Tuesday, August 31, 2010

Gaming Wall Street

You remember the "flash crash" back in May? Well, one trader believes the crash was created on purpose, and that it is only a matter of time before it happens again.

He gives Forbes 3 reasons why the next flash crash will be caused on purpose:

1. Because the last one was caused on purpose. The average quote volume on the NYSE is 10,000 per second. At one point on May 6, somebody launched 5,000 quotes at the NYSE for the ticker of Public Storage inside of one second. None of those quotes led to a trade—but that traffic by itself took the NYSE to 25% of its stable CQS capacity. So it’s clear that one trader or perhaps more discovered that by blasting the NYSE, they could introduce added latency in the CQS feed. Knowing that most players were looking at a delayed NYSE feed, anybody in the know could make easy arbitrage plays between the NYSE and other exchanges.

2. Because mini flash crashes have happened before. On April 28, for instance, the share prices of Wal-Mart and Procter dipped 50 cents for less than a second. If algorithms had been programmed knowing the dip was coming, profits are fat and easy.

3. The system has shown big delays more than once since then. It seems that whenever the NYSE receives more than 20,000 quotes per second, its CQS feed, which determines where many equity orders get routed, falls behind.

My advice? Keep your money in something safer than the stock market, or get to know one of these financial hackers very well.

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