Automated Trading Suspected in Stock Market Crash
May 6, 2010 3:35 PM   Subscribe

Major market indices fell almost 10% this afternoon before recovering half of that value. Some blame the failing Greek economy and the related loss of confidence in the Eurozone. But a lot of attention is being paid to the role of automated trading systems. Accenture's stock, for example, dropped from $41 to one penny in two minutes and then recovered just as quickly. Will this trigger a loss of confidence in automated trading?
posted by spitefulcrow (157 comments total) 9 users marked this as a favorite
 
I think they should go back to dudes standing in a circle and yelling at each other. Because that's so much more amusing. Also, without them, where would reuters get their pictures of sad guys on trading room floors?
posted by Afroblanco at 3:37 PM on May 6, 2010 [9 favorites]


No. Next question?
posted by sbutler at 3:38 PM on May 6, 2010 [4 favorites]


There are people with confidence in trading?

Oh wait, yeah, of course.
posted by cmoj at 3:41 PM on May 6, 2010


It's pretty impressive that Accenture would drop so dramatically without unusual volume.
posted by pwnguin at 3:44 PM on May 6, 2010


Imagine the poor bastards with loads of Accenture stock whose stock app/ticker software got the refresh during those two minutes it was selling at a penny, and were in an inconsolable panic for the quarter of an hour they thought they were (and in a way, actually were) completely wiped out!

It makes me smile, a little, this thought.
posted by hincandenza at 3:45 PM on May 6, 2010 [4 favorites]


Limit orders?
posted by nathancaswell at 3:47 PM on May 6, 2010


In one of the most dizzying half-hours in stock market history,
the Dow plunged nearly 1,000 points before paring those losses—all apparently due to a trader error.
Getty Images

According to multiple sources, a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble
posted by boo_radley at 3:48 PM on May 6, 2010 [3 favorites]


Also coincidentally congress is actually making (mostly bipartisan!) noise about real regulatory reform... it was a weird day to say the least.
posted by edgeways at 3:49 PM on May 6, 2010 [1 favorite]


Having worked in the stock-market data field, I can tell you that the 1-cent price on the Accenture ticker is not an uncommon thing to see. The unusual thing is that it hasn't been corrected already. Bad ticks are inevitable given the sheer volume of data that is flowing in and out of the exchanges every second.
posted by mr_crash_davis mark II: Jazz Odyssey at 3:51 PM on May 6, 2010


Fuck Accenture (formerly Arthur Anderson Consulting), could not have happened to a better firm. I'm seeing what boo_radley posted everywhere. The idea that this was caused by a typo is pretty worrying.
posted by fixedgear at 3:51 PM on May 6, 2010 [4 favorites]


According to multiple sources, a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble

Here is a video of the CNBC coverage in real time.

[Warning: contains Jim Cramer]
posted by clearly at 3:52 PM on May 6, 2010 [3 favorites]


According to multiple sources, a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble

Whoa. Is this Brazil or am I getting my dystopias mixed up again? If true that is pretty scary stuff.
posted by joe lisboa at 3:52 PM on May 6, 2010 [6 favorites]


Imagine the poor bastards with loads of Accenture stock whose stock app/ticker software got the refresh during those two minutes it was selling at a penny, and were in an inconsolable panic for the quarter of an hour they thought they were (and in a way, actually were) completely wiped out!

The thing is, if it was selling for a penny, that means someone was buying for a penny, so some lucky fast-fingered dickhead just made like a 400,000% profit in those two minutes. Probably some hedge-fund fucko in Greenwich.
posted by Nothing... and like it at 3:53 PM on May 6, 2010 [12 favorites]


The thing is, if it was selling for a penny, that means someone was buying for a penny, so some lucky fast-fingered dickhead just made like a 400,000% profit in those two minutes.

That's it, I'm putting a buy limit order for 2 cents on every stock on the fortune 500.
posted by nathancaswell at 3:57 PM on May 6, 2010 [30 favorites]


I thought the 1987 stock market crash was the trigger for a loss of confidence in automated trading. Was there a return of confidence, or is it just a new generation of traders who don't realize that they're playing with fire?
posted by indubitable at 3:58 PM on May 6, 2010 [1 favorite]


I happened to be trading two of my favourite stocks (FAS & FAZ) when this all went down. They normally trade at exactly inverse to one another, but today, there were points when the spread was 10%+. At the time, I had no idea why this was happening. So much money to be made (and lost).
posted by gman at 3:59 PM on May 6, 2010 [1 favorite]



How the hell does Jim Cramer still have a job ? Seriously. If I were as wrong at my job half as often as he is, I'd be permanently unemployed.

I went into the wrong line of work, evidently.
posted by Pogo_Fuzzybutt at 4:01 PM on May 6, 2010 [5 favorites]


First Mattress Bank has all my moneys.
posted by Devils Rancher at 4:04 PM on May 6, 2010 [1 favorite]


Indubitable--

It's not just program trading, it's high frequency trading: Is high frequency trading a good or bad thing?
posted by thecaddy at 4:04 PM on May 6, 2010 [1 favorite]


First Mattress Bank has all my moneys.

Meet-up at Devils Rancher's house!
posted by joe lisboa at 4:05 PM on May 6, 2010 [1 favorite]


This kind of stuff really doesn't help assuage my growing distrust of...well, everyone and everything in the entire financial sector.
posted by vibrotronica at 4:07 PM on May 6, 2010 [2 favorites]


Meet-up at Devils Rancher's house!

Ah, but that's where I keep my second mattress. You'll never find the mason jars I buried in the yar... shit.
posted by Devils Rancher at 4:07 PM on May 6, 2010


This seems like excellent evidence in favor of a financial transaction tax.
posted by teferi at 4:07 PM on May 6, 2010 [9 favorites]


You'd think that there'd be at least a pop-up dialog box in the trading software saying "Do you really want to trade a billion shares of P&G? [OK][Cancel]" before you could hit "send".
posted by octothorpe at 4:13 PM on May 6, 2010 [5 favorites]


caddis: it's only a matter of degrees; I doubt most of the program trades occurring in 1987 happened slowly enough for a human to be in the decision-making loop, either.
posted by indubitable at 4:13 PM on May 6, 2010


"How the hell does Jim Cramer still have a job ? Seriously. If I were as wrong at my job half as often as he is, I'd be permanently unemployed."

He's like the weatherman used to be, back in the days before satellite imaging and pulse-doppler radar: a friendly human face that gives the illusion we can predict the behavior of chaotic, complex systems. His forecasts aren't any more accurate than a 1970's weather guy, but people feel better about the uncertainty when they watch him.
posted by Kevin Street at 4:18 PM on May 6, 2010 [3 favorites]


How the hell does Jim Cramer still have a job ? Seriously. If I were as wrong at my job half as often as he is, I'd be permanently unemployed.

He's not wrong at his job. His job is not giving people sound investment advice. His job is getting people to watch a TV network so that they can see ads. He does that job quite well, notwithstanding that his investment analysis is often horribly wrong.
posted by The World Famous at 4:18 PM on May 6, 2010 [23 favorites]


The 1c stuff didn't help/hurt anyone (at least not in the way some implied above):

"Both markets said they will cancel all trades more than 60 percent above or below market that occurred between 2:40 p.m. and 3:00 p.m. New York time."

(From the CNBC article)
posted by wildcrdj at 4:21 PM on May 6, 2010 [1 favorite]


They enter trades using words instead of numerals???? -- "Get me a billion shares of MegaCorp for fifty billion four hundred million three hundred twenty thousand two hundred and one dollars and fifty two cents".

Don't these guys have numeric keypads?
posted by Rumple at 4:21 PM on May 6, 2010 [4 favorites]


Quickly, everyone. To the ouzo!
posted by Cool Papa Bell at 4:22 PM on May 6, 2010


First Mattress Bank has all my moneys.

Mattresses? Feh! Tasteless and starchy! Sandwiches, my friend, sandwiches.
posted by ROU_Xenophobe at 4:25 PM on May 6, 2010 [1 favorite]


I just love the rational market!
posted by kiltedtaco at 4:29 PM on May 6, 2010


Nothing... and like it: The thing is, if it was selling for a penny, that means someone was buying for a penny, so some lucky fast-fingered dickhead just made like a 400,000% profit in those two minutes. Probably some hedge-fund fucko in Greenwich.
That's an interesting point, although Cramer echoes what I was thinking, which was the selling price is based on recent activity, so there may not have been much activity at all to temporarily register as a 1 cent stock. But surely *some* sales were made though at 1 cent, and some buys, so... who were those lucky people/machines? Does that mean some person/group/institution just lost a bundle selling their Accenture stock, directly into the pockets of those who bought it?

And since this has happened already, why isn't everyone implementing nathancaswell's plan to have automatic buys of anything that hits < $0.10? You could retire off one or two such incidents!
posted by hincandenza at 4:29 PM on May 6, 2010


And since this has happened already, why isn't everyone implementing nathancaswell's plan to have automatic buys of anything that hits

As in this case, anomalous/erroneous trades are simply cancelled after the fact. This has happened in past incidents as well, so you really can't make money this way (otherwise plenty of automated systems would... and then there would be incentive to create such a scenario...)
posted by wildcrdj at 4:31 PM on May 6, 2010 [1 favorite]


And on posting, I see wildcrdj has already addressed this; presumably the trades are actual listed transactions which aren't necessarily finalized until the final bell, so they'll just be undone or ignored as if the glitch never happened. I am still curious who would have benefited, however.
posted by hincandenza at 4:31 PM on May 6, 2010 [1 favorite]


Fuck Accenture (formerly Arthur Anderson Consulting), could not have happened to a better firm

Yep.
posted by KokuRyu at 4:32 PM on May 6, 2010 [1 favorite]


Mattresses? Feh! Tasteless and starchy! Sandwiches, my friend, sandwiches.

Once again the conservative, sandwich-heavy portfolio pays off for the hungry investor...
posted by Afroblanco at 4:32 PM on May 6, 2010 [10 favorites]


So, basically, putting your money in the stock market is akin to placing it into Heidegger's bank box. At any given moment, you may be rich or broke. So, in fact, you are both.
posted by Joey Michaels at 4:37 PM on May 6, 2010 [6 favorites]


Also, and apropos of nothing at all, I'd like to take this moment to acknowledge that the Humpty dance is your chance to do the hump.
posted by Joey Michaels at 4:38 PM on May 6, 2010 [6 favorites]


One point that bugs the heck out of me...the poor management of stop loss in trading.

