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Marketplace Morning Report

Computerized trading may — or may not — have helped 500-point drop

Marketplace Staff Aug 5, 2011
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BOB MOON: We wondered this morning: what are the chances that what we saw yesterday was fear feeding on itself — a bunch of computers programmed to unload at the first hint of panic. So we’ve contacted an expert on the subject. Vasant Dhar is a professor at NYU’s Stern School of Business. Thanks for joining us.

VASANT DHAR: You’re welcome.

MOON: So does the huge amount of computerized trading on Wall Street make these sell-offs worse? What’s to prevent these programs from trading against each other and creating a cascade?

DHAR: That can certainly happen, although, there’s no evidence to suggest that that’s what happened yesterday. In fact, it could just be human initiated.

MOON: But aren’t these computers trained — you know, programmed to trade against fear?

DHAR: The truth is that there’s a really huge, diversity of programs out there. When one of them senses a selling opportunity, another may sense a buying opportunity. So, very often they can actually provide liquidity and stability to the marketplace, as strange as it might sound. On the other hand, what can happen sometimes — probably what happened in the flash trash in May of last year — is that many of these players sense that there’s something going on and they pull out of the market and so the liquidity vanishes. What you get is a move that are exacerbated by, you know, the absence of liquidity as opposed to sort of programs that are trading against each other and cascading.

MOON: Vasant Dhar, professor, Business NYU Stern School of Business. Thanks for your insights.

DHAR: Thank you.

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