Friday, May 07, 2010

Sotheby's and the Flash Crash

The stock market was the talk of the town (and the virtual towns across the Internets) yesterday. According to, automated "electronic trading" was to blame for what's being called a "flash crash," in which the Dow very quickly dropped nearly 1000 points but later, mostly, recovered:
Computerized trades sent to electronic networks turned an orderly stock market decline into a rout, according to Larry Leibowitz, the chief operating officer of NYSE Euronext. Nasdaq OMX Group Inc. canceled trades in 286 securities that rose or fell 60 percent or more.

While the first half of the Dow Jones Industrial Average’s 998.5-point intraday plunge probably reflected normal trading, the selloff snowballed because of orders sent to venues with no investors willing to match them, Leibowitz said in an interview on Bloomberg Television.

“If you look at the charts you can see fairly clearly where the trades came in,” he said from New York. “It’s that V-shaped drop where it came down and snapped right back up. You had some very high-cap stocks trading down 50 percent or large percentages in a split-instant because there really was no liquidity in electronic markets.”
As Rachel Maddow (not exactly my first source for Wall Street news, which tells you how widely the chatter on this had spread) noted last night, you also had some stocks trading down 100%, meaning that during the spike downward, their stocks were trading at $0...meaning they were free. Wahoo! With no money down---in fact, with no money at all--you too can be an instant industrialist!

As Rachel Maddow also noted, though, one company's stocks took a wildly different ride. That company is one I normally pay much more attention to than the ones who dropped to zero...but I'm kind of glad I missed what happened in real time. It would have been too surreal. Rachel explained:
At the same time that some companies were becoming free...the auction house Sotheby's, which has the stock price [ed: I think she meant stock "name", no?] BID, B.I.D., get it? Bid...Sotheby' Sotheby's started the day with its shares costing 34 dollars and something. Sotheby's ended the day with its stock costing 33 dollars. It's a drop, but it's no big whoop, right? It goes between 34 and 33 dollars. Whatever. Until you notice that in the middle of the day, at one point, the stock price of Sotheby's shares went to 100,000 dollars, per share. Which means that at some point today, Sotheby's went from being a company worth 2.2 billion dollars to being a company worth 6.8 trillion dollars. Which means, for a minute, that one company had a net worth of somewhere between the size of the entire economies of the United States and China. Congratulations Sotheby's.
Of course, even had anyone with significant amount of Sotheby's stock tried to cash in on the obvious glitch, they would have been sorely disappointed.
The New York Stock Exchange said on Thursday it would cancel all trades on its all-electronic trading platform NYSE Arca that were executed between 14:40 and 15:00 ET and that were more than 60 pct away from their last print at 14:40.
Indeed Sotheby's stock's official high price yesterday was $64.00. Still a bit more than it closed at, but not enough to make you the richest person in the history of...well, the universe I suspect.

The first thing I thought of when I heard of the flash crash and the decision to cancel all the trades during those moments of insanity was the plot of the Tom Clancy novel (I told you I have this inexplicable addiction to trashy spy stories) Debt of Honor in which an evil Japanese industrialist launches an attack on the US by first sending our stock market spiraling out of control via computer. People across the financial sector, unaware that the entire thing is being manipulated to make them panic, do just that and behave in ways they wouldn't have otherwise, selling like maniacs, and making matters worse. They eventually figure out it was an attack, but what can they do after zillions of trades? The story's protagonist realizes that if you simply cancel all the sales during that time, essentially rolling back the clock, you can start afresh, without the panic influencing everyone.

None of which is to say I'm suggesting the Stock Market got hacked yesterday. (It's just eerily similar.) And I can't quite believe the "fat finger" mistake rumor either, which goes that:
A trader at Citigroup, seeking to place an order for 16 million shares in a miniature exchange that mimics the performance of the Standard & Poor's 500 index, accidentally keyed in an order for 16 billion shares of the securities.
Citi said they found no evidence to support that rumor.

No, the electronic trading gone haywire theory seems the most solid, if still highly unsettling. But not to worry, our fearless lawmakers are on the case:
The market rout triggered scrutiny from lawmakers. U.S. Representative Paul Kanjorski, a Pennsylvania Democrat, set a May 11 hearing. U.S. Senator Ted Kaufman, a Delaware Democrat, questioned whether markets that increasingly rely on computer algorithms to execute thousands of transactions in seconds triggered false trades.

“This is unacceptable,” Kanjorski, who leads a House Financial Services subcommittee that oversees the SEC, said in a statement. “We cannot allow a technological error to spook the markets and cause panic.”
Apparently we're not able to stop it. Today's market should be interesting...even if it's entirely uneventful.

