> Sometimes, obviously, the use of these algos goes wrong. You get a flash crash with a death by ten billion cuts as the market moves to smooth in some incorrect way.
I learned recently that there have been many similar crashes throughout history, well before even the invention of computers eg
It seems to be more a matter of market dynamics rather than crazy algos. If some market shock drops prices too quickly you pass from a stable equilibrium into panic selling. Market makers will only accept so much risk before they start trying to offload stocks too, leading to a feedback loop. Lots of exchanges now have measures in place to break this feedback loop by halting trading on a stock if the price moves too fast and running an auction instead.
The 2010 flash crash was really only notable in that the move to electronic trading made both the crash and the subsequent recovery much faster. Panic selling itself is a problem with the market structure, not with the machines on the other end.
Indeed, crashes happen are nothing new, and HFT algos going wrong are only one of the billions of ways that it can happen. That's what you get when the market has ways of deciding prices--through people, machines, or contracts. It's possible that things can go wrong, but investors acknowledge that risk, and take responsibility if things go wrong. It's no great moral failing of the world that the market can go south.
I learned recently that there have been many similar crashes throughout history, well before even the invention of computers eg
http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
http://en.wikipedia.org/wiki/Black_Monday_%281987%29
http://en.wikipedia.org/wiki/Friday_the_13th_mini-crash
http://en.wikipedia.org/wiki/October_27,_1997_mini-crash
It seems to be more a matter of market dynamics rather than crazy algos. If some market shock drops prices too quickly you pass from a stable equilibrium into panic selling. Market makers will only accept so much risk before they start trying to offload stocks too, leading to a feedback loop. Lots of exchanges now have measures in place to break this feedback loop by halting trading on a stock if the price moves too fast and running an auction instead.
The 2010 flash crash was really only notable in that the move to electronic trading made both the crash and the subsequent recovery much faster. Panic selling itself is a problem with the market structure, not with the machines on the other end.