Build a system that even a fool can use, and only a fool will want to use it.
George Bernard Shaw, 1856-1950, Irish-born British Dramatist
The initial trigger for the drop in the Dow was probably due to fears that the Greek crisis was going to spread. One could credit this for 300 or maybe even a 400 point drop in the Dow; however, a 1000 point drop is quite another matter.
At 2.20Pm the Dow was at 10,460 and then suddenly in 7 minutes it shed another 600 points. Humans could never move that fast. There are rumours that a trader entered billion instead of million and this triggered the massive sell off. Whatever the cause the main wave of selling was initiated by computers.
A simplified look at quant models
A Quant (Quantitative) programme is a computer model which determines which investment strategy is going to yield a superior rate of return; to simplify matters let’s assume the programme decides when to go long or short.. It is assumed that because computers have no emotions, they should be better at trading as they can move in and out of the markets extremely rapidly. The scary part is that the computer renders the final decision. There is one problem, these computers are programmed by humans and one glitch in the programme can cause havoc. Let’s not forget the old saying junk in junk out. Today’s wild action is indicative of what can go wrong when computers take over.
These quant programs now make the vital function of market marker almost obsolete and this is a very dangerous situation if left unchecked. Today Treasuries, SP500 and other indices were moving so fast it was hard to manually follow them. Computers took over the markets for a few minutes and in that time they wrecked total havoc. What happens if the glitch is not spotted immediately, then a cascade of sell orders could be triggered pushing the Dow down until the circuit breakers kick in. However, if the glitch was not found then computers would resume selling after the markets opened again. Let’s not forget that big firms can still sell via Dark pools. They are basically electronic networks that allow big firms to sell stocks without tipping their hand; in other words, they can sell these stocks anonymously without the public ever…
