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Sunday, March 25, 2012

Future Flash Crash

 Man On A Wire... Philippe Petit at the World Trade Center

Some time ago I said that the next "big debacle" our system of economics and politics will have for us will be a breakdown of the electronic system of finance: the machine will just stop. I think I may have said it just after the flash crash of 2010; I may have said it after reading about banks establishing centers in various parts of the globe to grasp at a 10 nano-second advantage at some wondrous arbitrage in 2011.

Anyway, you get the drift: the system stops. Why? Because we really do not have total control over it. Our control is rather tenuous, at best; things go awry:  large cruise ships run into islands in the broad daylight because the captain is waving at the islanders, markets fall 1,000 points, enormous banks cannot live without cash infusion from the middle class taxpayers, and the energy grid is woefully in disrepair, and the litany of woe goes on.
Add to that the fact that if you have the temerity to throw a handful of Skittles at someone bossing you around, they may shoot you dead, well, you have a society that is doing a good imitation of Philippe Petit doing "Man On A Wire" after a drunken debauch.

How are the plans of the Best and the Brightest coming along?
From Reuters:

In a breakdown that resembled a mini version of the 2010 "flash crash," a series of glitches hit the market debut of BATS Global Markets Inc on Friday, causing the company to take the extremely rare step of withdrawing its initial public offering of shares.
The problems caused the shares of exchange operator BATS to plunge from their $16 offering price and briefly trade for less than a penny on Friday morning, creating havoc in the marketplace and again calling into question the stability of high-speed trading...

"The public should take comfort that circuit breakers are working as they should after the flash crash," said Holly Stark managing member of Efficient Frontiers, a market structure consulting firm in New York.
Since the May 2010 "flash crash" in which nearly $1 trillion in market value disappeared in minutes, the Securities and Exchange Commission under Chairman Mary Schapiro has pledged to crack down on problems in the high-speed electronic marketplace, which regulators worry has grown unstable and perhaps unfair as high-frequency trading has grown in prominence.
The BATS breakdown could trip up, once again, the march over the last decade toward increasingly automated markets in the United States, Europe and elsewhere...

 "It's just another black eye for the fragmented equity structure," said Joe Saluzzi, co-head of equity trading at Themis Trading in Chatham, New Jersey, and a frequent critic of U.S. equities market structure. "Every day we see things like flash crashes and now IPOs that can't get off the ground."

I added the emphasis... did you read that the same way I read it? "Every day we see things like flash crashes..."! "Every day..."??!!

OK. These are the same caliber of minds that are bringing us Genetically Modified Food and new improvements in fossil fuels.

Take Shelter!, as the film of the same name says.

Joe Ratterman, founder of BATS, in better times in 2010


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