For example, two factoids about my online broker:
- You can offer any low amount for a stock purchase
- Stop loss orders are based on offers, not completed transactions

So, I can put in a stop loss order at 8%, and someone else can offer $1 for my $20 stock, and the broker will accept that and sell my stock for $1, whether or not there are any completed transactions at $1 for that stock. So, I often (weekly) see people attempt this at end-of-day, hoping to pick up stocks at a fraction of their real value.

I've only been bitten by this once, for about a $100 loss. Therefore I don't do stop loss any more and watch my stocks closer. That being said, this week has been absolutely brutal to me, but I'm still holding and waiting for a quick turn recovery.
posted by swimming naked when the tide goes out at 4:43 PM on May 6, 2010 [1 favorite]


The WSJ removed the article for some reason but:
Exelon Corp. is one of the largest, most powerful utilities in the world, typically worth some $30 billion. For a brief moment Thursday, the stock market said it was worthless.

Exelon was just one of a number of stocks that produced bizarre, and presumably garbled, market quotes during the “Flash Crash” of the afternoon.

Another was Boston Beer Company, producer of Samuel Adams. During that period, the company hit zero after opening at $59.44. It closed at $55.82.

Boston Beer and Exelon were hardly alone. Here’s a look at a few other companies that endured some of the most extreme swings in Wall Street history.

Accenture:

The consultancy opened at $41.94, hit zero at around 2:50 and then closed at $41.09.

Exelon:

The utility opened at $43.35, hit zero and then closed at $41.86.

CenterPoint Energy:

The utility opened at $14.39, hit zero and then closed at $13.88

TransMontaigne Partners:

The transportation company opened at $27.46, hit zero and then closed at $27.50.

Impax Laboratories:

Thespecialty pharmaceutical company opened at $18.48, hit zero and then closed at $17.78.

Sothey’s:

While the other companies on this list hit zero briefly, Sotheby’s went in the other direction. After opening at $34.61, its shares briefly touched $100,000 before closing at $33.
(via)
posted by Skorgu at 4:45 PM on May 6, 2010 [3 favorites]


According to multiple sources, a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble.

Also known as a “fat finger” trade.
posted by ericb at 4:45 PM on May 6, 2010


Mattresses? Feh! Tasteless and starchy! Sandwiches, my friend, sandwiches.
Once again the sandwich heavy portfolio pays off for the hungry investor!
posted by amethysts at 4:47 PM on May 6, 2010 [1 favorite]


How the hell does Jim Cramer still have a job ? Seriously. If I were as wrong at my job half as often as he is, I'd be permanently unemployed.

He's not wrong at his job. His job is not giving people sound investment advice. His job is getting people to watch a TV network so that they can see ads. He does that job quite well, notwithstanding that his investment analysis is often horribly wrong.


He was also completely right in that clip, in that he knew something was wrong when P&G was down by that much and then said that it was due to a glitch, unlike all of the other people that were shown. He actually does give a lot of good general advice for people who are new to investing (like using limit orders and staying away from options), but like pretty much everyone else none of his short term stock picks are any better than random guesses.
posted by burnmp3s at 4:49 PM on May 6, 2010 [2 favorites]


Don't these guys have numeric keypads?

I have even less faith in their ability to count zeros. You'd have smaller errors than this one today, but they would be many times more frequent.
posted by Edgewise at 4:52 PM on May 6, 2010 [1 favorite]


How the hell does Jim Cramer still have a job ? Seriously. If I were as wrong at my job half as often as he is, I'd be permanently unemployed.

I can see why Cramer is annoying, but in this case he was correct by saying that it wasn't real price for P&G and one should buy.
posted by zeikka at 4:55 PM on May 6, 2010


NYSE Arca to cancel multiple trades
The New York Stock Exchange said on Thursday it would cancel all trades on its all-electronic trading platform NYSE Arca that were executed between 14:40 and 15:00 ET and that were more than 60 pct away from their last print at 14:40.
I think it's fascinating how the stock market has do-overs.
posted by Nelson at 4:57 PM on May 6, 2010 [4 favorites]


The fact that the first version of the story had nothing to do with the actual cause is just more evidence no one knows how this clusterfuck works.
posted by hellojed at 5:01 PM on May 6, 2010 [2 favorites]


How the hell does Jim Cramer still have a job ? Seriously. If I were as wrong at my job half as often as he is, I'd be permanently unemployed.

Well, you probably haven't had Jon Stewart question you on his show about your idiocy, so at least you've got that going for you.
posted by A dead Quaker at 5:03 PM on May 6, 2010


Rumple: "They enter trades using words instead of numerals???? -- "Get me a billion shares of MegaCorp for fifty billion four hundred million three hundred twenty thousand two hundred and one dollars and fifty two cents".

Don't these guys have numeric keypads?
"

The point is that traders type 1k or 1m or 1b, rather than 1000 or 1000000 or 1000000000. Much faster and much less error prone (remember than 100000 vs 10000 would be a big error too, and it's easy to miscount zeroes).
posted by Perplexity at 5:03 PM on May 6, 2010 [2 favorites]


They enter trades using words instead of numerals????

James, get me a score of P&G stock, at a baker's dozen, then sell again in a fortnight.
posted by qvantamon at 5:03 PM on May 6, 2010 [12 favorites]


Also coincidentally congress is actually making (mostly bipartisan!) noise about real regulatory reform... it was a weird day to say the least.

Yeah, I noticed that too, and pardon the "tin foil" but I can't help but wonder if there's a connection--especially given the anecdote about the anomalous mistake mentioned in the thread (i.e., a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble).

Fwiw, I did not see any substantive change in the news coming out of Greece, admittedly already bad, over the last 24 hours. While I realize it will be too much of a speculative leap for some, and while I'm not saying I'm necessarily convinced either way, it nevertheless is remarkable the way in which the markets seem to be reacting to the possibility of genuine regulatory reform.
posted by HP LaserJet P10006 at 5:03 PM on May 6, 2010 [1 favorite]


"Accenture's stock, for example, dropped from $41 to one penny in two minutes and then recovered just as quickly."

Hm. Would've been nice to buy 100 bucks worth of that... and buying a house with the proceeds.
posted by markkraft at 5:07 PM on May 6, 2010


Kevin Street: "He's like the weatherman used to be, back in the days before satellite imaging and pulse-doppler radar: a friendly human face that gives the illusion we can predict the behavior of chaotic, complex systems."

?!
posted by brundlefly at 5:24 PM on May 6, 2010


teferi : This seems like excellent evidence in favor of a financial transaction tax.

Transactions do not equal income, though.

For example, last year I, unemployed and with my "play" money reduced to under $5k, still had over $100k in stock transactions for the year. That doesn't mean I made a fortune, though (in fact, with carryover from 2008, I reported a substantial net loss on my taxes).

Taxing each transaction would quite literally bring the markets screeching to a halt. You think the recent credit-freeze and recession hurt? Nothing compared to what would happen if you get your wish. Volatility == liquidity, simple as that.


Nelson : NYSE Arca to cancel multiple trades

That scares the hell out of me. If someone entered a bad number, TFB. Unless the NYSE has reason to believe they experienced an outright malicious attack, I can think of a few companies who historically made similar mistakes, and paid dearly for it. If they really do allow "do-overs" for egregious errors, hey, I can "oops" buy a huge number of shares on margin too... If it goes up at the end of the day, I meant it; if not, hey, no problem the exchange can just void the transaction, right guys? Guys?
posted by pla at 5:25 PM on May 6, 2010 [2 favorites]


Nasdaq Canceling trades too. (Unless nyse arca is the same group)
posted by Lord_Pall at 5:28 PM on May 6, 2010


Can you Americans please just stop this? Sheeeeeeeeeeeesh...
posted by a non e mouse at 5:34 PM on May 6, 2010


Okay, maybe friendly was too strong a word. But even his shouty tirades are human, and more accessible than the cold uncertainty that comes from the knowing that the stock market is often beyond our control.
posted by Kevin Street at 5:37 PM on May 6, 2010


I'm pretty sure Heidegger's bank box is filled with Jewish dental gold.

[not existential-ist]
posted by sy at 5:37 PM on May 6, 2010 [3 favorites]


Whoa. Is this Brazil or am I getting my dystopias mixed up again? If true that is pretty scary stuff.

Nope, Brazil is the one where the counter narcotics police storm your house and shoot your dogs for smoking doobies.
posted by Meatbomb at 5:41 PM on May 6, 2010 [2 favorites]


This sort of thing happens pretty often I think. A year or two ago I had an order of some ETF set to sell when the price went over some amount — well, it actually bumped up from about $33 per share to $401.52 a share for some moment and they all sold. The trade actually looked like it went through. I was staring at a like sixty grand cash in my account (up from hardly anything) until the settlement date 3 days later and I got an email. I was really hoping nobody would notice.


So if this happens often, why did it trigger a market crash this time?
posted by spitefulcrow at 5:57 PM on May 6, 2010


The more I read the details presented in this thread about today's headline-grabbing market jitters the more difficult I find it to believe that these bizarre anomalies (see Skorgu's extended quote from the WSJ about the "flash crash" triggered by wrong numbers), happening as they did amid debates on immanent congressional banking regulation legislation, were simply coincidence (even with the ongoing uncertainty of the Greek situation). From my POV it looks like the market hysteria was being rigged from within Wall Street in order to spook lawmakers, but I am also open to arguments with alternate explanations.
posted by HP LaserJet P10006 at 6:01 PM on May 6, 2010 [2 favorites]


I, unemployed and with my "play" money reduced to under $5k, still had over $100k in stock transactions for the year. That doesn't mean I made a fortune, though (in fact, with carryover from 2008, I reported a substantial net loss on my taxes).

I can't decide if I should be horrified that you consider $5k play money or mock you for you terrible high volume negative yield investment strategy. I think I'll support that tax on each transaction after all.
posted by humanfont at 6:02 PM on May 6, 2010 [2 favorites]


I hate to break up the party, but just for the record electronic exchanges have nothing to do with high frequency trading. Heres what happened:

1. market is selling off hard, dow is down 350 points. there are imbalances on the floor. nothing unusual really.

2. nyse halts 150 stocks for 90 seconds, to figure out whats going on

3. during that period, all those orders route to the other electronic exchanges (they have to with reg-nms, a law put in place to "protect consumers from hf trading"). those other non-nyse exchanges have no bids in

4. those market orders get executed at the best market price, which are awful on those other exchanges.

end of story

lessons?

1. dont place market orders
2. reg-nms has a lot of unintended consequences
3. if nyse wanted to halt those stocks for a circuit-breaker type action, they should have coordinated with the other ecn's.


now 'yall go back to bashing shit you have no idea about.
posted by H. Roark at 6:07 PM on May 6, 2010 [13 favorites]


So if this happens often, why did it trigger a market crash this time?

