Thursday, May 06, 2010

High-Speed Trading Glitch Costs Investors Billions -

High-Speed Trading Glitch Costs Investors Billions -

"We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime,” said James Angel, a professor of finance at Georgetown University’s McDonough School of Business.

In recent years, what is known as high-frequency trading — rapid computerized buying and selling — has taken off and now accounts for 50 to 75 percent of daily trading volume. At the same time, new electronic exchanges have taken over much of the volume that used to be handled by the New York Stock Exchange.

In fact, more than 60 percent of trading in stocks listed on the New York Stock Exchange takes place on other, computerized exchanges."

But in spite of all of the advantages of computerized trading, people are still a good thing ;) . From the WSJ's How Humans Save P&G Shares:

"On other exchanges...Procter & Gamble had tumbled as much as ...37%.... But because the stock fell below a key circuit-breaker level called the "liquidity replenishment point" or LRP on NYSE, the exchange stopped its own electronic trading in the stock briefly to go into "slow" mode. Under that mode, the designated market makers on the NYSE floor are given an opportunity to come in on the other side of an order at a price they have time to think about.

In this case, there was a sell order for P&G. Lou Pastina, executive vice president of floor operations for NYSE, said the auction ran for about a minute and 20 seconds, and then the trade went through at a price of $56 even though at that time the stock was trading far lower elsewhere.

"During that period other orders went to other markets and drove the price down to $39 and change. Buyers in those markets were probably very happy to buy, but the sellers weren't happy to sell," MR. Pastina said."

Wow, today is a day I wish I were teaching Financial Institutions and Markets! Will likely be talking about this one for years.

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