Unplug the Machines. II.

An article in today's Wall Street Journal online makes the situation last Thursday clear: it was a catastrophe perfectly preventable and precisely caused by excessive use of machines for trading. And it was caused by Wall Street firms and the big hedge funds. "Real" investors had nothing to do with it.

***A few quotes from the WSJ follow***

Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?

On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later.

The trade by Universa, a hedge fund advised by Nassim Taleb, author of "Black Swan: The Impact of the Highly Improbable," led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank Barclays PLC—to do their own selling to offset some of the risk, according to traders in Chicago.

Then, as the market fell, those declines are likely to have forced even more "hedging" sales, creating a tsunami of pressure that spread to nearly all parts of the market.

The tidal wave of selling fed into a market already on edge about the economy in Europe. As the selling spread, a blast of orders appears to have jarred the flow of data going into brokerage firms, such as Barclays Capital, according to people familiar with the matter.

Exchanges, in turn, were clogged by huge volumes of offers to buy and sell stocks, say traders and exchange executives. Even before some individual stocks collapsed to just a penny a share, data from the NYSE Euronext's electronic Arca exchange started to appear questionable, say traders.

...

"It did point out that there is a structural flaw," said Gus Sauter, chief investment officer at Vanguard Group. "We have to think through how you preserve the immediacy and yet preserve the liquidity."


The episode highlights a bigger question about the stock market. In recent years, the market has grown exponentially faster and more diverse. Stock trading's main venue is no longer the New York Stock Exchange but rather computer servers run by companies as far afield as Austin, Texas; Kansas City, Mo.; and Red Bank, N.J.

This diversity has made stock-trading cheaper, a plus for both institutional and individual investors. It has also made it more unruly and difficult to ensure an orderly market. Today that responsibility falls largely on a group of high-frequency traders who make up an estimated two-thirds of stock-market volume. These for-profit hedge funds look out for their own investors' interests and not those of investors in the stocks they trade.

***end of quotes***

It's simple. Whenever the market (or individual stock) moves past a precise limit, unplug the machines. Make people make the decisions. Expose orders widely to everyone and give PEOPLE time to think. In these situation, liquidity is irrelevant. Fairness matters a lot more.

If this sounds like the OLD NYSE order imbalance mechanism, then you're right. Bring it back and enforce it on ALL markets.

The market is for investors, not computer traders. They come last.

Actions

I deferred Krypto's orders as yesterday gave no good buy points. The futures are down today, to it's likely I'll buy Krypto's buys today.

Word of the Day

"Kakistocracy" - noun [$100]
Kakistocracy means government by the worst person; a form of government in which the worst persons are in power.
Sentence: Al Capone's Chicago was a 20th century example of a small kakistocracy that was not ideologically driven. But modern DC seems moving towards a venal kakistocracy where its ruling classes are interested only in their own money and power, not the good of the nation.