Ridiculously bad timing, days after the second worst market one-day drop in the current recession, with everyone scared shitless that this will be double-dip and be worse than the Great Depression, and talking with shaking hands with other traders and investment pros whether Spain or Ireland or Chile or Portugal will be next to be on the brink of financial collapse like Greece is.

To be honest, I would not be at ALL surprised if there is an investigation into this "glitch" with an idea to who had the potential to extensively profit from it.
posted by swimming naked when the tide goes out at 6:08 PM on May 6, 2010


yall go back to bashing shit you have no idea about.

Sure thing, but I was confused about this sequence:

1. market is selling off hard, dow is down 350 points. there are imbalances on the floor. nothing unusual really.

2. nyse halts 150 stocks for 90 seconds, to figure out whats going on


In other words, what precisely needed to be figured out if there was nothing unusual going on? I'm not trying to be difficult, just trying to fill in the gaps as best I can.
posted by HP LaserJet P10006 at 6:12 PM on May 6, 2010


I think I'll support that tax on each transaction after all.

Tax per transaction hurts the little guys learning the market much, much more than the professionals who will just pass it on as a cost to their wealthy investors, who in turn will attempt to make up the extra cost by taking on greater risk investments than they normally would, which will ultimately get us in a worse situation than if we didn't have it.

It's the kind of government "we must take action! WHARGARBBBLLL!" idea that sounds great at first glance until you take a moment to think about.
posted by swimming naked when the tide goes out at 6:12 PM on May 6, 2010 [1 favorite]


That's a nice theory H. Roark, but I think Cramer did it.
posted by mazola at 6:17 PM on May 6, 2010


Its obviously a sneaky attempt by scientists to invent a time machine without doing all the hard sciency work. First they artificially made stocks go to $.01 a share. Then they hid behind potted palm trees and watched for anyone with clothes and haircuts like Lady GaGa making huge stock purchases. Then they slapped handcuffs on those scoundrels from the future and grabbed their time machine. Nice try boys, but I'm two steps ahead of you.
posted by digsrus at 6:19 PM on May 6, 2010 [9 favorites]


In other words, what precisely needed to be figured out if there was nothing unusual going on? I'm not trying to be difficult, just trying to fill in the gaps as best I can....

by "nothing unusual really" I mean yeah the market was getting whacked, but it was real selling. On our trading floor all tv's were on with live footage of riots in greece, with police bashing people and fires and whatnot. Estimates for spain's unemployment number were going around, bad. People were *selling*, hard. Its unusual for that kind of lopsided flow, but its not like it was a rogue algo gone wild.

The specialists on the floor of the nyse (a real person), has to take the other side of these situations - buy when everyone is selling etc. They also have the right / obligation to slow or halt trading if they are getting swamped with lopsided flow. This resulted in the 150 or so big stocks getting halted. It is unusual that they would actually halt the stocks like this.

So then with nyse halted, say ACN sells get routed to the other electronic exchanges, where liquidity can be much thinner. A typical buy-side book might look like:

40 1000
39 400
38 100
30 100

etc, meaning someone is willing to buy 1000 shares at 40, 390 @ 400, etc. this is not much. in nyse, the book might look like:

40 100,000
39 200,000
38 200,000

etc

so what happens when that 10,000 share market order to sell comes in and NYSE is closed? the order gets filled with the 1000@40, 400@39,100@38,100@30, then starts printing at .01 or whatever.

the telltale sign that its not high-frequency causing this is all this drop happened on essentially no volume.
posted by H. Roark at 6:21 PM on May 6, 2010 [19 favorites]


Per tax transactions won't hurt the little guy, even the day traders, because it will be less then their commission anyway. 0.25% of a $1k trade is just $2.50, while the commission might be $10. Unless the "little guy" is making $10k trades every day, trying to make money tiny blips, it's not really a big deal.
posted by delmoi at 6:25 PM on May 6, 2010 [2 favorites]


H. Roark--thanks for your input [it's a detail, but I think you may have mixed up your example somewhat when you wrote 1000 shares at 40, 390 @ 400, etc. (given your number sequence, I think this should read 1000 shares at 40, 400 shares at 39?)]. I gather from your comments (i.e., from not high-frequency causing this is all this drop happened on essentially no volume) that the anomalies (such as recounted in this comment) are all due to the 90 second freeze of the 150 stocks. Am I reading that correctly?
posted by HP LaserJet P10006 at 6:34 PM on May 6, 2010


shoot your dogs for smoking doobies

I thought the dogs who could roll their own were in Anthem.
posted by little e at 6:35 PM on May 6, 2010


Am I reading that correctly? >> I think so, yes. Things do get a little complicated as once you have SP500 index stocks ticking 50% lower than before, index-arb guys start going nuts and selling other stuff to compensate for the new index weights, but in general thats the issue here. If you look across the landscape of stocks, most of the smallcap ones that are not in the indexes were mostly unaffected, and the ones that got silly killed are the ones that were halted.

Its a fluid situation still, but from my vantage point thats the best explanation of what happened.
posted by H. Roark at 6:49 PM on May 6, 2010


Per tax transactions won't hurt the little guy, even the day traders, because it will be less then their commission anyway.

You say that as though commissions are a negligible expense. They are not. A savings of 15% is substantial.
posted by BigSky at 6:54 PM on May 6, 2010 [1 favorite]


According to multiple sources, a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble

What a silly bunt.
posted by schoolgirl report at 6:56 PM on May 6, 2010 [3 favorites]


from my vantage point thats the best explanation of what happened.

Well with all due respect I'm not sure your confidence in the specifics of what happened, and in the particular timing and sequence of events, is warranted at this stage: there seems to be much lingering confusion, and I certainly do not get a clear picture from the reports already linked to:

"We don't know what caused it," said Procter & Gamble spokeswoman Jennifer Chelune. "We know that that was an electronic trade...and we're looking into it with Nasdaq and the other major electronic exchanges."

A different P&G spokesman had said earlier the company contacted the Securities and Exchange Commission, but Chelune said that he spoke in error.

One NYSE employee leaving the Big Board's headquarters in lower Manhattan said the P&G share plunge lay at the center of whatever happened.

"I'll give you a tip," the employee said, speaking on condition of anonymity. "P&G. Check out the low sale of the day. Something screwed up with the system. It traded down $30 at one point."

Nasdaq said it was working with other major markets to review the market activity that occurred between 2:00 p.m. and 3:00 p.m., when the market plunge happened.

posted by HP LaserJet P10006 at 6:56 PM on May 6, 2010


Man, I can't believe I confused Schrödinger and Heidegger
posted by Joey Michaels at 6:57 PM on May 6, 2010 [4 favorites]


"We don't know what caused it," said Procter & Gamble spokeswoman Je.... why the heck do you think a P&G spokesperson would have any clue on this? of course its an electronic trade, the non-electronic venue (nyse) was halted!
posted by H. Roark at 7:00 PM on May 6, 2010


HP LaserJet P10006:"all due to the 90 second freeze of the 150 stocks. Am I reading that correctly?"

This article brings up a similar point. NYSE takes 90 seconds to do a live auction on a sell order, while other markets go on to close at the lower prices alluded to.

I'm not sure whether to blame Reg NMS or the NYSE's "human element" that turned on 'slow mode' in the first place.
posted by pwnguin at 7:01 PM on May 6, 2010


why the heck do you think a P&G spokesperson would have any clue on this? of course its an electronic trade, the non-electronic venue (nyse) was halted!

OK, but I'm not sure you understand what I'm saying. I'm saying that we don't yet know the sequence of events, specifically the time frame of the anomalies, the halt, etc. One problem as I see it is you have not really provided anything more than educated speculation about what might have occurred. There were anomalies in the system; the system was halted: that much we seem to know, but we're not even sure how it went down.
posted by HP LaserJet P10006 at 7:07 PM on May 6, 2010


Exelon Corp. is one of the largest, most powerful utilities in the world, typically worth some $30 billion. For a brief moment Thursday, the stock market said it was worthless.

Another was Boston Beer Company, producer of Samuel Adams. During that period, the company hit zero after opening at $59.44. It closed at $55.82.

The crash was actually a transwarp in the time continuum that gave us a instantaneous view of the future two hundred years from now....a future where both power and beer are free.
posted by storybored at 7:14 PM on May 6, 2010 [9 favorites]


It'd just cause me to stop trading, because I'm a little guy and it's not my job.

That's the point! While it's all well and good to make the stock market available to everyone, there needs to be a bit of a throttle on how fast people can buy and sell stocks. Stocks and bonds ought to be investments, not speculative instruments. At some point, the value used to be tied to the company's value. Now they're like trading cards for the jet-set.
posted by explosion at 7:42 PM on May 6, 2010 [5 favorites]


Per tax transactions won't hurt the little guy, even the day traders, because it will be less then their commission anyway.

The big guys are spending craploads of money on data feeds, commissions, whatever. It won't affect them hardly any. Little guys like me use discount brokers at $0 to a few bucks. Nickeling and diming me per trade would make it no longer be nearly free and I'd need to make more money to break even. It'd just cause me to stop trading, because I'm a little guy and it's not my job.


Honestly, if returns are so low on such miniscule scale of investing where a less than one percent tax per transaction will wipe you out, why even bother doing it in the first place? You should be doing online gambling, poker or horse betting instead, if it's legal in your area.
posted by peppito at 7:47 PM on May 6, 2010


swimming naked when the tide goes out wrote: "It's the kind of government "we must take action! WHARGARBBBLLL!" idea that sounds great at first glance until you take a moment to think about."

More importantly it would help direct people towards more stable buy and hold strategies, rather than using the stock market as a casino. That's a net gain in my book.
posted by wierdo at 7:52 PM on May 6, 2010 [2 favorites]


The thing is, if it was selling for a penny, that means someone was buying for a penny, so some lucky fast-fingered dickhead just made like a 400,000% profit in those two minutes.

For those of you looking curious about how much money traded that way:
A total of 19 trades of 100 shares each were executed at 1 cent in seven seconds from 2:47 p.m. to 2:48 p.m. in New York, a minute after the Dow average plunged by the most since the market crash of 1987, the data showed.

Eighteen of the trades were executed on the CBOE Stock Exchange and were canceled. The first trade that sent Accenture to a penny was executed on the Nasdaq Stock Market. That transaction has yet to be canceled, the data showed.

Source: Businessweek
Another interesting stock movement today was Exxon Mobil, the world's largest stock by market value. Over 4.7 billion shares went from 66 dollars to 58 dollars, wiping out over 37 billion USD. That's insane. That's like the GDP of Guatemala in under two hours. (It recovered to $63.89).

