I don’t know how many of the readers here pay attention to what’s happening in Wall Street. Yesterdays trade was quite spectacular, although from many points of view it is terrifying and it is a day that will probably live in infamy. From the academic point of view I’m sure it will be studied to exhaustion.
The most interesting thing that happened was a huge spike where the stock market plunged about 8% to recover within 20 minutes about 7% upward. This spike shifted a huge amount of money. If you want to read more about it, you can go to one of the articles in the New York Times here. IN the parlance of statistics, this was a large fluctuation, beyond those that are normal. This is where you know that the Gaussian errors don’t necessarily apply and its most likely that whatever model one has is wrong.
For me I had just finished writing some reports, and was at a break point when I started reading the news before going to lunch. This was coincidentally just as the stock market had plunged some 8%. I immediately called my broker and told him to buy everything, because it had to be a mistake. When he did buy everything as I instructed him, I had saved the day and made a tidy profit. Well, the part about the broker is fiction (as well as the profit ), but I realized that the news hadn’t been so bad that one would expect such a large deviation, and if I had any money to use I would have not hesitated in buying at the moment. Indeed, all of this instability can be attributed to Greece and the sense that they should be punished for their misdeeds, as is the custom when fate is involved . After all, we are talking about a Greek tragedy. (Ok bad joke.)
The most interesting thing of all about this episode are not my personal thoughts on what the markets are worth, but rather the rapidity with which this episode took place. Someone seems to have made an error. An army of robots sells. The market goes down. People realize that this is wrong and an another army of robots buys everything. All within a few minutes. The rest of us were lucky to even see it happen.
This shows the power of automated buying on large scales. Most hedge-funds, etc have in the end similar strategies for when to hit the buy/sell buttons with regards to fluctuations in the market. This means that when an anomaly shows (the large fluctuation), the effect is going to be exaggerated by the inherent non-linearity of the response: when things start to go down, you trigger sell buttons, and as soon as you hit some ‘floor of the day’, you hit buy. This happens even while you are at lunch with your friends. It is completely automated. Because it is so fast, one can make (or lose) huge amounts of money. The winner is usually the one with the fastest button whose algorithm gets a first hint of a whiff of trouble.
To malappropriate the words of a Wall Street insider: “They did god’s work“. If they mean causing what are considered acts of god, like earthquakes and other events that generate enormous amounts of poverty and mayhem on a single stroke, they might even be right about that one. I’m sure they would like to take back those words.
At the end of the day, everyone was left scratching their head because stuff like this is not supposed to happen. After all,
markets are self correcting
so we should be buying into the idea of markets. Except that this blip shows that this is just a fiction and that current technology makes the markets very unstable for short terms. There are going to be a lot of investigations surrounding this episode, and also cries for more regulation. With the usual crying against regulation by the entrenched interests that are happy with the system as it is. I still want to know who is going to clean that mess up and how are they going to prevent stuff like this from happening in the future.
In the meantime, and for the rest of us, life just goes on. I had chicken for dinner and it seems that I am just a little poorer today than yesterday. After all, I had to replace my water heater yesterday and bills have to be paid.