Flash Crash

Flash Crash

 Flash-Crash-1-300x151 Flash Crash

Flash Crash

The Day the Machines of Wall Street Took Over

  wp-content-uploads-2013-01-robertburan1 Flash Crash    

Did the Flash Crash of May 6, 2010 Foreshadow the Last Apocalypse?

This is the way the world ends, Not with a bang but a whimper. -The Hollow Men (1925) T.S. Eliot

The poet T. S. Eliot had his own prophetic ideas about how the world might end but scientists have recently seriously speculated on what kind of events could wipe mankind from the universe.  Of course an untreatable epidemic is usually mentioned along with encounters with a rogue black hole or an asteroid like the one that killed all the dinosaurs.  But one interesting and unusual scenario that results in the destruction of all of mankind is the “Hal Scenario” in which machines of our own creation take over the world and destroy us all.  Could Eliot’s Hollow Men be machines?

Could this really happen?  Well personally I think it COULD happen and I think we need to look more carefully at what is being done with our “machines of the mind” today while we still have some control.

We may have had a taste of the “Hal Scenario” as recently as May 6, 2010. On that fateful day Wall Street experienced its first machine driven Flash Crash.  On May 6, 2010 the machines were, for a few terrifying minutes, in charge of the largest economy on earth.

On May 6, 2010 the financial world saw the entire US equity market collapse, and recover, in about 20 minutes.  Never in the history of US markets had price dropped so low and so fast.  On May 6, the day of  the Flash Crash”, more than 19 billion shares were traded across multiple markets and investors lost billions.

This is what it looked like on a chart (click to enlarge):

Flash-Crash-2-300x155 Flash CrashFlashCrash 2

Traders were numbed by the pace of selling and many froze like deer caught in the headlights of an oncoming truck.

At 2:20 p.m. EDT the Dow was down 400 points.

This was bad, but then the DOW fell another 600 points in just seven minutes, the fastest and largest drop in the stock market’s history.

One stock, Accenture, fell from $42.17 to 4 cents.

But the overall market did not stay down long and by 3:09 p.m., the Dow had regained 700 points. Prices continued to fluctuate wildly until the markets mercifully closed.

After the close traders walked around in a daze, with vacant looks in their eyes, not unlike soldiers who had just been beaten by a vastly superior and unseen enemy.

Flash Crash, “I think the machines just took over”

“I think the machines just took over. There’s not a lot of human interaction,” said Charlie Smith, chief investment officer at Fort Pitt Capital Group. “We’ve known that automated trading can run away from you, and I think that’s what we saw happen today.”

Was the flash crash a precursor to the Hal Scenario?

Initially the flash crash attracted some attention and President Obama commented briefly on the largest stock market drop in history.

But then the whole event seemed to disappear from the public consciousness.  Newspapers stopped running stories about it and three years after the flash crash the many government investigations have failed to explain what really happened.

But there have been some interesting rumors:

Machines can mimic human thought processes AND emotions through a process dubbed by some as Androgenic Syntactic Analysis or ASA.  ASA allows for a smooth conversion between the ways humans think and communicate into binary code which is the way machines and computers think and communicate.

Using androgenic syntactic analysis the most sophisticated aspects of human intelligence are converted into usable machine language where it can be parsed at lightening speed, networked and compounded.  “It’s like taking 100 of Einstein’s brains, networking them, and then having them capable of outputting a life time of Einstein’s ideas in a millisecond” said an unidentified source alleged to be close to the government investigations.

I have been unable to verify any of this or for that matter establish the true source of this information.  I offer it here only to stimulate discussion of the role (and danger) of machines in our society.

But IF it were true it might suggest that the Flash Crash of May 6, 2010 was a precursor of the Hal Scenario and that for a few terrifying minutes the machines had total control over the American economy.  Furthermore the machines might have thought about and knew what they were doing.

Or perhaps it was just a mistake made by the programmers of these machines, a case of the research animals briefly escaping from their cages and raising a little hell.

Or perhaps it was just aberrant market behavior or random market theory on steroids.

I have argued that machines can understand Wall Street whereas the human mind cannot. Furthermore I have suggested that traders should not try to make subjective stock trading decisions, but should let their computers do the thinking for them.

We traded through the flash and crash with our computers running hot and we emerged more or less unscathed.  But perhaps we were just lucky.

But regardless of whether or not you buy into the possibility of the “Hal Scenario” I think it is clear that thinking machines are alive and well on Wall Street and these thinking machines can and will at times take over our markets.