The Nikkei is already down over 400 points tonight, after losing over 300 points yesterday. Tomorrow is a Friday. If you were heavily in the market, would you want to wait and see what happens tomorrow, knowing that if it's bad you might have to stew for the entire weekend before joining the rush of everyone who decides to get out on Monday? Or would you try to get "safe" before the weekend begins, just in case? Gold is almost at a new record price already.

If NYSE and the other exchanges don't announce their solutions and final settlements before market open tomorrow, it might be an interesting weekend and we'll wait to see what colour Monday is. New York opens in less than 11 hours. London opens in less than 4.5 hours. There's a new job number report coming out tomorrow; it won't help if that's also bad news.
posted by ceribus peribus at 7:55 PM on May 6, 2010 [1 favorite]


It seems to me that it would be way less insane if we had a system where corporate fund-raising was done only via non-transferable bonds, not stocks.

Sure, there's something to be said for the liquidity of stocks in encouraging investment in businesses, but....I think the whole liquidity thing has gotten a little out of hand with this high-frequency trading. Isn't most of the stock market just a casino nowadays, rather than a tool for starting and expanding businesses?
posted by Salvor Hardin at 8:10 PM on May 6, 2010


That's the point! While it's all well and good to make the stock market available to everyone, there needs to be a bit of a throttle on how fast people can buy and sell stocks.

While that sounds like a good solution on the surface, it would not have done anything to prevent the precipitous drop today. All it would really do is shut out some small traders while slowing liquidity a bit. I'm all for practical solutions, but this is a bit like putting sand in the gears.
posted by krinklyfig at 8:12 PM on May 6, 2010


Thank goodness for Control-Z, am I right traders?
posted by Laen at 8:22 PM on May 6, 2010


Isn't most of the stock market just a casino nowadays, rather than a tool for starting and expanding businesses?

Historically, investment markets create derivatives so as to create liquidity. This is not new. What's different today is computer technology as a trading tool. The edge today is all in the speed, which does worry me a bit. OTOH, it's an easy scapegoat in situations like this, when to me the explanation by H Roark made the most sense. In illiquid markets the buy-ask spreads get out of whack, and a few trades can cause wild swings in price, so liquidity does matter. You can see this for yourself if you try to trade options which attract very little open interest. You may have a gain you can't sell because nobody is bidding. This is just the nature of markets, however. Yeah, a little like a casino, but a casino trades purely in risk and leaves out the equity, and in a casino, if you win too much they aren't too friendly anymore.
posted by krinklyfig at 8:23 PM on May 6, 2010 [1 favorite]


Also, in a casino, no matter what you do, if you keep your money in play long enough you will lose. This is not true of the stock market, but you have to become educated about it and manage your risk. I made money today because of option spreads which profit if the market moves enough in either direction. But I didn't have all my money in these trades, and I spread out the risk among several different equities. It was easy to predict rising volatility during earnings season. This event was not easy to predict, but you don't have to if you can hedge a little or learn how to play volatility.
posted by krinklyfig at 8:32 PM on May 6, 2010


So I got a message from a friend of mine from my old Wall Street days, telling me that this trade was almost certainly not a fat finger but a programmed trading response to terrible weaknesses in European banks that were revealed.

I am sort of on the fence about it. Certainly, the fat finger issue seems very dubious - for one, it's hard to believe that trading a billion dollars accidentally wouldn't put this trader over his limit; for another, there are almost always specific hard-coded limits that require an extra confirmation for very large trades, precisely to avoid this sort of issue.

Honestly, if returns are so low on such miniscule scale of investing where a less than one percent tax per transaction will wipe you out, why even bother doing it in the first place?

You need to do the arithmetic! If you're an active trader and you trade your whole position every day, then you need only make 0.1% on each trade to capture the handsome return of 28%.


But you can also count me as someone as someone who used to be against taxes on each trade, and now I'm for it. The taxes can be tiny, 1% of 1% but they'll have only good effects, decreasing volatility, making investors pay more for options and derivatives (because the cost of delta hedging) and reducing liquidity.

Wait, did I say reducing liquidity was good? Well, I think it is. The trouble with US markets is that they are paradoxically too liquid - the stated reason that Goldman and all these other scum make so much money is that they supposedly "help liquidity" but Americans should simply get over the idea of making a fast buck. Having to think in terms of weeks, months and years for investments would encourage people investing for real value instead of this bipolar, nervous trading that's so very destructive.
posted by lupus_yonderboy at 8:37 PM on May 6, 2010 [8 favorites]


We're all blaming these errors on human error? I'm saying, entrepreneurial hackers! Can't you imagine the movie where some guys create this complicated algorithm causing all of these stocks to hit 0.01, then going and buying them all up, to watch them increase 4,000%? Instant billionaires!

Why blame something on stupidity when we can blame it on Hollywood-style conspiracy?
posted by jabberjaw at 8:45 PM on May 6, 2010


Yes but what I, a Fox News watching conservative, want to know is how this stock market drop is Obama's fault. Not some fat, lazy day trader's.
posted by Talez at 8:54 PM on May 6, 2010 [1 favorite]


But you can also count me as someone as someone who used to be against taxes on each trade, and now I'm for it. The taxes can be tiny, 1% of 1% but they'll have only good effects, decreasing volatility, making investors pay more for options and derivatives (because the cost of delta hedging) and reducing liquidity.

OK, I think if you do it you make it like $.01 per $100 or even $1000. I think if you make it per trade you may encourage larger blocks. This wouldn't affect the little trader at all but would slow down high-frequency trading designed to take advantage of making very small amounts on very high volume. Personally, I'd be fine with that.
posted by krinklyfig at 8:54 PM on May 6, 2010


Can't you imagine the movie where some guys create this complicated algorithm causing all of these stocks to hit 0.01, then going and buying them all up, to watch them increase 4,000%? Instant billionaires!

Why blame something on stupidity when we can blame it on Hollywood-style conspiracy?


Is it Ghostbusters Superman 2?
posted by joe lisboa at 9:01 PM on May 6, 2010


Tomorrow is going to be interesting with all those trades that get clawed back and all the margin calls that follow. We might see a bunch of stuff dumped all at once when that happens. I would not be surprised if a lot of people were completely unaware of the busted trades and have already bought more or pulled money off the table after some crazy gains today and have little to nothing for padding in case the shares come back to them.
posted by krinklyfig at 9:37 PM on May 6, 2010


so what happens when that 10,000 share market order to sell comes in and NYSE is closed? the order gets filled with the 1000@40, 400@39,100@38,100@30, then starts printing at .01 or whatever.

Nice theory, but do people really trade 10,000 shares with a market order instead of a limit order? Big block trades like that will normally be directly managed by the broker.
posted by JackFlash at 9:39 PM on May 6, 2010


Nice theory, but do people really trade 10,000 shares with a market order instead of a limit order? Big block trades like that will normally be directly managed by the broker.

A stop loss order will get filled at market price.
posted by krinklyfig at 9:52 PM on May 6, 2010


krinklyfig wrote: "This is not true of the stock market"

It works exactly like a casino would if the casino were the size of the stock market and had an ever-increasing clientele. More specifically, it's like the poker tables. You pay your bit to the house for the privilege of playing and you get to take everybody else's money (or lose your own).
posted by wierdo at 9:58 PM on May 6, 2010


I should clarify: In the sense that day traders and HFT outfits use the market, it acts like a casino. Otherwise, it's not at all a casino. Throw out the bunkum and it's a good tool for matching buyers and sellers and provides a great service in providing transparent pricing.
posted by wierdo at 10:03 PM on May 6, 2010


That's the point! While it's all well and good to make the stock market available to everyone, there needs to be a bit of a throttle on how fast people can buy and sell stocks. Stocks and bonds ought to be investments, not speculative instruments.

Says who? And why?

At some point, the value used to be tied to the company's value.

That is still the case. If the value of the stock gets too far away from the inherent value in the company, then it follows that there is profit to be made by responding accordingly. Increasing the public's access to the markets isn't detrimental to price discovery; it's just the opposite.
posted by BigSky at 12:32 AM on May 7, 2010 [1 favorite]


Taxing each transaction would quite literally bring the markets screeching to a halt. You think the recent credit-freeze and recession hurt? Nothing compared to what would happen if you get your wish. Volatility == liquidity, simple as that.

This I don't understand at all. Buying stock isn't making a loan - the company that issues the stock already got most of their money out of it in the IPO. After that, it's all just mindlessly shuffling paper around - stock only has a real value if you want to buy it to acquire a company, or at least gain a controlling interest. But no one does that, every just speculates on pieces of paper, which is why corporate governance in this country is so atrocious. There aren't any investors anymore - just speculators who rarely think beyond the next quarter.

I hate it when I hear libertarian types say "it's not a zero-sum game". It's true that, in general, when someone gets rich they don't necessarily have to do it by making someone poorer. However, I can imagine plenty of types of economic activity being zero-sum or even negative sum. For example, how can stock speculation be anything but a zero-sum game? If I bought P&G today $45 and sold it at $55, all I did was transfer wealth from the people who panicked to myself. I didn't do anything to create material value, and the transaction is totally divorced from anything the company is doing.

Why does it benefit our society to do transactions like that a million times a day, rather than just thousands?

Also, I seriously don't understand how "the market" is supposed to be an investment vehicle for retirement. Every educated source I see says that picking stocks over the long run is a losing game - the smartest thing you can do with money you need 30 years from now is to put it into an index fund. So we all do that, we all put our nest eggs into index funds? Now what? There's no decision making or actual investment going on there - how does that money do anything other than inflate stock prices?

Don't get me wrong, I think the stock market is a useful tool if you want to start a business, or transfer control of a business. It's a good system. But it seems that 95% of the trading that goes on isn't about the underlying business, it's about trying to "beat the market".
posted by heathkit at 1:00 AM on May 7, 2010 [7 favorites]


heathkit: "how can stock speculation be anything but a zero-sum game? "

Stock speculation does increase liquidity, which makes it easier for you to sell your stock whenever you want to & narrows the bid/ask spread. The price for that increased liquidity is probably more volatility though.
posted by pharm at 1:21 AM on May 7, 2010


I hate it when I hear libertarian types say "it's not a zero-sum game". It's true that, in general, when someone gets rich they don't necessarily have to do it by making someone poorer. However, I can imagine plenty of types of economic activity being zero-sum or even negative sum. For example, how can stock speculation be anything but a zero-sum game? If I bought P&G today $45 and sold it at $55, all I did was transfer wealth from the people who panicked to myself. I didn't do anything to create material value, and the transaction is totally divorced from anything the company is doing.

