Sunday, October 28, 2007

N Y Stock Exchange Changes the Rules

Bloomberg reported Friday that the NYSE eliminated computer trading curbs when the market goes up or down drastically. Last December the exchange completed their conversion over to electronic trading. Then in July, they got rid of the uptick rule which prevented the shorts from piling on in a down market. The training wheels are off.

With all of the computer trading going on, things could get a bit wild. Each Mutual fund, pension plan, IRA etc, probably has a program that will instantaneously calculate and execute arbitrage positions to take advantage of the current market. What we may be looking at is an electronic financial war, your retirement fund against mine.

The computer programming used by the NYSE has been pretty well tested in an up market, but it has never really been tested in a down market. It’s a little like the housing market. No problem going up.

Suppose someone types in a sell order with too many zeros in it by mistake and hits enter. White out isn’t going to fix it. By the time someone says oops, we could have a meltdown. If the herd (seasoned money managers) panics, it’s going to be over fast (speed of light comes to mind). It’s kind of like having a party where you use dynamite sticks for birthday candles; everyone's going to remember that special occasion for all the wrong reasons.

5 comments:

Anonymous said...

please anyone reading this post, take 10 minutes of your time and go to http://financialpetition.org/ read it. if we have any hope whatsoever of getting out of a world-wide depression of biblical proportion, signing this petition is worth 10 minutes of your time.

and pass it on to your friends that are scared of what they are seeing as well. if enough people sign this we might have a chance.

just a small flicker of hope in an emmense black void.

stormsailor1981

Jim in San Marcos said...

Anon posted a link to a petition to our Congress that was drawn up by Denninger a fellow blogger.

I recommend participating in the petition. Your Congressman is no idiot, people who take time to sign petitions are people who vote.

Click here to go to his petition. Give it a vote if you can, it might just make these lawmakers stop and think about what they are doing before they do it.

FYI, Denninger is listed under "Market Ticker" in the "Links" column.

Anonymous said...

Jim,

I'm sure the system has been tested for the downside, they will have run numerous simulation of different events to see that the system has no glitches before deployment into the real world. Every software program is tested in that way, why should nyse's be any different?
Unless you are eluding that the nyse is setting the market up for a crash in order to profit the few on to[p, that I might be able to fathom.
In any case, you do make a good point about the up tick, it has caused a lot of volatility for the markets, and a crash is just that, a huge amount of volatility.

Jim in San Marcos said...

Hi Anon 3:59

Software glitches are not always so obvious. The the value the computer stores as current year, that use to be a two digit field, they had to change it to four when we hit the year 2000. If the programmer sets a field for a calculated amount to what he considers a ridiculous amount and the calculation exceeds it, you may not get an error and that could compound itself.

The other issue could be bandwith. Can the system handle a tremendous amount of traffic. How many hits does it take to knock the server off line? A router could go stupid and it might take 20 minutes to reset it.

Bandwith came to play in 1929, not enough people to answer the phones.

In 1987 it was still a bandwith problem. Discount brokers didn't have the staff to execute customer trades.

It's kind of like dropping a softball off of a second story window and having someone catch it on the ground. It's not very hard. Now visualize using a 50 pound sandbag instead, catching it is no longer an option--unless you are a computer.

LtRand said...

Anon,

Here's anotherway to imagine it, because he's specifically talking about bandwidth.

Most cities design their highways based on "projected usage". Now, they are usually right, but what happens when these "projected usage" numbers are exceeded? Traffic Jams. Imagine an entire city populace attempting to use the highways all at the same time, and that's what happens when you have a huge volume of computer generated trades based on pre-programmed "sell" or "buy" conditions. They never foresee every position attempting to trade at the same time, or even in the same day, so if it happens, you get an information jam, and that's exactly what will happen if you have too large of a movement in either direction. Now, when you get to trader mentality, an uptick is less volumous than an equal sized downtick because a large downtick incites panick.