Stock Market Undoubtedly Broken By Trading Algorithms

In the past year or so major Wall Street players have turned more and more to High Frequency Trading (HFT) algorithms, computer code which automatically buys and sells stocks based on price movements. These algorithms can trade stocks thousands of times a second and are highly profitable because they are designed to rip off all the other market players.

The strategies of the different algorithms make for a very interesting intellectual exercise as they interact in complex and unpredictable ways, forming an electronic ecosystem. Like all ecosystems, there are predators and prey, parasites and symbiotes, evolution and -- as I bet we will find out happened today -- collapse. Systems experts and market insiders have been warning for months that the algorithms take up too much of the market (somewhere around 70% of all volume is now HFT) and that an unexpected major move could easily cause the market to plunge uncontrollably. The solution is to ban them by making execution time as "long" as a second or two.

Today the market fell around 5% in less than five minutes, most likely artificially caused by HFT in response to the very real stress in the global debt and currency markets. [The Street has identified a few of the individual stocks that broke down.] I happened to be looking at some real time feeds and they were shut down, in fact almost all the major financial sites and blogs were sporadically offline for about 30 minutes. In that time the market rebounded: my guess is that they shut down the trading computers and bid the market back up through floor traders.

The debt problems will last for years and are very complex to address, but the HFT meltdown is simple to fix. Until it is we will experience more occurrences like today and increase the risk of a prolonged meltdown.