Eideard

May 6, 2010
Daylife/Reuters Pictures used by permission

Regulators in the United States and overseas are cracking down on computerized high-speed trading that crowds today’s stock exchanges, worried that as it spreads around the globe it is making market swings worse…

Regulators are playing catch-up. In the United States and Europe, they have recently fined traders for using computers to gain advantage over slower investors by illegally manipulating prices, and they suspect other market abuse could be going on. Regulators are also weighing new rules for high-speed trading, with an international regulatory body to make recommendations in coming weeks.

In addition, officials in Europe, Canada and the United States are considering imposing fees aimed at limiting trading volume or paying for the cost of greater oversight.

Perhaps regulators’ biggest worry is over the unknown dynamics of the computerized stock market world that the firms are part of — and the risk that at any moment it could spin out of control. Some regulators fear that the sudden market dive on May 6, 2010, when prices dropped by 700 points in minutes and recovered just as abruptly, was a warning of the potential problems to come. Just last week, the broader market fell throughout Tuesday’s session before shooting up 4 percent in the last hour, raising questions on what was really behind it…

High-frequency trading…done by independent firms or on special desks inside big Wall Street banks, now accounts for two of every three stock market trades in America…

Even the traders’ authorized activities are coming under fire, especially their tendency to shoot off thousands of orders a second and suddenly cancel many. Long-term investors like pension funds complain that the practice makes their trading harder…

In the United States, the Securities and Exchange Commission has been looking into the new market structure for almost two years…Looking and looking and looking. Though it gets in the way of lunch – sometimes.

And the S.E.C. last year proposed what would be an even more high-powered monitoring system called a consolidated audit trail that would gather data on trades in real time from all United States exchanges, and be a powerful tool in helping regulators piece together events in case of another flash crash…

That’s called building a better barn door after the stables are empty. But, the SEC will have sufficient information on how to construct a great looking screenplay about one more failure to act on behalf of investors.

Lots of normal people would pay $23 for a book. But $23.7 million (plus $3.99 shipping) for a scientific book about flies!?

This unthinkable sticker price for “The Making of a Fly” on Amazon.com was spotted on April 18 by Michael Eisen, an evolutionary biologist and blogger.

The market-blind book listing was not the result of uncontrollable demand for Peter Lawrence’s “classic work in developmental biology,” Eisen writes. Instead, it appears it was sparked by a robot price war…

Eisen watched the robot price war from April 8 to 18 and calculated that two booksellers were automatically adjusting their prices against each other.

One equation kept setting the price of the first book at 1.27059 times the price of the second book, according to Eisen’s analysis, which is posted in detail on his blog.

The other equation automatically set its price at 0.9983 times the price of the other book. So the prices of the two books escalated in tandem into the millions, with the second book always selling for slightly less than the first.

The incident highlights a little-known fact about e-commerce sites such as Amazon: Often, people don’t create and update prices; computer algorithms do.

Individual booksellers on Amazon and other sites pay third-party companies for algorithm services that automatically update prices. Some of these computer programs purportedly work very well, getting sellers up to 60% more sales because they underbid the competition automatically and repeatedly…

“It’s pretty much like the stock exchange. What you see there is the prices changing all the time — but they never change drastically. Sometimes it’s a dollar here a dollar there — maybe $10. For a book, it probably would be pennies.”

Often producing as much useless “value” as many of the computer trades made for hedge funds and mutual funds. All you can hope for as a retail investor is to focus on what you calculate is the real value of equity over time – and let the rest of the market spin wheels in artificial endless loops.

Our stock markets will not do anything about it. I doubt Amazon will do anything about the same absurdity in their own mosh pit.