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August is the month for high speed trading disasters

David Brancaccio Aug 28, 2013
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August is the month for high speed trading disasters

David Brancaccio Aug 28, 2013
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One of the themes this August is electrons run amok in financial markets. Last week, Goldman Sachs software put a dent in the options market. Two days later, on Thursday, a three hour long shutdown brought down the Nasdaq market in what’s being called a “flash freeze.” And, earlier in the month, some kind of error — still under investigation — caused a phantom six percent spike on the Shanghai Composite.

In each instance, the culprit has been, at least in part, the high-speed electronic trading systems that run markets all over the world. And, according to Jason Voss of the CFA Institute in New York, the group that charters financial analysts, the high speed trades are only going to get faster.

“Nasdaq and the Chicago Mercantile Exchange are spending tens of millions of dollars to build a tower — one in Chicago, another in New York — to raise itself up over the curvature of the Earth,” says Voss. “By defeating the curvature of the Earth, trades can happen four milliseconds faster.”

If the phrase “defeating the curvature of the Earth” sounds a bit militaristic, make no mistake. There is an algorithm arms race going on on exchange floors worldwide. And as the trades get faster, the margin for calamitous error is only going to increase.

“It’s not just speedy execution, it’s about the sophistication of these computer programs,” says Voss. “But they’re also kind of brainless in a particular way. Yes, there is human error in entering trades, but once those algorithms are in place, they can run amok and do dumb things — like take 99 percent of the value of the stock away.”

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