The transaction between traders is zero-sum. But the existence of the market where the traders compete is of benefit to others. Companies can access capital through the equity markets, risk can be hedged (not all market participants are speculating for their own gain, but speculators help provide liquidity for the hedgers), and in the commodity and foreign exchange markets the tradeable instruments' value is discovered through the deals of traders.

While it might be prudent for each individual to only invest in an index fund, that's a different claim than the best scenario for society as a whole being all potential market participants making that choice.
posted by BigSky at 1:23 AM on May 7, 2010


BigSky: "The transaction between traders is zero-sum."

Actually, I think even that's not zero sum if we put some thought into the trader's heads. Traders only execute trades when the value of whatever it they get more than they give. If a trade of stock XYZ happens at price 50, the seller would prefer the 50 dollars (perhaps they think it's only worth 40), and the buyer prefers the stock (perhaps they think it's worth 60).

The question people have been asking for ages is, if you think a stock is worth 60, why put in an order to sell at 45 (ten percent below the original purchase price)?
posted by pwnguin at 2:28 AM on May 7, 2010


Metafilter does lots of things well but things like this are not one of them. H. Roark above has the best explanation of the last part of the collapse and how the bid dried up completely, but this was probably driven by a number of factors which are connected to computers and algorithmic trading.

The market was in a pretty ropey state already when the Yen went into a massive rally against the dollar, rising something like 4 cents in 1 hour. Other currencies (eg CAD) has similar but less extreme moves, blowing through support levels as if they weren't there. I and lots of other people were watching this, and by this point it was already obvious that something drastic was going to happen in the markets.

The Yen spike seems to have triggered a wave of selling of US equities by computerized carry trade players. These are basically algorithms which borrow Yen at low interest rates, convert it into US$, and buy equities. These algs were short Yen and long equities and losing money at a staggering rate. They immediately went into full unwind mode and dumped US equities.

This then seems to have triggered the systemic collapse of the market. But that isn't the end of the story. A large part of the liquidity of the market (which has been rallying on low volume all along) is provided by High Frequency Trading algortithms. However, with equities falliing off a cliff, some of these went into full dump mode while others hit the panic button and stopped trading completely. This sucked liquidity out of the market, since a sizeable number of buyers simply disappeared from the scene. This accelerated the collapse that was already happening.

Finally, the accelerating collapse of prices triggered a further wave of computerized selling by more conventional algs -- the stat arbs and so on. By now the storm drains at the NYSE were overflowing. Individual equities went into cut-out mode and the situation that H. Roark describes unfolded.

This was a complete disaster for the markets. I heard of one individual trader who was full tits long index futures (which was not an unreasonable position as it hit 1100) but could not get out of his position as the markets fell. He was hit with a margin call as the index plunged and lost not only the entire $250k account he was managing but another $200k as well.

In these circumstances there is NOT A CHANCE that institutional and individual investors will get back into the market. They will pile -- as they are doing -- into gold and treasuries. Which will cause a further set of problems that I am too depressed to get into here, but mostly consisting of a series of bubbles (remember the oil bubble a couple of years ago?) that cause misery and then pop, causing more misery.

To paraphrase Churchill, this crash isn't the end, or even the beginning of the end. But I think it's the end of the beginning.
posted by unSane at 5:25 AM on May 7, 2010 [10 favorites]


Every time there is one of these threads someone posts something so egregiously incorrect it boggles my mind. I mean, maybe you are genuinely misinformed, maybe it was just a typo, maybe it is malicious misinformation. This is important stuff and if you say something so authoritatively, that is just demonstrably wrong, it could do real harm to someone who acts on that belief.

So, for the record: it is Superman 3 that has the fraction of a penny subplot. Superman 2 is the one with General Zod.
posted by dirtdirt at 6:24 AM on May 7, 2010 [19 favorites]


Some incredible knock-ons from yesterday: suppose you bought Proctor and Gamble at the height of its collapse (0.10). Many traders have long-standing, stupid bids like this just in case.

This was a perfectly legal trade on the open market.

You didn't want to risk too much, so you just spent $1000 and bought 10,000 shares.

You sold them almost immediately, and your market order was filled at $30.

You just netted a $299,000 profit on a $1000 trade.

But guess what? Overnight the NYSE decided that your original buy was invalid, so they struck it out. All the other exchanges follow suit with the same policy.

Congratulations! You are now short 10,000 shares of PG!

You sold them at $30 and today they are trading at $60.

You are now $300,000 in the hole.
posted by unSane at 6:41 AM on May 7, 2010 [1 favorite]


down 300 pts
posted by empath at 7:29 AM on May 7, 2010


That's it, I'm putting a buy limit order for 2 cents on every stock on the fortune 500.

Looking at my level 2 quotes for, let's say, AAPL, there are several bids out there at $1.00, a whole bunch more at $0.01, and even more at $0.0001. Of course, if you'd prefer to take advantage of a melt-up rally, you could join the dozen orders to sell at $199,999.98.
posted by malocchio at 7:30 AM on May 7, 2010 [1 favorite]


humanfont : or mock you for you terrible high volume negative yield investment strategy.

I did say that I posted a loss after carryover. I actually made around 25% net last year (market recovery FTW!), but lost my shirt at the end of 2008. And I don't think I'd call trading every week or two "high volume"... Yes, it means I trade based on events rather than growth or value, but not on per-tick up/downswings.


heathkit : This I don't understand at all. Buying stock isn't making a loan - the company that issues the stock already got most of their money out of it in the IPO.

From the perspective of the company's books, you have it correct. But by buying that stock, you own a piece of that company, which you can then either hold in the hopes it will grow (and split the stock) or profit (and yield dividends), or both.

But you can (though shouldn't) view it as a loan in that someone else pays you back when you sell. While you hold it, you gain from the success of the compan (and lose from its failures); When you sell, you give someone else the chance to do so by paying back the "loan" you made in buying it.


For example, how can stock speculation be anything but a zero-sum game? If I bought P&G today $45 and sold it at $55, all I did was transfer wealth from the people who panicked to myself. I didn't do anything to create material value, and the transaction is totally divorced from anything the company is doing.

The transaction itself, yes, but you have to remember that underneath all that activity, you really do have a company doing something. That company will, on some regular basis (usually quarterly), report how well it has done.

Consider a simple case of dividend reinvesting - I start with 100 shares of a stock trading at $5. It issues a $0.15 quarterly dividend which I use to buy three more shares. I now hold 103 shares of it with no additional input from me, and the market in general has $15 more floating around than it did the day before. All those myriad transactions between such events merely serve to spread the love around. For X dollars of input, regardless of who gave them and who ended up with them, the market ended up with 1.03X dollars at the end of the day.

Not zero-sum (though as you point out, it can (and does) end up going the "wrong" direction from zero, on occasion.
posted by pla at 7:39 AM on May 7, 2010


When someone questions the value of the easy buying and selling of stock, a really common response is "But, but the stock markets provide liquidity"--which is another way of saying, in that context, the easy buying and selling of stock. This strikes me as circular, self-justifying logic.

If the question is "Should we encourage the trading of stocks (which still, in theory at least, represent investments in real-world companies) to occur as often and as easily as it does today?", then a response which can essentially be paraphrased as "Yes, because that's what allows stocks to be traded as often and as quickly as they are today" seems to miss the point in a really annoying way.

Using "liquidity" to argue for patterns of market behavior that almost completely ignore market fundamentals and that churn large sums of capital into what's essentially a machine for making money without creating new goods or services of value, seems like a really misguided thing to do.

Stocks are not money. They're not even the only investment vehicles in the world. The question is should stocks be as liquid (and hence, volatile) as they are, and there are legitimate arguments to be made that, no, they shouldn't, especially since much of the volatility has no meaningful relationship to the underlying value of the investments that stocks (tenuously) represent. A related question might consider whether we're really better or worse off for letting the stock market be the de facto center of our economic universe at all.
posted by saulgoodman at 8:07 AM on May 7, 2010


So if I understand correctly, nothing illegal (either by law or software) happened.

Does this mean that if someone truly DID try to trade the right billion shares, they could crash the whole system in fifteen minutes? Could a party with sufficient leverage use such a situation to tilt the whole market just long enough to buy everything?
posted by General Tonic at 8:10 AM on May 7, 2010


...Am I the only one wondering about Chinese hackers when I see shit like this go down?
posted by caution live frogs at 8:28 AM on May 7, 2010


...Am I the only one wondering about Goldman Sachs when I see shit like this go down?
posted by mazola at 8:37 AM on May 7, 2010 [2 favorites]


So if I understand correctly, nothing illegal (either by law or software) happened.

The jury's still out on that question.
posted by saulgoodman at 8:40 AM on May 7, 2010 [1 favorite]


The question is should stocks be as liquid (and hence, volatile) as they are, and there are legitimate arguments to be made that, no, they shouldn't, especially since much of the volatility has no meaningful relationship to the underlying value of the investments that stocks (tenuously) represent.

Volatility is not a consequence of an asset being liquid; this is backwards. A liquid asset is one that can be bought or sold with little effect on the price resulting from the transaction (Wikipedia). When a lot of money comes pouring into the market spreads widen and the market moves fast, for two reasons. First, liquidity dries up. There's no one to take the other side of the transaction. Second, the dealers and market makers recognize that there is likely an information asymmetry and widen the spreads to protect themselves. Decreasing the liquidity would help neither the markets nor the market participants. Volume would decline, and perhaps there would be less price movement, but without a doubt spreads would widen. The market is less about investments and more about a way to deal with uncertainty. A lumbering, expensive market is simply less useful.

Using "liquidity" to argue for patterns of market behavior that almost completely ignore market fundamentals and that churn large sums of capital into what's essentially a machine for making money without creating new goods or services of value, seems like a really misguided thing to do.

Price behavior does not and can not ignore market fundamentals. By definition, if the market price gets too far from its fundamental value then it is profitable to take a position which brings the two prices back in line with each other. When there are large price movements you aren't seeing the price move away from the company's fundamental values but rather the market's own uncertainty. This uncertainly is an essential element. If it was possible to accurately determine value by some other means, we wouldn't need a market to begin with. But we do.
posted by BigSky at 9:39 AM on May 7, 2010 [3 favorites]


Unsane, thanks for that comment. I was wondering what would be the result of them nullifying all the trades. Now, I have a few questions. Forgive me if some of them are uninformed.

Regarding the "fat finger" explanation:

How could selling even that much of one stock all by itself cause such a huge decline in the whole market? And also in the NASDAQ?

If ONE trader can cause that much damage, are we really supposed to believe that they can locate and undo all those trades successfully, without causing chaos?

What was the deal with all the currency hoo-ha right before the collapse? I was watching all that Yen stuff and even though I understood precisely none of it even I, a liberal arts major, was like "Hmmm, this can't be good." Some seriously off-kilter stuff was going down before the fall, and I think it has more to do with the Euro and European banks and everybody realizing that we're pretty seriously on the ropes, debt-wise. So, stupid question, why not just say that? Why all the "fat finger" malarky?

