Why Did the Market Tank?

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Hey, remember how one of the big benefits of high-frequency trading is supposed to be that it deepens market liquidity? And remember how I wrote that, in reality, HFT probably does a great job of providing liquidity when you don’t need it and a lousy job when you do need it? Well, yesterday the stock market needed liquidity and guess who didn’t provide it?

Tradebot Systems Inc., a large high-frequency firm based in Kansas City, Mo., closed down its computer trading systems when the Dow Jones Industrial Average had dropped about 500 points, said Dave Cummings, founder and chairman of the firm….Mr. Cummings said Tradebot’s system is designed to stop trading when the market becomes too volatile, too fast.

….The withdrawal of high-frequency firms from the market didn’t necessarily cause the downturn, but could have added to it, some market experts say. A number of high-frequency firms closing down in the midst of a sharp market drop can “widen markets out substantially,” said Jamie Selway, managing director of New York broker White Cap Trading.

In other news, the SEC is investigating what happened yesterday: “U.S. regulators plan to examine whether securities professionals triggered yesterday’s stock-market plunge or exploited the turmoil to profit illegally, two people with direct knowledge of the matter said….The SEC and Commodity Futures Trading Commission said in a joint statement after U.S. markets closed that they will examine ‘unusual trading’ that contributed to the plunge.”

Overall, I’m with Atrios. Maybe this whole thing was mostly a glitch, maybe not. “Still, my gut tells me we are heading in a downward direction.” Maybe not today and maybe not next week. But the aftermaths of banking crises don’t usually play out in just a year or two. Normally it takes three or four. We’re still in the middle of the hurricane.

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DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily bluster—Mother Jones' journalism is driven by one simple question: Will America move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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