Wall Street panics as high speed trading tanks stock market

Friday, May 7th, 2010 By

stock trader signaling thumbs down

Wall Street panicked as the stock market tanked during chaos triggered by a combination of investor fear and high speed trading. Flickr photo.

Wall Street breathed a little easier and the end of trading Thursday. The Dow Jones Industrial Average finished the day down only 348 points. Earlier in the day the stock market dropped like a rock — 1,000 points and nearly 700 points during one panic-stricken stretch. On Friday Nasdaq canceled the trades of 296 stocks that fluctuated most. It turns out that a toxic combination of algorithmic, or high speed, trading and fearful investors may be the culprit.

High speed panic on Wall Street

A Wall Street system to prevent what happened to the stock market Thursday may have actually caused it, thanks to high speed trading. When a stock price falls rapidly the number triggers a “circuit-breaker” that briefly halts New York Stock Exchange trades on it. CNN Money.com reports that at about 2:45 p.m. on Wall Street, shares of Procter & Gamble fell 10 percent. The circuit-breaker stopped NYSE trading on it for 80 seconds. Meanwhile the stock was in high speed play on other exchanges.

How does high-speed trading work?

The NYSE, down about 400 points, took a breather on P&G, Accenture, Boston Beer Co. and others. Meanwhile, investors afraid that the Greek debt crisis would leave them in need of faxless payday loans were clamoring to sell. How does high-speed trading work? Automatic programs in computers on other exchanges like Nasdaq began issuing tiny orders every millisecond. The computers found no offers to buy for the stocks that had hit their NYSE circuit-breaker. High-speed trading software seeking best offer saw the best bid as $0.  The high-speed trading computers, with greed in mind, are designed to add a penny to each trade to make a commission on every deal. The high-speed trading software placed millions of bets at 1 cent. Many stocks traded all the way down, triggering a massive sell-off.

High speed trading crackdown?

The computer-driven panic on Wall Street Thursday has people calling for a crackdown on high speed trading. Reuters reports that the massive sell-off that pushed the stock of highly regarded companies into a tailspin highlighted concerns that regulators can quickly lose control of the markets in the world of high speed trading. Democratic senators Edward Kaufman and Mark Warner said Congress needs to investigate the causes of the market plunge, which at its deepest point wiped nearly $1 trillion off equity values.

What is high speed trading?

On Wall Street, high speed trading has caused average daily volume on the stock market to explode. The New York times reports that powerful computers enable high-speed traders to transmit millions of orders at lightning speed and reap billions at everyone else’s expense. Stock exchanges say that a handful of high-speed traders account for a more than half of all trades.  What is high speed trading? It’s a bunch of computers that are so fast they can outsmart or outrun other investors, man or machine. It also appears they can outsmart and outrun themselves.

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