Stock market volatility blamed on "machines"

We've been through this before, but sufficient controls were not instituted.  Here we go again.

As the Dow Jones industrial average collapsed 700 points in 20 minutes Monday afternoon and the stock market jerked from bad to cataclysmic, traders and analysts coalesced around an increasingly routine explanation: Blame the machines.

Lightning-fast trading models, automated sell orders and an arsenal of sophisticated algorithms... are likely to have made a crazy trading day that much crazier, spooking anyone with a retirement fund and sparking an outburst of panic selling...

The market is always “just one step away from massive volatility because of programmed trading,” said Michael Yoshikami, the chief executive of Destination Wealth Management, an investment-management firm in Walnut Creek, Calif. “There’s no way that investors can compete with a computer making 1,000 trades a second. What it does is it ramps up the psychology of fear and greed for individual investors.”..

But Monday’s abrupt fall — which followed months of rising markets and engineered at superhuman speeds — had many analysts remembering the 2010 “flash crash,” another breakneck fall and rebound blamed on the chaos of unchecked automated trades...

The computers react to evidence exponentially faster than any human — think millionths of a second, instead of minutes — and can move en masse, trading at high volumes around the world...

Investment managers say the algorithms’ cold calculations end up sparking hysterical sales among the humans, undermining confidence and feeding a vicious cycle that leads more and more algorithms to do their thing...

And who benefits from this lack of control?  Those with the best computers.

Few analysts expect this new reality of high-speed, high-data trades will change, save for a crackdown from government regulators or the stock exchanges themselves, which make money from fast-paced trading by selling access to by-the-microsecond data feeds of market activity. The Nasdaq exchange made $156 million, or a quarter of its revenue, in the most recent quarter from “information services” including selling trading data.

But critics — including those named in “Flash Boys,” Michael Lewis’s 2014 book on high-frequency trades — say that computerized trading can end up rigging the markets in favor of super-fast trading firms at the expense of everyone else.

More at the Washington Post.