View Full Version : Market automation

08-29-07, 06:01 AM
Notwithstanding the recent difficulties experienced by quant funds, it appears that automated trading is definitely here to stay. There's an article in Infoweek discussing some of the background:


My reading of this is that a lot of the automation is centred on exploiting simple arbitrage opportunities and large trade execution tactics, rather than on the more "sophisticated" stat.arb. strategies that have gotten people into trouble.

Nevertheless there's plenty of potential for things to go wrong. Quote from the article:

"Computers are just so much faster and more efficient that there's no point in doing things the old-fashioned way," says Mark Akass, CTO for BT's global financial services unit. "Computers make both the decision process and the execution so much faster that eventually everything will be done electronically." That doesn't mean that they're infallible. The sequence of events that followed the sharp decline in the Chinese stock market in late February was compounded by a computing error that made it appear that the Dow Jones industrial average had dropped 178 points in a minute. Automated trading systems responded, and the Dow plunged 416 points, or 3.3%, on the day. The NYSE was forced to suspend electronic trading that afternoon.
Reminiscent of 1987. In that event, not only did the sophisticated portfolio insurance models fail, but also the telephone switchboards stopped working.

08-30-07, 07:19 PM
I'll be a bore and reply to my own thread...

Another article on the February "glitch" at the NYSE:


Sequence of events:

1. Rapidly falling prices caused a surge in the volume of trades
2. Servers at NYSE, providing market data to automated trading systems, started to fall behind.
3. After some time, the stuggling servers failed over to a back-up system. This system had up-to-date prices, causing apparent prices to suddenly plunge.
4. Automated trading systems reacted to the plunge with a new surge in sell orders.

So how does it compare with 1987? Obviously that event was more extreme. A summary of the technology problems encountered then can be found in Donald McKenzie's paper:


Essentially, phone and network systems became jammed, causing a breakdown in the normal arbitrage relationship between stock and future prices.

With all the advances in IT in recent years, surely we should be able to do better now? Not neccessarily. There is essentially a technology "arms race" between exchanges and traders. The exchanges continually improve their latency and throughput metrics. Simultaneously, the traders contrinually increase their trading frequency and reactivity. Hence, the potential for a technology breakdown during a "high volume trading day" (i.e. a crash) can never be completely eliminated.