly chose not to. The sell algorithm performed exactly as it was designed. It angers me when people blame technology for what are clearly lapses in human judgment.

Now that the regulators know what happened, what are they going to do? Is there any penalty for massively disrupting the market? Are we going to let people throw around billion-dollar orders with no understanding of market impact? After the "flash crash" but before the CFTC/SEC report came out, Waddell executives were unloading stock in their company. Maybe these brilliant market timers expect things to get worse.

-- David Cummings (Tradebot and BATS), The Real Story Behind the 'Flash Crash'