Finally, wait until the thing REALLY blows and all those traders get covered with sticky black oil. We'll have to encase Wall Street in a giant dome, or something.
posted by staggering termagant at 9:59 AM on May 7, 2010


Man, I can't believe I confused Schrödinger and Heidegger.

I sense a masters thesis here though, something like Feline Facticity: The housecat as emblematic of Being and Non-Being
posted by joe lisboa at 10:21 AM on May 7, 2010


So, basically, putting your money in the stock market is akin to placing it into Heidegger's bank box. At any given moment, you may be rich or broke.

Man, I can't believe I confused Schrödinger and Heidegger.

The weirdness of a stock being a loser or winner almost simultaneously actually made me think more of quantum mechanics and the Heisenberg Uncertainty Principle

My favorite Heisenberg quote from the link, btw:

The more I think about the physical portion of Schrödinger's theory, the more repulsive I find it...What Schrödinger writes about the visualizability of his theory 'is probably not quite right,' in other words it's crap.

posted by bearwife at 10:51 AM on May 7, 2010


Man, I can't believe I confused Schrödinger and Heidegger.

Brangelina-ize(Heisenberg + Schrödinger) = Heidinger

And also heisenbödinger and schrödiheis.
posted by morganw at 11:10 AM on May 7, 2010 [1 favorite]


Consider a simple case of dividend reinvesting - I start with 100 shares of a stock trading at $5. It issues a $0.15 quarterly dividend which I use to buy three more shares. I now hold 103 shares of it with no additional input from me, and the market in general has $15 more floating around than it did the day before. All those myriad transactions between such events merely serve to spread the love around. For X dollars of input, regardless of who gave them and who ended up with them, the market ended up with 1.03X dollars at the end of the day.

No, no, no. In your example, the market may well have gone up $15 or it may have gone down $0.01, but no value was created. You owned some small part of a company that had some cash and then you owned a slightly larger part of a company with less cash. In fact, if we are to believe the efficient market hypothesis, the shares should be worth exactly the amount of the dividend less, so you'd end up with exactly the same market value of shares in the end. The fact that this doesn't happen is yet another indication that the efficient market hypotheses just doesn't hold, and it certainly does not indicate that any value was created.
posted by ssg at 11:42 AM on May 7, 2010 [1 favorite]


ssg : In fact, if we are to believe the efficient market hypothesis, the shares should be worth exactly the amount of the dividend less, so you'd end up with exactly the same market value of shares in the end.

In terms of the dividend itself, yes. A $0.15 per share dividend theoretically means the share price drops by $0.15.

I had meant to gloss this bit over for the sake of simplicity, but technically the act of "creation" occurred slowly over the previous quarter. Decent sales (or whatever) allowed the company to issue a dividend in the first place. No, the act of issuing a dividend didn't "create" value, it merely lumped it into a bite-sized chunk.
posted by pla at 11:50 AM on May 7, 2010


From the perspective of the company's books, you have it correct. But by buying that stock, you own a piece of that company, which you can then either hold in the hopes it will grow (and split the stock) or profit (and yield dividends), or both.

And this makes sense to me, but there are a great many stocks out there trading with horrendous yields, and many that pay no dividend at all. Furthermore, when I last looked into why dividends don't seem to matter, I found articles that suggested companies should return value to shareholders by buying back their stock rather than paying dividends. I can see how that works, but it seems more indirect and subject to price manipulation than just straight up paying dividends.

Yields are at a historic low, though after googling around I haven't been able to find a good graph of average dividend yield of the Dow over time - that might be interesting.

Price behavior does not and can not ignore market fundamentals. By definition, if the market price gets too far from its fundamental value then it is profitable to take a position which brings the two prices back in line with each other.

While this is true in theory, in practice I think think the adage "Markets can remain irrational longer than you can remain solvent" applies. It's possible for price behavior to become divorced from fundamental value for years at a time - ie, the housing market.

Looking at my level 2 quotes for, let's say, AAPL, there are several bids out there at $1.00, a whole bunch more at $0.01, and even more at $0.0001. Of course, if you'd prefer to take advantage of a melt-up rally, you could join the dozen orders to sell at $199,999.98.

I just now realized you see this exact behavior in Eve online. People put in ridiculously low buy orders to try to catch sellers fat-fingering their sell orders. I'm kind of shocked these shenanigans are allowed in the real world.
posted by heathkit at 11:51 AM on May 7, 2010


By definition, if the market price gets too far from its fundamental value then it is profitable to take a position which brings the two prices back in line with each other.

But many, many traders don't even consider the fundamentals of a company when they trade. They trade using black box methods, like trend analysis (the stock market version of phrenology). And you still haven't explained what the underlying value all this liquidity helps us access is supposed to be.

After a company's initial offering, trading just provides an elaborate mechanism for people swapping their money back and forth, essentially, without regard for getting something of value in return (other than the opportunity to cash out their holdings under the right circumstances so that they end up with more money than they started with). The only difference is, occasionally the pieces of paper being traded become completely worthless when a company goes under. Otherwise it's all just about the perceived value of the stock, and a given stock isn't valuable for what it's worth in hand, but for what you'd expect to be able to earn on trading it away.

So for the most part, it's not even the stock itself as an investment that's valued in today's market; its the opportunity to profit from a trade that a stock represents that we value. That's back-ass-wards, in my opinion. We buy stocks not so that we can own pieces of companies, but so we can sell pieces of companies we have no long term interest in owning. We buy stocks so that we can as quickly as possible divest ourselves of the stocks at a profit. That's not investment. You can argue about whether it adds overall economic value or not all day, but it's not really investment.

If the return on investment in the stock market still came primarily in the form of stock dividends, the value would inhere to the stock, rather than the trade. That would decrease pricing volatility and encourage fundamentals-based investment strategies.

These days, we might as well trade baseball cards on the stock market instead of stock for all the underlying value that changes hands in a trade. I realize mine's an archaic and essentially irrelevant view, but I still maintain we've gotten too far away from the basic principles of the market, the basic useful function of the market as an economic engine for the creation of new, innovative enterprises with sustainable, long-term business models, and that's a major contributing factor to our recent economic problems.

(Also what heathkit said.)
posted by saulgoodman at 12:03 PM on May 7, 2010 [2 favorites]


pla: "ssg : I had meant to gloss this bit over for the sake of simplicity, but technically the act of "creation" occurred slowly over the previous quarter. Decent sales (or whatever) allowed the company to issue a dividend in the first place. No, the act of issuing a dividend didn't "create" value, it merely lumped it into a bite-sized chunk."

Well, duh. But the question you were purporting to answer was about stock speculation. If your argument is that some companies create value, therefore stock speculation creates value, you'll have to do a lot better at linking the creation of value to the stock speculation. If your argument is just that some companies create value, then you are missing the point.

posted by ssg at 12:09 PM on May 7, 2010




ssg : Well, duh. But the question you were purporting to answer was about stock speculation.

I think we might not quite have the same focus for our discussion, here.

I think by "speculation" you mean (and correct me if wrong) to refer to "trading for reasons other than a long-term bet on the success of a company". But by that definition, you could arguably call any trading "speculation" if it doesn't occur directly in response to some news about the company.

The deeper reality involves more shades of gray than that, however. Companies carry on doing their day-to-day business regardless of the market, sometimes going weeks or even months without the least bit of new information about them coming to light. Should trading completely stop during those periods?

If company-X regularly earns 7.6% profit per year over time, their stock price should steadily grow by a similar amount. And even though they may only pay off their investors on a quarterly basis, they still arguably grow by 0.2% per day.

I would also point out that new information about a company can come indirectly - If mining Company-X seems perfectly healthy but six major players in the mining industry report various disasters, you can expect Company-X to dip as well (that actually counts as one of my personal favorite times to buy in, hold for a week or so until it recovers, then sell). Based on the massive interdependency of the market as a whole, in practice that means "new information" doesn't just come from press releases and earnings reports, it comes as often as you feeling like digging deep enough.


That said, I certainly don't mean to defend the sort of high-volume traders who rarely hold for more than five minutes at a time. You simply can't get new information fast enough to do that as anything but a semi-automatic response to the output of a short-term model.
posted by pla at 1:00 PM on May 7, 2010


But many, many traders don't even consider the fundamentals of a company when they trade. They trade using black box methods, like trend analysis (the stock market version of phrenology). And you still haven't explained what the underlying value all this liquidity helps us access is supposed to be.

Traders are not obligated to consider fundamentals, they're not obligated to consider anything at all. The larger point is that if there is some such thing called "fundamental value" or "real value" than a divergence from that value is an opportunity for profit. Everyone else's motives don't really matter. The truth will out. By the way, there is no resemblance between trend analysis, more often called technical analysis, and phrenology. Many traders have done quite well using principles of technical analysis (e.g. Richard Donchian), and a few academics have started to give it some attention as well (e.g. Andrew Lo).

Liquidity is valuable because it opens up the market for everyone to pursue their own independent financial ends. That's its value. There's nothing more to it. There is and always will be uncertainty about the current and future value of our assets. The market provides an avenue for everyone to adjust their assets relative to their individual concerns.

After a company's initial offering, trading just provides an elaborate mechanism for people swapping their money back and forth, essentially, without regard for getting something of value in return (other than the opportunity to cash out their holdings under the right circumstances so that they end up with more money than they started with). The only difference is, occasionally the pieces of paper being traded become completely worthless when a company goes under. Otherwise it's all just about the perceived value of the stock, and a given stock isn't valuable for what it's worth in hand, but for what you'd expect to be able to earn on trading it away.

So for the most part, it's not even the stock itself as an investment that's valued in today's market; its the opportunity to profit from a trade that a stock represents that we value. That's back-ass-wards, in my opinion. We buy stocks not so that we can own pieces of companies, but so we can sell pieces of companies we have no long term interest in owning. We buy stocks so that we can as quickly as possible divest ourselves of the stocks at a profit. That's not investment. You can argue about whether it adds overall economic value or not all day, but it's not really investment.


"Successful investing is anticipating the anticipations of others."
-John Maynard Keynes

Of course its investment. We're choosing to place our capital (or our time, or our labor, for that matter - there's no difference) in one place as opposed to another. That's what investing is.

It sounds like you would prefer some sort of economic model where all the companies were similar to co-ops. I'm not much on corporations myself. To my mind there's something wrong about an investor profiting from a corporation's success but not being liable for its mistakes. But that's a separate issue. A tax on transactions is about access to the markets at the retail level.

