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Lesson of today's stock market plunge: Speed kills

GERMANY STOCK EXCHANGE

Image by artemuestra via Flickr

If you want to take away a quick lesson from today's massive Wall Street plunge, it's this: speed kills.


Here, I'm talking about what "Terminator" fans would call the Rise of the Machines: automatic, untouched-by-human-hands trading.

Veteran trader Mark Fisher -- who never appears on CBNC -- came on tonight practically begging for someone, anyone, to slow this thing down. He looked scared and for good reason: he knows what's going on on the trading floors and he says it needs to get the brakes put on it, pronto.

"I came on TV because as someone who's been doing this for over 35 years I think this is a warning," Fisher said on CNBC. "I think what we saw on (Thursday) is just the tip of the iceberg. There is no way this isn't going to happen again and again and again unless we can slow the process down.”

As an illustration, he told a CNBC host to tap her finger on the desk in front of her. A highly sophisticated computer-driven trading desk could make 10,000 buy-and-sell orders in the time it took for her to tap her finger on the desk. Yes, we're talking about thousands of trades in seconds.

Markets have invented these computers to efficiently speed the flow of capital around the globe and to give their trading houses millisecond advantages over rivals, which can translate -- when thousands of trades are involved -- into millions of dollars in profits.

This need for speed is nothing new. European traders 200 years ago used carrier pigeons to transfer trades, because they were faster than horses. One of the first uses of the telegraph was to speed trades.

But those advances increased human trading by factors of two, three or maybe 10. Now, the computer algorithms have increased human trading by factors of 1,000.

I've written before about high-speed trading, sometimes called "flash trading." That in itself is not the problem.

The problem is that traders move in herds and computerized trading allows them to move in massive herds at high speeds and make wild swings. That can cause wreckage like we saw today. Speed is a force-multiplier, as the armed forces would say.

Think of it this way: Imagine you're one guy on a skateboard and you take a corner too fast. You fall over. Maybe you skin a knee. Now, let's imagine you're driving a super-charged bus full of people at 200 mph and you're heading toward a corner. One hundred other bus drivers see you and fall in behind. What happens now when you take that corner too fast? The engine was too much for you to handle and the lot of you go over the cliff.

Fisher, the trader, was begging for the Commodity Futures Trading Commission to put the brakes on the system. He warned this can happen any time the machines are in control. You can be certain that the day's turmoil caught the attention of Democrats on Capitol Hill and in the White House who are eager to reform the financial system.

Billions and billions of dollars in capital was wiped out, literally in seconds Thursday. And that's not just esoteric money being shuffled around by hedge fund managers. That's your 401(k), your portfolio, the investments your pension fund depends on. If you regularly check your 401(k) online, you will see the result of today's carnage. And that's especially galling, considering we've been made steady progress toward recouping the losses inflicted by the financial crisis.

Follow me on Twitter at @theticker.

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By Frank Ahrens  |  May 6, 2010; 8:38 PM ET
 | Tags: Business, CNBC, Commodities and Futures, Commodity Futures Trading Commission, Investing, Mark Fisher, Trade, Twitter, Wall Street, dija, dow jones, dow jones industrial average, dow jones plunge, european debt, greece debt, greek debt crisis, nasdaq, proctor and gamble, s&p 500, stock market plunge, stock market today, wall street  
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Posted by: xianyou55 | May 6, 2010 10:25 PM | Report abuse

"You can be certain that the day's turmoil caught the attention of Democrats on Capitol Hill and in the White House who are eager to reform the financial system.*

Eager? More like dragged kicking & screaming by public outrage ... NO incumbents in 2010, 2012, and 2014. The fate of the Republic depends on it!

Posted by: decsatsv | May 6, 2010 11:01 PM | Report abuse

It is only going to speed up. It's wireless and fast. What's the solution dial up and new Model T Fords? Don't the m key instead of the b key. If billions can be lost they can be made and made fast. Oh well, all's well that ends well. Greece slowed to a crawl and walking beats crawling and running beats walking. Keep up or get dusted. Ashes to ashes and dust to dust, the quick and the dead.

