Automation boosts market volatility, analysts say
High-frequency trading can lead to fear and panic among investors
Computerworld - Over the past month, stock market indices have looked like a lot like a Six Flags roller coaster, with 500 point swings either way -- often on a daily basis.
The Dow Jones Industrial Average finished at 12,747 on July 21, fell to 10,719 on Aug. 10, rebounded to 11,529 on Wednesday before dropping to 10,953 on Thursday. The Nasdaq stock index has experienced a similarly erratic ride.
Some observers say automated computer systems can be blamed for at least part of the accelerated unpredictability of the markets
"[The recent] volatility is absolutely crazy," said IDC analyst Sean O'Dowd. "I don't know a better way to put it. We've seen record lows to record highs in a span of days, not months or years," O'Dowd said. "That's what electronic markets have done."
Up to 70% of trading volume is now consummated by computerized high-frequency trading systems, according to O'Dowd.
David Furlonger, an analyst at Gartner, said proprietary algorithms developed by hedge fund and other Wall Street firms are making decisions without human input. "That doesn't necessarily allow for more analytical, reasoned judgment by a human," he said.
Such firms generally build their own computer infrastructures and design proprietary algorithms that consider the timing, price, and quantity of a trade order, and then initiate the stock buy or sale, all without human intervention.
A little history
In 2003, analysts projected that the financial services industry would spend some $6 billion over two years replacing manual workflows with a new scheme dubbed straight-through processing (STP) of trades.
In simple terms, STP is the replacement of manual processes with an unbroken electronic stream of information that travels from the broker/dealer systems to the clearinghouse. STP uses messaging standards, translation middleware and networks that link investment managers, broker/dealers, custodian banks and clearinghouses.
In 2005, the New York Stock Exchange (NYSE) moved into the electronic exchange marketplace by merging with Archipelago Holdings,a pioneer electronic trader. The Nasdaq Stock Market followed suit by purchasing Instinet Group, the other leading U.S. electronic trading company at the time.
Fears that automated trading could cause problems have been fulfilled at times, such as last October when a so-called "flash crash" saw the Dow plunge by almost 1,000 points in a half hour, wreaking havoc on the financial markets.
An investigation by the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) determined that automated trade execution caused the "flash crash." An SEC report said automated trade execution system had flooded the Chicago Mercantile Exchange's Globex electronic trading platform with a large sell order causing a panic among investors.
The Financial Industry Regulatory Authority (FINRA), the enforcement arm of the U.S. Securities and Exchange Commission (SEC), responded by enacting rules requiring a pause in the trading of individual stocks when the price moves 10% or more either way in a five-minute period.
Congress has not investigated automated trading systems, according to O'Dowd and Furlonger.
Lucas Mearian covers storage, disaster recovery and business continuity, financial services infrastructure and health care IT for Computerworld. Follow Lucas on Twitter at @lucasmearian, or subscribe to Lucas's RSS feed . His e-mail address is email@example.com.
Read more about Financial IT in Computerworld's Financial IT Topic Center.
Crafty hackers hack craft stores -- again.
Michaels Stores (NYSE:MIK) has finally confirmed the details of the point-of-sale hack revealed in January. It's unclear what's taken them so long -- the company claims the hack was "highly sophisticated," but everyone uses a blah-blah phrase like that.
Your humble blogwatcher notes that the problem persisted for more than a month after the news first broke. smh.
In IT Blogwatch, bloggers are aghast that, for the second time, the company's POS was hacked -- lasting almost nine months.
- IT Certification Study Tips
- Register for this Computerworld Insider Study Tip guide and gain access to hundreds of premium content articles, cheat sheets, product reviews and more.
- The Big Data Opportunity for HR and Finance
- If CEOs, CFOs, CIOs, and CHROs want to drive their businesses forward, they will need to quickly recognize the enormous value of big...
- Manufacturing Outlook: Improving time to market, operational effectiveness and innovation in a highly competitive environment
- An enterprise project portfolio management solution can help manufacturers position themselves in the new competitive landscape.
- Time-to-Market: The Need for Speed in the Automotive Industry
- Bringing new vehicles to market quickly has never been more challenging. To bring new models to market on-time and on budget, automakers need...
- Application Rationalization Scorecard: Analysis to Action
- This paper details a proven method, used most recently to evaluate a financial services application portfolio. At the method's core is the scorecard....
- Changing the Way Government Works: Four Technology Trends that Drive Down Costs and Increase Productivity
- This paper discusses four technology-based approaches to improving processes and increasing
productivity while driving down department and agency costs.
All Financial IT White Papers
- Cloud Knowledge Vault Learn how your organization can benefit from the scalability, flexibility, and performance that the cloud offers through the short videos and other resources...
- LIVE EVENT: 5/7, The End of Data Protection As We Know It. Introducing a Next Generation Data Protection Architecture. Traditional backup is going away, but where does this leave end-users?
- On-demand webinar: "Mobility Mayhem: Balancing BYOD with Enterprise Security" Check out this on-demand webinar to hear Sophos senior security expert John Shier deep dive into how BYOD impacts your enterprise security strategy...
- Mobile Security: Containerizing Enterprise Data In this on-demand webinar, Fixmo's Lee Cocking, VP of corporate strategy, explains why Apple-ization trends like mobility and "bring-your-own-device" (BYOD) are driving the...
- Endpoint Data Management: Protecting the Perimeter of the Internet of Things Not surprisingly, "Internet of Things" (IoT) and Big Data present new challenges AND opportunities for enterprise IT. Teams need to harness, secure and...
- All Financial IT Webcasts