That Flash Crash Thing

note to readers:  Kid Dynamite is on vacation.  Through the powers of the Internet, he scheduled this post ahead of time, and will not be able to respond to comments until he returns.

Yep, it was a mere year ago that we had the now infamous Flash Crash.  I’ve written a lot about the subject, so let’s revisit some of those pieces now:

my recent piece:

Stupid Computers are Good for Smart People

“when “stupid” computers do “irrational” things in the market, that’s good for us sentient, cogent, “smart” carbon based life forms.  We make money trading in the market off of the stupidity of others (except, of course, for the problem that the Powers That Be don’t let the erroneous trades stand – that’s another issue).  Crazy algos doing crazy things in the market results in opportunities for you to make money.  Full stop. Think about it.”

Don’t Lose Faith In Markets, Lose Faith In Market Orders

“there’s really no reason why we couldn’t ban the “market” order type.  Really.  There’s no reason why anyone should ever use a market order. None.  In fact, BATS exchange automatically adjusts all incoming market orders to limit orders, where the limit is the greater of 50c or 5% of the stock price:  higher for buy orders, and lower for sell orders.  Just a little bit of built in protection. “

The Little Guy Has Nothing to Complain About

“In my opinion, the most important items for an investor are selection of products, availability of information,  ease of access, and costs of trading.   I don’t know how anyone could argue that we’re at unprecedented “bests” in all four of those categories.”

On Canceling Trades

“And the Law of Unintended Consequences rears its ugly head again.  Merkel’s point is simple and accurate:  if buyers who step in later see their trades canceled, it removes all incentive for them to step in – and then you don’t get the bounce back that we saw!  Think about how much havoc it causes a trader who astutely bought cheap stock, then sold it out at a profit.  He’s now short!  Or, he spent the entire day wondering if his order would be canceled, in a state of limbo.  What’s the alternative – that traders should just assume that the orders will get canceled, and NOT buy stock?  Guess what – if no one buys, the stock stays cheap!  SOMEONE has to buy, and that someone shouldn’t be penalized in favor of remedying the ignorance of the seller who screwed up.”

And finally, the coup de grace – Ben Lichtenstein’s amazing audio from the S&P 500 futures pit during the crash.  World class stuff.  I still get an adrenaline rush listening to this a year later.

-KD

 

 

 

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