Whether good or evil, we have gone to an electronic trading system here in the US allowing for many different avenues to execute trades. It used to be that the NYSE specialists were primarily in control but not anymore. Our world has become much too complicated for such an archaic system where humans do all the work. Now we leave it up to computers and allow the humans to make the mistakes.
One major topic of discussion yesterday was PG and its massive selloff. It traded down almost to $39.37, from a high of $62.00, only to recover and close at $60.75. And how about ACN dropping to $0.01!?! Yes, that’s right, ONE PENNY, before recovering and closing at $41.09. How does this happen? In the blink of an eye, in nanoseconds program trading can upset the trading cart as these programs look for the lowest price in thinly traded markets. Thus you have strange price prints such as you have with PG and ACN. And the reason behind these trades? Possible human error or the “fat finger” has been paraded as the scapegoat. Someone entered a “B” for Billion when it should have been an ‘”M” for Million. There is a big difference between B and M! Evidently the person entering the trade is missing the “N” on their keyboard and just got mixed up. Big mistake anyway you look at it.
With all the talk about algorithm trading that goes on now it is important to understand how the cascading effect can quickly take place. As soon as trades are entered, bids are lowered and the process of looking for trades and sales at a lower and lower price begins, thus creating a cascading effect when adding in the electronic trades and how they seek pricing from other markets. All this happens in nanoseconds; therefore, you had the big drop and reversal in no time. It was not the long, death by a thousand paper cuts selloff just a quick stab in the back. Because all the trades cannot be processed so quickly the recovery from the lows yesterday may not find its proper footing until later today.
It is easy to see how a manmade computer program can get out of hand. It is merely reacting to the way it was intended to work. It is doing the job it was designed to do. The question then becomes, is the program properly written and designed and is there a way to provide other safeguards to keep this event from happening again?
Some traders and their clients made a fortune yesterday; some went broke. Even with stops such big moves would have just passed you by. In fact, I spoke with a futures trading friend of mine who could not get out of his trade quickly enough and instead of making money on a trade he actually ended up losing money. His orders were never filled as the bids were moving at such a pace that he could not enter the orders fast enough.
Granted the markets were down and the news has been rather grim lately but a 998 point drop on the DOW, not to mention the corresponding drops on the other indices in a matter of minutes, leaves us all to question the possible ghost in the machine.
And our response?
No bragging (you got lucky) or crying (you were unlucky). Whatever the case may be it is what it is.
Do not panic: dumb, scared money panics. Smart money waits and takes advantage. The market will be here next week and the next and the next…
Do not watch the “tele”, especially CNBC. If you think your head was spinning yesterday just wait until you hear all the different opinions about the market today! Better yet don’t and keep your head.
Stick with what works. Your strategy is allowed to take a vacation and so are you!