-----

While this is true in theory, in practice I think think the adage "Markets can remain irrational longer than you can remain solvent" applies. It's possible for price behavior to become divorced from fundamental value for years at a time - ie, the housing market.

To what does that adage apply, an individual's failure? There will always be traders who make mistakes in their timing. If no one was ever out of step with the markets for longer than he thought possible, then there would be no divergence from the fundamental value to begin with. And since the fundamental value would be so obvious and apparent to everyone, there would be no market at all.

As for the housing market, it was massive, sustained government intervention that resulted in the boom and bust of the housing market. Without the government's interference, it couldn't have happened. Using that as an example of price behavior is disingenuous. It's a textbook example of a manipulated market.
posted by BigSky at 1:25 PM on May 7, 2010 [1 favorite]


It sounds like you would prefer some sort of economic model where all the companies were similar to co-ops.

Originally, the investment in a stock was meant to yield returns primarily in the form of dividends as a company profited. The investment was in a company, and the return was a share in the companies profits, not a return on the share price at the time you sold a stock. The modern speculative function of the markets was once much less central. (And the first stock markets, incidentally, were French.)

Many traders have done quite well using principles of technical analysis (e.g. Richard Donchian), and a few academics have started to give it some attention as well (e.g. Andrew Lo).

No, no they haven't done quite well. Major studies have consistently shown that traders using the techniques of technical analysis (which, BTW, for anyone wondering, basically amounts to plotting a stock's price fluctuations onto a graph and then making trades based on how closely the shape of that particular graph corresponds to the shape of certain standard graph patterns that are held to be especially significant for their predictive power) fare no better over time than other traders. No trader or trading technique has been shown to consistently outperform others, or even outperform random chance, over time--and the major indices consistently outperform active traders over time. But you must already know that.
posted by saulgoodman at 2:08 PM on May 7, 2010


we've gotten too far away from the basic principles of the market, the basic useful function of the market as an economic engine for the creation of new, innovative enterprises with sustainable, long-term business models, and that's a major contributing factor to our recent economic problems.

Unfortunately, the history of modern capitalism does not bear this view out: there have been numerous speculative bubbles, and "long-term" is really relative in any case (cue Keynes' famous quote). Rather than have a rose-tinted view about the past, we need realistic market regulations to minimize future crashes. Either that or we need to realize the dream of emancipation from capitalism Marx famously articulated.
posted by HP LaserJet P10006 at 2:12 PM on May 7, 2010


Of course its investment. We're choosing to place our capital (or our time, or our labor, for that matter - there's no difference) in one place as opposed to another. That's what investing is.

No, any spending at all qualifies as investment under this definition. It's debatable what investment really means. I hold that investing involves putting capital into something you expect to appreciate in value and that offers a return on the investment as a direct result of your taking an ownership stake in it--not as a result of what you can earn when you choose to divest yourself of it.

In the most literal sense possible--by definition--you are making money off of "divestment" not "investment" when you make money by trading stock.
posted by saulgoodman at 2:14 PM on May 7, 2010


you are making money off of "divestment" not "investment" when you make money by trading stock.

This is just semantic quibbling though: speculation and the bubbles that accompany them are a feature, not a bug, of any complex capitalist society. Starting from both an underlying pessimism about the profit motive and an underlying pragmatism about the history of speculation, seems to me a better way to think about all of this than to see our current financial problems as representing a radically historically anomalous phenomena.
posted by HP LaserJet P10006 at 2:19 PM on May 7, 2010


Rather than have a rose-tinted view about the past,

Well, that's fair--I realized, later, that I was making my point sound like some appeal to a mythical golden age, but the general point doesn't depend on the past having been perfect either.

As an ideal, the markets ought to be investment, not divestment driven, and the more so that they are, the fewer speculative bubbles we should expect to see. You're absolutely right that the problems have been there since long into the past--and the arguments that focusing on fundamentals and long-term investment can serve as antidotes to those self-destructive tendencies of markets have been there all along as well.

You're point is correct, but again: if we weren't speculating so much, we wouldn't end up with so many speculative bubbles. That's just tautological. Therefore, stocks ideally shouldn't be viewed as speculative instruments.

Rather than have a rose-tinted view about the past, we need realistic market regulations to minimize future crashes.

This is actually what I'm trying to do: I'm arguing that we need regulations that go in the direction of trying to encourage the kind of long-term investment-oriented behaviors and strategies I've been describing as ideal. But you're absolutely right that these ideals have never really been the rule.
posted by saulgoodman at 2:26 PM on May 7, 2010


This is just semantic quibbling though

I hate this phrase. "Semantic quibbling" is nothing more than a pejorative way of saying "trying to settle the terms of what it is we're actually talking about."

Why do we treat that like it's not important? Isn't it really the most essential precondition to meaningful communication? Shouldn't we always try to reach a common understanding of what we're talking about when we discuss things first, if our aim is to communicate?

Fact is, these words are paired to one another as semantic opposites: investment, divestment. One means putting money in; the other means taking money out. It's not that complicated or fuzzy, really. If you are making money by taking money out of some instrument, you are making money by divesting yourself of it, not by investing in it. To me, it's divestment oriented markets that inevitably lead to unfettered, self-destructive speculation.
posted by saulgoodman at 2:35 PM on May 7, 2010 [1 favorite]


these ideals have never really been the rule.

Too true, since the only ideal capitalism tends to embody is the will to make money.

There is one way in which the current market situation might be unique, however, and that is in the possibility that a kind of megabubble has now built up for so long, and to such a degree, that the effects of it popping would be even more catastrophic than all the bubbles of the past combined.

The nature and size of the derivatives market and the shadow banking industry that is built on that market give indication that we are indeed in the midst of just such a situation.
posted by HP LaserJet P10006 at 2:42 PM on May 7, 2010


Honestly, if returns are so low on such miniscule scale of investing where a less than one percent tax per transaction will wipe you out, why even bother doing it in the first place? You should be doing online gambling, poker or horse betting instead, if it's legal in your area.
Well, the difference with poker is that an average player, commissions notwithstanding, will make money if the market overall moves up, which it generally does. In other words, it's a way to gamble with positive expectations. The problem these days is that the market is not moving up.
It works exactly like a casino would if the casino were the size of the stock market and had an ever-increasing clientele. More specifically, it's like the poker tables. You pay your bit to the house for the privilege of playing and you get to take everybody else's money (or lose your own).
It's like poker tables that had a negative rake. Remember, the underlying corporations do make some money, which goes back into the system, either by stock buybacks or dividends.
Buying stock isn't making a loan - the company that issues the stock already got most of their money out of it in the IPO.
Companies don't just do an IPO and that's it. After the first IPO they'll do follow on offerings when they need cash. For a publicly traded company, the market works like a bank they can get cheap loans from, and when they have too much cash they do buybacks, which raises the price of the shares, which benefits their shareholders.
This would make a lot of sense if the market was shooting up and down 30% every day, but it doesn't. I mean, pull up Google Finance or something — we're usually talking a couple percent in some direction.
Sure, but there are companies out there with more volatile stocks. And doubled up ETFs like FXP or QLD
posted by delmoi at 7:44 PM on May 7, 2010




So I got a message from a friend of mine from my old Wall Street days, telling me that this trade was almost certainly not a fat finger but a programmed trading response to terrible weaknesses in European banks that were revealed.

NYSE is saying it's exactly as H Roark said, that the exchange slowed down and routed orders through other exchanges where there wasn't as much liquidity. There was a cascading effect as the market was already dropping, and the thinner exchanges ran out of good bids and started putting orders through that normally don't get executed. Then, partly because the NYSE was slow, the bids just stopped while everyone waited for someone to come in and start buying to put in a bottom, which was spooky - I watched it as it happened. It happened very quickly, but for a moment there it looked like we were going to fall off a cliff - we very nearly did, in fact. There should be some mechanism which slows orders through other exchanges when this sort of thing happens, which may have prevented at least the nearly 1000 point drop. Although the market was already falling when it happened and corrected back a great deal, it definitely took out a lot of money.
posted by krinklyfig at 5:06 PM on May 8, 2010


I should clarify: In the sense that day traders and HFT outfits use the market, it acts like a casino.

Well, the fact is that investing markets always include speculators. There's nothing wrong with that, as long as the speculation doesn't cause damage to the rest of the market, and of course it can and does in the US. That's why we do need meaningful regulation, but this incident isn't a problem of HFT or any sort of speculation as far as I can tell.
posted by krinklyfig at 5:09 PM on May 8, 2010


However, I can imagine plenty of types of economic activity being zero-sum or even negative sum. For example, how can stock speculation be anything but a zero-sum game? If I bought P&G today $45 and sold it at $55, all I did was transfer wealth from the people who panicked to myself. I didn't do anything to create material value, and the transaction is totally divorced from anything the company is doing.

What traders do (and have done for thousands of years) in essence is take advantage of market inefficiencies. I know it might not seem very honorable, but there is nothing dishonorable about trading in markets actively if you're good at it or intend to learn. However, the problem with HFT is that most of the systems are basically front-running the bids so that someone who doesn't have a box at the exchange gets a bid put in front of them for a slightly higher amount. This is indeed taking advantage of market inefficiencies, but it's in a way that damages the healthy functioning of a market, because the normal bid-ask spread is not working in a way that is equitable to anyone who is not using an automated system at the exchange. This does need to stop. I'm not worried about day trading per se, even automated systems set up by day-traders (as is often the case), but HFT which shaves fractions off all our transactions by front-running is nothing more than a leech and a drain on the market.
posted by krinklyfig at 5:17 PM on May 8, 2010


The question people have been asking for ages is, if you think a stock is worth 60, why put in an order to sell at 45 (ten percent below the original purchase price)?

There are many reasons why someone might take a loss for intelligent reasons, although it is true that people often act irrationally. It's difficult to say whether a decision is wise until you have enough time to look back at it in retrospect, although nobody ever went broke taking profits.
posted by krinklyfig at 5:24 PM on May 8, 2010


BigSky wrote: "If it was possible to accurately determine value by some other means, we wouldn't need a market to begin with. But we do."

You miss the fact that the market relies upon third parties accurately (for some definition of accurately that is at least as close as the market usually gets) determining the value of a company. These people are called auditors. While they issue no opinion on specific value of the business as a whole, they do at least attempt to accurately value assets and liabilities of the company.

Without this, the market would not be in a position to determine the value of anything.

