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February 28, 2007
Technology Trouble on the NYSE
It seems clear that while the market was going to do a deep drop yesterday anyway, the tumble was exacerbated by technology troubles on the NYSE. Specifically, a Dow Jones computer that feeds updated index prices got behind on all the trading volume, and when the computer caught up -- they had to switch over to a backup machine -- it caused a late-afternoon apparent collapse in the Dow, which fed selling on all three indices, only to reverse somewhat in the last hour.Would things have been better without the glitch? Interesting question. The WSJ's MarketBeat argues -- using some recalculated data -- that things were bad anyway, so this didn't really matter.
I'm going to disagree. While things admittedly were falling anyway, the pace of the fall matters a great deal in terms of how traders respond, how aggressively they buy (or sell), and overall market sentiment. Given that the correct figures showed an earlier and steeper decline than was displayed by the flawed DJ systems yesterday, it could easily have been the case that buying programs, which propped the market up toward the close, kicked in much earlier and stopped the tumble sooner.
Could it have gone the other way too, with an earlier and steeper correct Dow decline dragging things down farther and sooner? Sure, but I have a harder time buying that, for two reasons: One, the Dow came back more than 100 points after it became clear a glitch had screwed things up; and two, the major U.S. markets are all up (so far) today.
Look further out, this is a problem worth watching. The data volume and overall computational complexity on major markets is not going to get easier to handle. Matter of fact, Regulation NMS is going to make for more intricate communications, with specialists on any of the nation's regional exchanges now on equal footing with entrenched rivals at the major exchanges. It will require a great deal more communications, and much more opportunity for data-deluged systems to get behind, as happened yesterday, even if only briefly.
As an aside, the usual suspects are saying that this sort of thing wouldn't have happened with floor traders (i.e., humans) maintaining more orderly deal flow. I say, Bullshit. We are long past the point where humans could maintain orderly flow in the complex and internetworked world of exchanges and trading types we see today. People who say otherwise are either wearing rose-colored glasses, or are recently unemployed floor brokers.
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I don't know. It's hard to say if we'll see much more of this going forward. The question is how much of this screwup was due to an untested Hybrid system? Software bug? I would expect a few. And expect a few more once they do away with the pretense of Hybrid and go all electronic. But after that I wouldn't expect many problems.
Well, it's pretty difficult to stop a billion chinese's sell order ( assuming they flooded the trade desk).
does anyone teach you moron's that price discovery happens in the futures markets?
and that no one cares about the dow jones indeeiix
and how is this much different from....well you get the point. infectious new dumbness
Lanceypoo, chill out. I happen to agree with the substance of what you are saying. Check out my take at Information Arbitrage http://www.informationarbitrage.com/2007/02/who_made_money_.html for the futures-centric view of the what happened.
I've been amazed at how flippantly main-stream journalists and bloggers have dismissed the 'glitch'. Responses such as "nobody looks at the Dow anymore" or "the snafu didn't cause the downdraft, so it doesn't matter" are very common. However, the glitch raises some questions:
1. Critics have argued over the past decades that the DJI isn't a good measure of broad market performance. Yet, it continues to be a mainstay on the pages of prominent newspapers and web publications. Why? Will the glitch get people to refocus on the old problems with the index and hasten it's supplantation with more timely and accurate indices?
2. The dow has 30 stocks and the index calculation is relatively simple. How is it possible for other indices with many more components to be unaffected ... indices like the S&P and Nasdaq? How and why are the Dow Jones systems different?
3. Computers have been around for decades. I seems inconceivable to me that a contemporary computer system couldn't the data surge. Was the hardware bad? Were the designers and programmers incompetent? Why isn't anyone taking the time to explain exactly what happened to these systems? I'm not an expert, but it seems that the machines today should be able to handle data flows and calculations that are trillions and trillions and trillions of times more massive and complex than the simple task of tabulating a few stock prices. Why aren't the experts explaining this stuff to us (novices) in more than mystically shrouded in 1950's style computer terms?
4. Anyone sophisticated enough to have access to futures markets and real-time stock quotes was able to determine (calculate for themselves) the actual level of the market. What happened to Surweiki's "Wisdom of the Crowds"? Why didn't the Web 2.0 WiseOnes rapidly tag, categorize and disperse the truth to the rest of the crowd? Hopefully, Google will *soon* provide real-time stock information so that we all can calculate the market levels.
5. Why is the coverage of this story from the WSJ so shallow? The problem emanated from the mother ship and their journalists don't seem to have a firm grasp of exactly what happened, what the impact was/is to the market and market participants. Why was news of the original problem disseminated so slowly?
Trading algorithms, risk-management systems, an individual's ability to perceive how the world is functioning, and efficient capital markets are dependent upon accurate (price and other) information. Skeptics have wondered if the glitch was intentional: used to quell affrightment and restore orderliness and higher market levels. glitch doesn't do much to engender trust in our markets.
Paul, what's your take on the large amount of U.S. debt held by China and their possible desire to diversify for higher returns than our bonds are providing? This tech mess episode reminds me of the Tom Clancy novel where the Japanese orchestrated a programming attack on the NYSE in an attempt to shake up the world economic order. If the Chinese DID decide to dump substantial U.S. debt, wouldn't the effect be to devalue the dollar and make Chinese goods less cost-competitive with the U.S.?