The New York Times has written an investigative piece on Thursday's stock market freefall, Computer Trades Are Focus in Wall Street Plunge, in which they explain the potential route caused by what could have been one of the single worst days in stock market history.
Although, what they are actually reporting is unlike the initial reports that were circulated on mass media news - indicating the event was not caused by a human "fat finger" error.
After a weekend of analysis, many specialists at the major exchanges no longer believe that a single large sell trade in one stock, like that of Procter & Gamble, was the trigger, according to the people familiar with the investigation. Instead, they suspect that a mismatch in rules between the older New York Stock Exchange and younger electronic exchanges set off a frightening sequence of eventsThis event taught me, and the major firms, that a new scenario can arise from a computer takeover of the financial sector. The reality of the situation is that our trading regulations have been designed with human limits in mind, and as these limits are lifted, an overwhelming percentage of orders are completed in microseconds by automated traders.
Ever since computerized trading became dominant in the nation’s stock markets in recent years, market experts have been warning that the lack of consistent rules among exchanges and the increasing complexity and speed of computer trading systems could destabilize markets. This appears to have happened last Thursday, when stock prices plunged and the Dow Jones industrial average fell roughly 600 points in a few minutes.With a drop of 777 points on September 29 2008, what is the big deal here? The major difference here is in the rate of the fall. You can say that the plunge of 2008 was a controlled descent, while Thursday 's fall caught many trading firms looking to pull the plug on the market. Another major difference that have investors running with fear is the failure of the circuit breaker that was supposed to halt the slide.
Why "Human Halts" No Longer Work
All the markets in the world have what is called a circuit breaker, points where the market will slow down or even halt trading, in hopes of finding buyers for the massive sell-off that is causing an overall side in the market. Thursday's event showed us that with the ever increasing amount of virtual black box trading going on we need to be able to have a system wide shutdown on all trading... Not just human traders.
The Wall Street Journal reports today in an article called "
The rule, debated for years, enabled electronic upstarts like Bats Global .Markets and Direct Edge to take big chunks of market share from the major incumbents, the Nasdaq Stock Market and the New York Stock Exchange, by letting them trade even when the NYSE decides to pause.