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Article Teaser: The stock market has been having a bad week. Wednesday the market ended the day down over 300 points. I heard reports that this was the result of investors taking their profits. Happens all the time. Then within a few days, the prices on many great stocks is so low that the investors are buying the stocks right back up.

Keep reading below...

Stock Market Falls Sharply

Copyright (c) 2010-2017

The stock market has been having a bad week. Wednesday the market ended the day down over 300 points. I heard reports that this was the result of investors taking their profits. Happens all the time. Then within a few days, the prices on many great stocks is so low that the investors are buying the stocks right back up. Thursday, May 6th 2010 the market was again down over 300 points. This pullback was blamed on the worsening economic and political situations in Greece and the effect on the European Union.

At approximately, 2:40 PM on this same Thursday, the stock market began a free fall and plummeted over 1000 points in one hour. Is it Greece or is it a typographical error that saw Proctor and Gamble plummet within 60 seconds? Many other stocks fell dangerously low as well. There will be an investigation surrounding this time frame and adjustments might be made to the stock prices that were affected in these few minutes.

So this is what we know. No, this is what we are told, in some cases conflicting reports confounded the issues. We have no idea what was really going on. Why would a typographical error of a "B" instead of an "M" affect the stock market sending it spiraling into a deep selloff? And why did it happen near the end of the trading day?

Reported by Lucas Mearian for Computerworld, Chris Nagy, managing director of order routing strategy at TD Ameritrade, stated that they had warned the SEC regarding the effects of high-frequency trading (HFT) and the resulting damage to the stock market. Nagy continued to describe what he called "the algorithmic effect on the marketplace." So now of course, we need to know what the algorithmic effects are that can broadly affect the entire stock market in less than one hour.

Clues to the algorithms can be found in the computerized programs designed by many different companies to use the algorithms to define trends in the market. The programs include variables such as trades of high-frequency, trades of millions or billions of dollars or possibly in every currency, as well as stock sectors such as financials, foreign markets, etc. in which the stocks themselves are weighted according to their potential impact on the economy. The stocks might be in mortgages, oil, banking, foreign countries and so on.

What occurs is that the orders are placed by the computer without human intervention being necessary. The computer uses factors such as timing, price and quantity to make the decision to trade up or down on trends forecast by the intelligent systems. Wikipedia describes the use of the algorithms for use in sell side trades versus buy side trades in high-frequency trading. "This information allows the computer to make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information that they observe......"

With all this in place is it any wonder that the market fell like a bomb plummeting to earth. But with the types of trading curbs put into place why wasn't the free fall curbed? Trading Curbs described as circuit breakers will go into effect based on the percentage decline and the time of the day that the decline occurs. According to HL CAMP and Company, Program Trading Research, the New York Stock Exchange has determined the decline levels at 10,20, and 30 percent as well as a fall before 2:00PM, or before 2:30 PM, or between 2:30 and 4:00 PM.

These numbers correlated to the drop in the point percentage and the time describe why the curbs did not go into effect. The decline in points was ignored because the drop of 1,350 points did not occur before 2:00 pm. We were only at about an 850 point drop at that time. If it had fallen 1350 points, the market would have halted trading for 1 hour. Instead, at 2:30 the time frame changed and the new level that needed to be met was a 2700 point drop. This did not occur either so the 30 minute halt did not take place in the trading again.

Instead, according to the point levels and percentage drops determined by the DJIA, between 2:30 and 4PM there will be no halt of trading. There are no numbers that correlate to that time period and drop percentage. Although, if the Dow Jones Industrial Average (DJIA) falls to 4000 points at any point, trading would immediately be halted. Yesterday's trading drop took place at 2:40PM, outside of the time-frame and percentage drop that would have called a halt to further trades. DJIA adjusts the point levels and the percentage levels on a quarterly basis.

I am not secure in knowing that computer error can cause chaos in our stock market. The extent of which was overturned by the increased buying signals that took place when the stock prices were so low. Even the computer recognized a good buy when they saw it. And I am sure that the buying will continue and the market will eventually return to it's former glory. Although, there are investment risks, and stock market risks and now we have computer-generated high-frequency trading (HFT) risks to determine our trends. Be wise.


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Irene A. Majchrzak helps people retire debt-free with a sense of well-being and the freedom to have the things they want. Get her free ebook, Debt Free to Retire, by going to http://debtfreetoretire.com/

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Internal ID: #7501
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Total Views: 2753

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