Labels: politics, stock market


Blogger Iris said...

Wall street is very similar to Las Vegas, except that in LV the house always wins, and what happens in LV stays in LV. On the other hand, on Wall street the whole world economy is influenced or even dependent on the results of gambling there, plus, instead of the house running the gambling, it is being run by computer programs which are vulnerable to glitches, viruses, hacking etc, plus are too fast for any human brain to follow, which makes Wall street like Las Vegas on steroids holding a gun playing Russian Roulette, or just shooting randomly in the air, having a lot of fun, singing and dancing... Something like that...

5/07/2010 10:27:00 AM  
Blogger Iris said...

correction: not holding a gun, but an ipad, which when used with fat fingers can be as dangerous lol...

5/07/2010 10:35:00 AM  
Anonymous Anonymous said...

Wall Street = crack
How can we wean ourselves from our dependency on it?
Like Iris said, the whole world economy revolves around it. I think that is a very bad thing...

5/07/2010 11:01:00 AM  
Anonymous Gam said...

there is a quote somewhere that goes something like ...the more sophisticated a technology becomes, the less sophisticated its users must act ... the more we offload our judgment onto automated algorithms, our actions of necessity become less and less responsible.

Glad I'm of the generation that got the opportunity to drive a car and motorbike without AI assissted crash avoidance systems. But I guess the next generation will be surfing security algorithms with the same care free seat belt less abandon as I once had. The human need to overcome risk, simply being applied to another technology.

Its surmised that our current propensity for risk management (as obviously required for automated trading) has simply become a means of avoiding judgment. (Known as reputation risk management.) -Judgment being central to art appreciation; something I believe you circled around in the prior posting concerning the Picasso painting pricing, the question circles around to- what of arts future in a society where we hesitate to exercise our proper judgment?

100k per share - oy oy oy imagine

5/07/2010 12:26:00 PM  
Anonymous Anonymous said...

We have thousands of computers executing trades hundreds of times per second, on top of millions of derivatives which even in slow motion drive volatility, and you have the makings for a fast and unstable system that is prone to go off the rails at the slightest error.

As a technical professional I know when an electronic system goes unstable, and that is what we saw yesterday. And it won't be the last unless they put in a few safeties.

Over the last 2 years we have seen how this complex web is prone to systemic failure with the smallest perturbation. I hope this will add some urgency and focus to the regulatory bodies trying to figure out what to do.

5/07/2010 12:51:00 PM  
Anonymous Anonymous said...

2008 Damien Hirst auction top.
2010 Picasso auction top.

5/07/2010 01:16:00 PM  
Anonymous Gam said...

I think the electronic system needs a counter balance system which is separate from it. As an extreme example. Our vision system is actually at least two vision systems, color/focus in the macula area and luminosity/motion detection in the rods zone. Two separate systems for two (day and night) conditions.

So as an extrapolation, the automatic trading algorithm would not need anti-algorithms, but should have more of a complementary system that was based upon being optimal for different trading conditions - ie operative under panic conditions.

Heck even current voice recognition systems are a system of systems. The trading system likely should be concurrent trading systems, with each system overlapping the other. Obvious why I am not rich -huh...

5/07/2010 02:02:00 PM  
Anonymous Cedric said...

Edward should write a post on his top 10 "trashy" spy novels ever.
Suggetions to read up this summer.

Cedric C

5/07/2010 02:51:00 PM  
Blogger George said...


seeya at the opening

5/07/2010 04:04:00 PM  
Anonymous Ping said...

Iris: "plus are too fast for any human brain to follow"

They are run by us Asians. That's why our eyes look like that. We are living life in the fast lane...

I'm not sure you actually understand how it works.

5/08/2010 12:48:00 PM  
Blogger Bill Dyszel said...

Here's what I don't understand: How did Sotheby's price rise to $100K/share without a transaction? What would cause it to be quoted at that price?

It's easy to understand an execution error where a $30 stock sells for 1 cent, but in the earlier case, somebody had to bid $10 million for 100 shares of Sotheby's. That doesn't happen by accident, and it's not a trivial amount to anybody, no matter how big your portfolio.

5/08/2010 01:21:00 PM  
Blogger George said...

@Bill. Sotheby's price took out the old highs around $65 last week in a spike. (not $100k) My hunch that trade was cancelled by the exchange. The reason it occurred was that there were open buy or sell orders on the books which were taken out by the high volatility. These were market orders executed in a panic on either the long or short side of the market.

@Ed, When the rubber band of fear is streatched as far as it was on Friday it is a setup for a large countermove. The positive news from the Euro zone creates a perfect storm for a big rise today. Up 500 points?

5/10/2010 08:12:00 AM  

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