Recent Oil Price Drop: Blame Algorithmic TradingMay 12, 2011 1:26 pm
We have seen this before – when there is a sudden fall in the markets, algorithmic traders can easily be blamed. They were blamed for the October 1987 Crash. They were blamed for the Flash Crash in 2007. And now, they are blamed for the recent oil price drop.
The issue is fairly simple: if everyone has systems based on the same rules, the trigger would definitely lead to disaster. It has been widely quoted as a perfect example of a “Domino Effect”. For the recent price drop, stop-loss trading takes the blame.
“The automated sell orders were generated as oil crashed through price points that traders had programed in advance into their supercomputers. In many cases, computer algorithms sold for technical reasons, as oil dropped through levels that, once breached, could trigger ever larger waves of selling yet to come.”
Statistics Source: Reuters
Just have a look at the NYSE trading composition – what percentage of trading is done by institutions, what percentage is automated, what percentage is done by retail users – the picture is scary.