And if robots are running Wall Street you are going to need a robot if you want to make money!  I hope the Flash Crash taught us something.

 Copyright 2010-2015 Short Term Stock Trading        

 

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I am a trading system pro and have been trading markets and have been involved with trading system development and the programming of trading system software for 25 years. “Today Stock Market” is my opportunity to share with you some of my trading experience while discussing stock market news and giving my daily stock market update.

Weekly Trading System

Weekly Trading System

 

wp-content-uploads-2013-01-robertburan1 Weekly Trading System  By Robert Buran

The second system that is not posted daily is my weekly system which is longer term and holds trades typically 2 to 4 weeks.  This system takes much fewer trades.  One reason I like it is that it lends itself well to running in full automation with TradeStation 9.1.

 I traded this system with real money for about 7 months in intraday-4 Weekly Trading System2012 and liked it.  It is not really a new system at all.   It is actually my oldest system which has been adapted to work with weekly bar charts.  It uses a 75 % retracement  stop that I discuss in my manuals.

If anybody wishes to attempt to replicate these results you should understand that I ran the tests on Christmas day 2012 and went back a little over 13 months.  I did not cherry pick these markets.  These markets were selected BEFORE I started trading in real time and were based on positive performance prior to 2012.

 

WEEKLY SYSTEM  November 2011 to 12/24/12 and tested on TradeStation 9.1  These results show net profit (loss) and number of trades during the 13 month period.

AAPL – APC

 AV  +6247  10T

ANR  -1028  8T

ADSK  +3456  11T

AIG  +15498  10T

AMD  +2357  9T

AAPL  +12214  14T

AMGN  -5280  15T

APC  -6,071  10T 

 APH – DV

 ARG  +2073  10T

CI  +1730  9T

CLF  -806  9T

CMCA  +12127  +10

DELL +6359  9T

DHI  + 8270  11T

DNR -1280

DV +13900 9T

APH +13556 11T

 ESRX – GNW

 ESRX  +8167  10T

EXPE +28343  12T

F  +7518  11T

FDO  +2732  11T

FFIV  -3048  10T

FITB  +609  10T

FLS  +6199  11T

GCT  +9751  11T

GNW  +1309  11T

 GOOG – JCP

 GOOG  +8432  9T

HAR  +11738  11T

HBAM  +4247  9T

HOG  +10792  11T

HP  +4358  6T

IRM  +9203  9T

JBL  +3127  10T

JCI  +7330  6T

JCP  +11254  13T

 JDSU – MRO

 MRO  +10025  8T

MOS  -2736  10T

LSI  +13038  8T

LEN  +12219  10T

KSS  -11244  13T

KMX  +15079  10T

JEC  -3767  10T

JDSU  +7306  11T

 PCLN  –  SYK

 PCLN  +13852  11T                 

PHM  +24515  10T                                                                   

PLL  +3705  9T

RHT  13776  8T

  The Chart below shows $13,776 profits in RHT during the testing time period:

ROST  7281  8T

RSG  3199  12T

SBUX  4508  9T

SHLD  18855  13T

SYK  -254  15T

 MU – OXY

 MU  +5577  11T

MUR  +11360  11T

NBR  +4336  11T

NFLX  +32663  7T

NKE  +3664  9T

NOV  – 5932  10T

NSC  +3111  8T

NWL  9370  10T

OXY  -7412 7T

 THC – ZION

 ZAGG  -78  13T

TIE  -7742  8T

ZION  +12468  9T

WYNN -1950 8T

WY  +9509  8T

WMB +3051  10T

UNH  +5386  9T

TXT  +6353  9T

THC  -78  13T

 Final Totals for WEEKLY SYSTEM

 Profits before slippage and commissions = $427, 395

Total number of trades = 697

Estimated slippage and commissions = $69,700

Profits after slippage and commissions = $357,695

Annual % return on one million dollars = 36%

I was nevertheless gratified to see the good performance with the weekly system.  Obviously this algorithm performs better in the low volatility environment by taking fewer trades and holding them longer.

As mentioned previously The Weekly System also lends itself well to fully automated trading using TradeStation 9.5 or Multi Charts.

 
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I am a trading system pro and have been trading markets and have been involved with trading system development and the programming of trading system software for 25 years. “Today Stock Market” is my opportunity to share with you some of my trading experience while discussing stock market news and giving my daily stock market update.
avatar-4f1fb54d4e1e67a6ddb595b546ce787b-s-80-amp-d-http-0.gravatar.com-avatar-ad516503a11cd5ca435acc9bb6523536-s-80-amp-r-g Weekly Trading System

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