Unintended Consequences
On [Thursday], the Dow Jones industrial average rapidly fell nearly 1,000 points before rebounding 700 points. … Although regulators have not pinpointed the cause, it has become increasingly clear that the stock exchanges’ disparate rules contributed to the market chaos. … As several stocks declined sharply under heavy selling pressure, the New York Stock Exchange, one of the largest pools, stopped or slowed trading in particular stocks.
As part of that process, the NYSE held on to “buy” orders, in the hopes that it could gather enough of them to meet the selling demand. “Sell” orders that came to the NYSE were rerouted to other exchanges, which were not required to slow trading. Those other exchanges were soon overflowing with sell orders and didn’t have enough buy orders to meet them, leading to the rapid decline in prices. (more)
So an NYSE regulation intended to prevent large price drops actually caused a big price drop. Of course one must expect all regulations to have unintended consequences; the issue is whether regulators understand a situation well enough to on net to improve it via imperfect regulations. My guess is that in this case no regulation is on average better, but that savvy regulators expect that the public expects them to “do something.”
Hi talisman,
Here's Senator Kaufman discussing HFT:
"We cannot simply react to problems after they have occurred. We need the information and resources to identify problems before they arise and stop them in their tracks...[W]e cannot allow liquidity to trump transparency and fairness, and we cannot permit the need for speed to blind us to the potentially devastating risks inherent in effectively unregulated transactions"
http://www.huffingtonpost.c...
Hi talisman,
I make no claim to be an expert in any part of the market. One look at my portfolio will prove that.
The only point of my post was to provide another perspective from what was presented in the original post. And to suggest that blaming the event on imperfect regulations was imperfect, too.
As to your claim that the DOW was down only 600 points, 5.5%, well others disagree. Try this on for size: http://www.ritholtz.com/blo...
Further, my use of the 1000 number was just a reflection of what was in the original post. Mr. Hanson cited the 1000 number. I make no claim to accuracy, but you do. Perhaps you should overcome your own biases.
You agree that market structure needs to be improved. And I agree my few sentences on HFT were a stretch. But I have seen others, much more sophisticated than I, argue that HFT is nothing more than a tax on the market, providing no social value other than making the traders richer.