NYT: Flood of Errant Trades IS a Black Eye for Wall Street

Old_Skeet

New York Times article is linked below for your reading on Wall Street's most recent Black Eye.

http://www.nytimes.com/2012/08/02/business/unusual-volume-roils-early-trading-in-some-stocks.html?partner=rss&emc=rss

Seems the more this happens ... the smaller investor seems to be driven more and more away from the stock market and with this comes less demand for stocks. To me, it seems there are now less investors who want to hold stock assets for an extended period of time and there seems to have become more investors that want to turn there holings over more frequently. It also seems capital formation in the market is hard to come by these days as it keeps getting nibbled away by the high frequency traders. Fewer investors seem to want to hold assets ... just let them pass trough our hands ... make a few bucks off them ... and, move on. With this, it is harder to have capital formation form my thoughts.

Perhaps one day the regulators will do something about this and capital formation will return to the markets as investors return. I have more and more friends that say to me they are done with the markets and don't have a great deal of trust in them any longer and feel a select few are allowed to profit at the expense of others. I guess they are saying the game seems to rigged against them. Perhaps, it is. Oh where ... Oh where ... Oh where ... has capital formation gone?

Have a good day ... and, "Good Investing."

Skeeter
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An apology to Old_Joe,

Hi Old_Joe,

I looked before I linked the article up; but, I failed to see you had already made post of the same article.

I was in now way seeking to steal your thunder.

Please accept my apology.

Sincerely,
Skeeter

scott

I couldn't agree more - this will just result in yet another portion of the investing audience leaving and it will result in less capital formation. I understand trading, but the almost ADD-level time frame of many investments these days is nothing but a negative.

However, I do think this is potentially interesting:

"As the third chart below shows what the algo did with furious repetition and steadfast consistency was to buy at the offer, and sell at the bid, in other words buy high and sell low. Over and over and over and over. As Nanex laconically notes, "In the case of EXC, that means losing about 15 cents on every pair of trades. Do that 40 times a second, 2400 times a minute, and you now have a system that's very efficient at burning money." Which also means that by not DK'ing several hundred million prints, the NYSE may have just thrown Knight under the bus, because the market maker is suddenly on the hook for tens if not hundreds of millions in inverse market making profits."

http://www.zerohedge.com/news/what-happens-when-hft-algo-goes-totally-berserk-and-serves-knight-capital-bill

msf

As a long term investor, I still view this as noise, just as I view commissions, bid/ask spreads, etc. as noise. These are very important, if not critical factors for traders (human but especially electronic). But for me, if I get nice growth over several years, the jiggles in the price, whether because of normal volatility or HFT, look insignificant.

That's not to say that a huge rogue swing wouldn't have a significant impact, but like yesterday's event they are rare, and in some cases can be unwound.

One of life's little ironies: Knight Elects to Go Self-Clearing, 2010.

Knight ... recently began self-clearing a small percentage of its trades. ... [T]he move is expected to be completed over the next year or so.

Industry observers say that self-clearing makes greater sense today, with memories fresh of the market meltdown and fears of counterparty risk. However, ... the move is not without its risks. That's because Knight is going to keep all of the clearing functions in-house, which can be daunting .... Others going the self-clearing route have outsourced technology to providers such as ADP or Thomson Financial.

So a company taking actions possibly motivated by an interest in reducing risk goes and takes on additional risk by doing its own software. And in doing so it creates the very problem it was supposedly acting to avoid. (And as the NYTimes notes, it had also just days before criticized others for their software problems.)

scott

Reply to @msf: I suppose my concern is what happens when vastly more money is sloshing around via similar computerized trading, to the point where that money starts to view things like "long-term" investors as "quaint" and "noise" because it's their actions that move markets.

Whether or not you think they are "noise", their actions are having an impact on everyone else and general investor confidence. Given that these issues are really not being addressed, it's really only a matter of time before a more serious "HAL 9000" event occurs.

Final Berserk Algo Bill To Knight - $440 Million; Stock Implodes (down nearly another 60% in pre-market.)

http://www.zerohedge.com/news/knight-faces-440mm-loss

Old_Joe

If I was a certain other grumpy older poster I'd be demanding to know why the lot of you completely ignored this identical post-subject about six items down the MFO page, and rapping your collective knuckles for not carefully perusing the entire MFO to ensure that this sort of reprehensible conduct doesn't occur again.

Being a different older grumpy person however I'll just note that I thought that this article was quite interesting, and I'm glad that you-all finally noticed it. Also, I thought it very interesting that the story appears to have been given quite a play in the NY Times, but no mention, in the internet headlines at least, from Reuters or Bloomberg. Maybe that itself is a commentary on the difference in perspective between Wall Street and the rest of us?

msf

Reply to @Old_Joe:

OJ, the reason I ignored you was simply that I hadn't looked at this board in a day and read from top down. It annoys me also when people repeat links, especially when yours (and fortunately this one) make it so clear in the subject what the link is.

With respect to Reuters, that's a general news service (that just happens to slice and dice its content into different feeds - as a professional, I've had a small amount of contact with Reuters Health). So it ought to be more like the NYTimes than like Bloomberg. Here's their take:

http://www.reuters.com/article/2012/08/02/us-knightcapital-loss-idUSBRE8710PG20120802 (Knight seeks financing after $440 million loss; shares drop) - this is in their headlines now

http://www.reuters.com/article/2012/08/01/usa-nyse-wizzard-idUSL2E8J1H6M20120801 (Knight problems send Wizzard on a wild stock trading ride)


Bloomberg:

http://www.bloomberg.com/news/2012-08-02/knight-has-all-hands-on-deck-after-440-million-bug.html - front page below the fold

http://www.bloomberg.com/news/2012-08-01/swings-in-small-cap-stocks-spur-speculation-on-computer-trading.html

fundalarm

Reply to @Old_Joe: it's all over Bloomberg and other media -- Another Grumpy Older Poster (AGOP). Knight is loosing $440mm on this 'trade error' about 4 x its 2011 net income.. if they are out, less liquidity for the market...