Hell, saying that the market accurately values anything is just denying the myriad bubbles of the last 30 years.

delmoi wrote: "Remember, the underlying corporations do make some money, which goes back into the system, either by stock buybacks or dividends. "

Well, ideally the money goes back into the system, but these days it tends to go into management's pocket at a lot of firms. You could make the argument that the money ends up in the market anyway, indirectly, but you could make the same argument for just about every dollar earned or spent.
posted by wierdo at 5:50 PM on May 8, 2010


You miss the fact that the market relies upon third parties accurately (for some definition of accurately that is at least as close as the market usually gets) determining the value of a company. These people are called auditors. While they issue no opinion on specific value of the business as a whole, they do at least attempt to accurately value assets and liabilities of the company.

Without this, the market would not be in a position to determine the value of anything.


The market value is simply the price at a transaction between a willing buyer and seller. Value is not dependent on the existence of auditors. Market participants may use auditors if they so choose, but with or without them, the market continually reaches a consensus on value. The independent third-party auditor is not the essential element here. The market is.

Hell, saying that the market accurately values anything is just denying the myriad bubbles of the last 30 years.

The value that the market sets is dependent on conditions. Those conditions and the consequent values change, sometimes rapidly.
posted by BigSky at 12:28 AM on May 9, 2010


BigSky wrote: "The market value is simply the price at a transaction between a willing buyer and seller. Value is not dependent on the existence of auditors. Market participants may use auditors if they so choose, but with or without them, the market continually reaches a consensus on value. The independent third-party auditor is not the essential element here. The market is."

Only if you consider a wild-assed guess (or a series thereof) to be an efficient way of determining value. As the real estate bubble showed very clearly, the market is very poor at determining a realistic value for many classes of asset.

While it will always produce (presuming there's someone ready to buy) a value, it may not be a rational value, as evidenced by the mini crash at bar. "True believers" consider severely depressed prices due to a transient interruption in liquidity an accurate valuation. I do not. What an asset can be sold for at this very moment is only one part of that asset's true value. The changing conditions you mention only serve to obscure the asset's value, not illuminate it.

Your explanation is a clear example of how the market value of an asset is often based largely on random chance, lending credence to my supposition that the stock market, as implemented today, operates more like a casino than a market.
posted by wierdo at 6:08 PM on May 9, 2010


What an asset can be sold for at this very moment is only one part of that asset's true value.

I think an analogy to quantum mechanics might be useful. Until a particle is observed, it exists only in a nebulous waveform of probabilities. You can't say that an electron is in any one particular place, until it's observed, then the waveform collapses and the electron exists in that place.

Until an asset is sold, it could be worth a lot of different things to a lot of different people, but in reality, it's value is what someone ultimately is willing to pay for it with real money.
posted by empath at 8:33 PM on May 9, 2010


empath wrote: "Until an asset is sold, it could be worth a lot of different things to a lot of different people, but in reality, it's value is what someone ultimately is willing to pay for it with real money."

Yes, that is the definition of value. The problem is that it's only an approximation, the same as if I were to do a deep analysis of the books of a company and derive a valuation that way. I say it is at best an gross approximation, because at least on the stock market, the asset's price changes wildly without any change in the underlying business.

Is it any more accurate to say that one share of Accenture was worth only a penny rather than ~$40 just because there was some difficulty in finding a willing buyer at $40 for a few minutes?

Or we could take my car as an example. It is pretty beat up; I could probably find a willing buyer for $800 or so. However, it also has an intrinsic value as a continuing source of transportation. One that I value far more than $800. There is a significant spread between its intrinsic value and its market value. The market is like that. A lot. Largely because prices often vary in response to sentiment, rather than reason.
posted by wierdo at 8:48 PM on May 9, 2010


As the real estate bubble showed very clearly, the market is very poor at determining a realistic value for many classes of asset.

As I stated above, the real estate bubble was caused by government intervention. You could have hardly picked a worse example to make a case against free markets.

Or we could take my car as an example. It is pretty beat up; I could probably find a willing buyer for $800 or so. However, it also has an intrinsic value as a continuing source of transportation. One that I value far more than $800. There is a significant spread between its intrinsic value and its market value.

Saying that there is a significant spread between its intrinsic value and the market value is pure sophistry. The car does not have an intrinsic value in $, separate from its market value. What it has is a personal value to you, which you value at greater than market value. That is how everyone who chooses to buy or hold on to an asset, values their own particular asset. If they rated its personal value as less than the market value, i.e. they would rather be holding the cash than the asset, they would be selling. There has to be a disparity between what a person values an item at and that item's market value, on both sides, or no one would ever make a deal.

Markets vary in response to sentiment because they are human. Emotions play a large role in what we value. Yes, changing sentiment can result in sudden changes in valuation. That's not a sign of a flaw in our market system. It's just the way people are. There's no way to somehow factor the emotions out and just value economic goods by reason. Without emotion and desire guiding our choices there could be no ranking of economic ends at all.
posted by BigSky at 11:38 PM on May 9, 2010


If by government intervention you mean the pouring of vast funds into the market for no particular reason, then sure, government intervention caused the real estate bubble. In all the countries it happened in. Every time. It was government policy. I tend to think it's the typical bubble economics that drives the price of gold. Don't have somewhere better to put your money? Put it in x.

Of course any utilitarian object has an intrinsic value. It has a value in the amount of time or work it saves you. That it is not as easily determined as its market price does not make that value any less valid. Not everything in this world is an intrinsically valueless slip of paper.

Moreover, your position requires that people actually be rational actors, which they are plainly obviously not. The popularity of lotteries and casinos is proof enough.
posted by wierdo at 8:31 PM on May 10, 2010


If by government intervention you mean the pouring of vast funds into the market for no particular reason, then sure, government intervention caused the real estate bubble. In all the countries it happened in. Every time. It was government policy. I tend to think it's the typical bubble economics that drives the price of gold. Don't have somewhere better to put your money? Put it in x.

Probably wouldn't phrase it this way myself, but I wouldn't argue the point.

Of course any utilitarian object has an intrinsic value. It has a value in the amount of time or work it saves you. That it is not as easily determined as its market price does not make that value any less valid. Not everything in this world is an intrinsically valueless slip of paper.

Calling it intrinsic is misleading. It is a personal, subjective utility. In a previous post you claimed that the market was flawed in its allowing for gaps between this "intrinsic" value and the market value. But there is no intrinsic value as measured in dollars. It is a subjective measure of your own preferences (e.g. you prefer your car to $800). That's why a disparity between your ranking of goods and the market's ranking is not a problem. In fact it's a necessity, or there would be no motivation on anyone's part to do a deal.
posted by BigSky at 9:58 PM on May 10, 2010


Your way of valuing goods is circular, BigSky. It's a snake that never stops chasing its own tail, and provides no non-arbitrary mechanism for determining the value of anything. Good thing there's still book value to consider for those of us who prefer less arbitrary pricing mechanisms.
posted by saulgoodman at 7:29 AM on May 11, 2010


BigSky : Calling it intrinsic is misleading. It is a personal, subjective utility.

Calling it extrinsic (or at least, "not intrinsic", since they don't quite count as opposites) seems even more misleading, however.

Yes, you can argue that a car-as-transportation has value only at the personal level, in that not all people need a means of transportation (some people live in a city with decent public transit, for example). However, I would posit that the second scenario counts as the exception, not the rule - A localized situation (public transit) has reduced the personal weighting of the intrinsic "transportation" value of owning a car, but the car still very much contains that valuable property.

In a previous post you claimed that the market was flawed in its allowing for gaps between this "intrinsic" value and the market value. But there is no intrinsic value as measured in dollars.

In that, I would agree with you. I think, though, that weirdo most likely didn't mean "intrinsic" in the technical sense (unless you trade commodities and actually take delivery of them, you'd have a hard time saying that any financial instrument has an intrinsic value). If you want to use a technical term, I'd hazard a guess that he meant something more along the lines of P/E ratio (or more realistically, PERcompany/PERindustry).


saulgoodman : Good thing there's still book value to consider for those of us who prefer less arbitrary pricing mechanisms.

What "book value" do you place on, for example, x shares of IBM common stock? Book value works well for readily replaced physical objects with known rates of expected deterioration. It doesn't work so well for valuing companies. Even if you take the sum of IBM's physical assets, how do you value their patent portfolio? How do you factor in their reputation, their open-source karma in certain tech circles, their raw name recognition?

This all boils down to the most famous of all investing disclaimers - "Past performance is not indicative of future results". Despite all IBM's power in its industry, their history and their holdings, a new CEO and a few bad quarters could put them out of business within a year. Extremely unlikely, but betting on the future value of a stock requires you to weigh that risk as part of your due diligence.
posted by pla at 9:40 AM on May 11, 2010


Yes, you can argue that a car-as-transportation has value only at the personal level, in that not all people need a means of transportation (some people live in a city with decent public transit, for example). However, I would posit that the second scenario counts as the exception, not the rule - A localized situation (public transit) has reduced the personal weighting of the intrinsic "transportation" value of owning a car, but the car still very much contains that valuable property.

I'm not trying to deny that the car has that property, or even that the property has value, only that it is not an objective value which can be stated in dollars. An $800 car on a used car lot will likely be valued differently by someone who is working class, needs a car, and has basic car repair skills (i.e. car is worth more than $800), than by someone who is upper class, owns two cars and is disabled (i.e. car is worth less than $800).

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Good thing there's still book value to consider for those of us who prefer less arbitrary pricing mechanisms.

Book value is the product of auditors, mentioned above. While their work may have some utility, they are not capable of replacing the market. The values assigned by analysts have even less sway when it comes to commodities and foreign exchange. Future valuation is by definition, uncertain. Uncertain is not the same as arbitrary, but it's easy to confuse the two. And when people have to make decisions about how to manage that uncertainty, they don't just rely on analysts and book value, they go to the market to hedge and speculate.
posted by BigSky at 11:21 AM on May 11, 2010


If you want to know how accurate book value, appraisals, and auditors are, look at the housing bubble. Millions of people thought they knew what a house was worth. Unfortunately, it's only worth what someone is willing to pay actual money for today. Which was a much, much lower value than the number crunchers thought.
posted by empath at 11:49 AM on May 11, 2010


SEC: No evidence that one event caused market plunge. "also rebutted assertions on Wall Street that the drop may have been caused by hackers or terrorist activities."
posted by Nelson at 1:45 PM on May 11, 2010


Thanks to saulgoodman, I think my position was clarified: Things have a value independent of their market price. Ignoring that is retreating into the world of candy and nuts, which economics seems to have done a lot of since the mid-70s.

Pointing out that stock cannot necessarily be valued as easily as a physical item is merely pointing out that dirt is not the same thing as air.

That said, a first order approximation of the value of a company can be determined directly from the books: Assets-Liabilities. Obviously, it's a very rough approximation, but it's a starting point. I don't think I really need to explain this.
posted by wierdo at 2:46 PM on May 11, 2010


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