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Dan Power

Greetings to all of my friends who work in the area of computerized decision support. This blog is a way for me to share stories from my encounters related to decision support, to comment on industry events, and to comment on other blogger's comments, especially those of my friends on the Business Intelligence Network. I'll try to state my opinions clearly and provide an old professor's perspective on how computers and information technology are changing the world. Decision making has always been my focus, and it will be in this blog as well. Your comments, feedback and questions are welcomed.

About the author >

Daniel J. "Dan" Power is a Professor of Information Systems and Management at the College of Business Administration at the University of Northern Iowa and the editor of DSSResources.com, the Web-based knowledge repository about computerized systems that support decision making; the editor of PlanningSkills.com; and the editor of DSS News, a bi-weekly e-newsletter. Dr. Power's research interests include the design and development of decision support systems and how these systems impact individual and organizational decision behavior.

Editor's Note: More articles and resources are available in Dan's BeyeNETWORK Expert Channel. Be sure to visit today!

May 2010 Archives

Programmed trading is partly responsible for the extreme market instability of Thursday, May 6, 2010. According to Matt Goldstein, "High-speed trading, which uses sophisticated computer algorithms based on specific scenarios to automate transactions at speeds in the millionths of a second, now accounts for about 60 percent of U.S. equity volume." In one 10 minute span, the Dow Jones average fell 700 points. Some stocks lost 30% or more.

What is happening?  Traders develop rules that are monitored by software and then executed automatically using trading systems.  Let's say I create a rule that "if the price of stock X falls to $20, then sell 10000 shares."  Because the market moves so fast a person does not review the sell order and confirm, rather it executes automatically.  That is fine unless a panic occurs and then the programmed trading magnifies the panic.  What about counter trades?  For example, "if the price of stock X falls to $20, then buy 10000 shares." Market makers are facilitating trades but there is risk aversion on the part of traders that results in stop loss rules that seem to cause and magnify the downward spiral.

Can programmed trading be better regulated? Should it be regulated?  Do traders make errors when they create trading scenarios and develop trading rules? YES. The easiest solution is to require human confirmation of all trades.  Will this solve all the problems? NO.  Some human decision makers will push "OK" without monitoring what is happening in the market and will fail to look at the reasonableness of the trade.  Is requiring human authorization in real time better than automated? YES, a human will be more directly responsible for the consequences and results of the trade. Decision support is better than decision automation.

References

Goldstein, M., "Stock plunge raise alarm on algo trading," Reuters, May 7, 2010, URL http://www.reuters.com/article/idUSTRE64631Y20100507 .



Posted May 7, 2010 8:15 AM
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