Could Yesterday’s Market Disruption Been Prevented?

Two people with intimate knowledge of markets come up with ways the markets could improve in the future to reduce the likelihood of disruptions. Will anyone listen?

Yesterday’s temporary market crash has been blamed on fat fingers and/or potentially some fraudulent trades. Whatever the reason it is apparent that trading is something which is become more automated and as a result markets are swinging more and more wildly. Many of the companies in the communications and technology space in fact aid Wall Street firms to create ever-faster systems to get an edge on the next guy. It is likely that yesterday’s massive sell-off was exacerbated by systems which are highly automated and engage in algorithmic, high frequency trading.

John Najarian of explains above just how trading speeds and activity are increasing. As he says in the video above – he had to increase his firm’s bandwidth connection with a 10 Gbps circuit just this year to keep up with all the trading. Najarian explains how in golf and in car racing there are organizations which restrict the speed of golf balls and vehicles by eliminating the use of certain technologies.

Some ideas on how to solve the problem come from the BlindReason blog at Seeking Alpha which explains four ways to prevent market disruptions. One item of note is having the SEC spend more time on understanding how quants (sophisticated traders/mathematicians using programs to buy and sell based on momentum and inter-correlated factors) make money and then use this analysis to curtail any behavior which is damaging to the markets.

Obviously there need to be changes but they also need to be made with extreme caution and for once, a the government needs to do right by its citizens and not make a decision based on who spends the most lobbying dollars.

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