I was reading a blog post today, this one at the Points and Figures blog:
Investors Flee Market
The article’s opening sentence reads:
Why are investors fleeing the market?
The article then quickly covers some of the current fears, Japan, China, Europe, US government action/inaction … but it quickly mentions these in order to move on to hit the nail on the head, what seems to me to be the real problem with US stock markets, the problems that manifested themselves with the Flash Crash of May 6.
Read the article, and the linked WSJ article. In fact, read and find out as much as you can about the Flash Crash, about algorithmic trading, and about HFT trading (and whatever other names this automated trading goes by).
Let me make this perfectly clear – I have NO PROBLEM at all with automated trading, whatever name it goes under. There are always going to be traders using technology better than yours, that responds faster than you do … this is the way of the world, things get better, innovations happen … we have to adjust, adapt … and compete (by getting smarter if need be).
BUT, there are three things I would change if it were up to me (there are probably more, but these are all I can think of for now):
1. Make HFT/algos/auto/whatever you want to call it, comply with the law. Specifically, what I am thinking of is make price changes (changing bids and offers etc.) be in response to wanting to adjust orders. Enforce regulations that disallow the input and canceling of orders intended to ‘manipulate’ a market. Some of these algos change their bids and/or offers 15,000 times a second.
Read that again … Some of these algos change their bids and/or offers 15,000 times a second.
Now, 15,000 changes per second is not in response to changing intentions to trade (please try to convince me otherwise). This is quote stuffing, and it seems the intent is to overwhelm competing bots (can provide links if anyone interested, or just look up Nanex on Google and check out their report of the Flash Crash.
2. If one exchange suspends trading in a stock, better make sure other exchanges do so too. Seriously, what is the point of a suspension of trade in a stock if your order is automatically rerouted to an exchange where trading in it continues? More to say on this, but not now.
3. The big one. THE most important change that needs to be done to instill confidence back into the US stock market. Get rid of ‘Flash Orders’. If you don’t know what these are, research it; in brief, when you are trading a US stock and you want to buy or sell ‘at market’, and you instruct your broker to do so (usually via an automated process through your interface with the broker computer on your home PC via the internet) your ‘at market’ order is first shown to other brokers before it goes to the exchange. I am trying to keep cuss words off my posts to my blog, but this issue of flash orders … how can I type without cuss words appearing on this issue? Arrggghhh …. My vocabulary is not sufficient to communicate my seething anger at this unfair, pernicious practice. That will have to do.
Now, I am a trader of futures on the CME (specifically the ES contract), so I have no personal issue with flash orders – I don’t trade US stocks so they don’t affect me. So no personal axe to grind here.
But why would anyone trade a market where your private orders are flashed out for all the world (at least their brokers) to see before going into the market? Time to get rid of flash orders.
My no. 1 model is calling for sideways now after the fall of the past few days.
My no. 2 model is not saying anything, but will need updating just prior to cash open (9.30 am NY time).
On the basis of these results (and assuming no change due to the pre-open update, which is probably a safe assumption) it will be a day to trade both sides of the market (long and short) without bias. With the recent down moves, though, if I do have a slight bias it will be to hold shorts longer than longs.