Posted by: tossnokia | May 7, 2010 12:00 AM | Report abuse

Yes, billions destroyed today only to be gained back tomorrow. So please tell me who was hurt in this downdraft? If you have a head on your shoulders, own good stocks and mutuals funds, and hold them for more than a couple of days, then these swings should smooth out in your performance over time. The only people who may have lost today were huge program traders and the idiots who panic at the first sign of blood. What is your solution? Do you advocate that the Government set a time limit, trade limit, what? Will the Governement then step in to approve or disapprove trades? Will they then determine who will be the winners and losers? Sure doesn't sound like a market to me - sounds more like the Orwellian world to which we are headed.

Posted by: fwillyhess | May 7, 2010 12:03 AM | Report abuse

The solution is NOT to slow trading down, for that would be like attempting to put the genie back in the bottle.

The solution is to INCREASE margin limits, as the margin requirements on stock index futures were calculated for 2 standard deviations of volatility -- not the 'black swan' move that occurred today.

In the EU, the margin to trade ONE stock index futures contract is $17,000 vs. $5700 for the US S&P 500 futures.

Consequently, all those sells were likely a cascade of stop loss orders which eminated out of Chicago and rippled through to the cash market in NY.

Margin not speed is the bogeyman of financial market excess. I would wager that a lot of futures traders got wiped out in the sharp decline as margin is 10:1 and a 10% drop = a 100% loss.

Posted by: pgrv | May 7, 2010 12:50 AM | Report abuse

I suppose a good Capitalist would unplug their machine rather than let that happen. We either need to regulate to protect the "widows and orphans" in the bus being whipped around these corners at high speed or convert to a cash based society in which we are investing in something more substantive than the stupid stock market.

Posted by: SarahBB | May 7, 2010 6:09 AM | Report abuse

So if this keeps happening time and again, Wall Street will eventually shut down? Best news I've heard in months. I say do nothing.

Posted by: halifar59 | May 7, 2010 6:56 AM | Report abuse

Where is the contingency planning by CFTC and others ? --- the simulation models to assess risk, develop proposed changes in operating parameters, and any remedies. Where is coordinated policy exchange among various markets/exchanges worldwide to ensure availability of liquidity ?
What happened yesterday was not "noise", and has lessons for accelerated automated processes in other areas such as electrical grids, worldwide information flows.
Bottom line: Our automated webbed world has posed risks that outrun our understanding and institutions.
William F. Buckley wanted to automate (take human decision out of the launch order)nuclear launch. Mighty fine plan, Mr. Buckley.

Posted by: steveandjanereed1 | May 7, 2010 8:25 AM | Report abuse

We have speed humps installed here to slow down the paramedics, fire engines and police. Having a heart attack? This will take a little longer than planned. The house on fire? It can wait. Speed kills!

Posted by: tossnokia | May 7, 2010 9:00 AM | Report abuse

They are going to send me papers and give me five years for paperhanging. They'd a made great nazis if they weren't so incompetent. If we slow this thing down, our brains can catch up with our bodies. Keep the jet under 450. At 500 it burns too much fuel. Rip out your V-8 get a new 4 banger. They have clunker money and for 25 cents you can watch a dancing chicken. It's the road or road kill. What's for dinner? Slow raccoon.

Posted by: tossnokia | May 7, 2010 9:31 AM | Report abuse

This week's main lesson? That the flock of sheep had grown back enough wool to be ready for another fleecing. When are ordinary Americans ever going to figure out that the markets exist only to steal money from the small investor and hand it over to the smart guys? Your 401(k) is literally a pot of gold to be periodically raided at their convenience.

Even companies who attempt to invest conservatively by purchasing AAA-rated securities through a "highly reputable" firm like Goldman Sachs are fair game, as we're told that they should have been "sophisticated" enough to figure out they were about to get the shaft. To quote the immortal words of Otter from Animal House, "You f***ed up -- you trusted us..."

Posted by: jerkhoff | May 7, 2010 3:05 PM | Report abuse

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