Monday, June 14, 2010

"Flash Crash" Follow-up

My guest blogger today is Travis Ferber, Senior Account Executive,
at Makovsky + Company.

On Thursday, June 10, the results of the May 6th "flash crash" hit the nation's securities exchanges once again, this time in the form of circuit-breaker rules.

What do these rules do? Well, in the event of a security's rapid and extreme price change (10% or more in five minutes), all trading venues (exchanges, markets, ATSs) must halt the trading of that security. In theory, everyone gets a chance to figure out why the price of a security is changing.

If you're like most, when you think of people trading stocks you probably envision a bustling floor of jacketed individuals yelling out buy and sell orders at the direction of some institution. And that's how stocks were traditionally traded. These people understood everything about a stock, all the information available in the market would go through them and they could control the speed at which securities traded. They were the hub, the central communicators of the market.

However, high-speed trading and black box models (computer programs using algorithms to pick stocks to buy or sell) have changed the way the vast majority of securities are traded. Today, a stock trades in 250 microseconds, or 0.00025 seconds! At that speed, prices can change rapidly (as May 6th demonstrated, stocks can lose their entire value in a matter of seconds).

With the circuit-breaker rules, we're forcing markets to slow down and communicate at a more human speed before things get out of hand.

After the past decade's obsession with speed, it's a relief to see the value of information, interpretation and communication reasserted — even if it took a "flash crash" to make it happen.

Technorati Tags: high-speed trading, flash crash, algorithms, regulations, communication, Wall Street, public relations, business, Makovsky

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