Dow madness

Not a day for protective stops.  Yeesh….  Been listening to a lot of emotional FUD on electronic, algo and high-frequency trading.  Crash – the Machines are in Control, proclaims the WSJ.

The point of markets is to provide liquidity, transparency and a market-clearing price.  The fact that computers can execute and move 100s of thousands of shares in microseconds is not by itself the problem.  One problem may be the lack of diversity among trading algorithms.  If every house follows one another using a narrow universe of strategies developed by a relatively small cohort of practitioners, then when market conditions deteriorate, there’s a clear herd effect that spirals downward.

Regardless of fat fingers, machines gone wild, or even the specter of cyber-terrorism that one astute commentator raised, I do look forward to the increased press around high frequency trading and regulation/management in computationally intensive markets.   Need more sophisticated management systems, fault detection, circuit breakers, root-cause analysis etc.  Expect Reg NMS to enter the mainstream financial discussion.

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