Consider the true implications of the idea that an algorithm "set off" the market crash:<p>- Traders were happily trading along at a market price they all had tremendous confidence in.<p>- An algorithm decides to liquidate some shares, causing the market price to dip a bit b/c of extra supply.<p>- Said traders immediately lose all confidence in the market price they'd been happily trading along at all day and start dumping their own shares.<p>Conclusions:<p>If the traders were confident in the initial market price (i.e, if they were "right" then they should have started buying when the price started dipping. This would have held the price up. That they didn't reveals a lot about their own strategies.<p>If the fact that the order placed by the algoritm is "to blame" implies that a human wouldn't have placed that order.<p>It sounds to me that the algorithm simply wanted to liquidate and wouldn't have placed such a large market order if it were overly concerned about getting top dollar for every share. This happens with human traders all the time. The bigger the order the more it will move the market. There are large trade desks that help minimize this but they take a big spread for the service.<p>So ironically it was the algorithm that had a principled, deep view of the market and the human traders who were fickle and skittish... exactly the opposite of the typical impression of each. It's like if Kasparov were playing against Deep Blue and Deep Blue sacrificed a pawn and Kasparov knocked over the board.
PDF of the actual report:
<a href="http://online.wsj.com/public/resources/documents/WSJ-flashreport10012010.pdf" rel="nofollow">http://online.wsj.com/public/resources/documents/WSJ-flashre...</a>
The title of this post (and the WSJ article) is potentially misleading.<p>The 'Algorithm Trade' referenced was a Mutual Fund company executing a very large sell order in E-mini Futures. The sell order was executed through a trading algorithm which attempted to participate in 9% of market volume.<p>Many people associate 'Algorithmic Trading' with 'High-Frequency Trading' but there is no link made by the report.<p>ETA: An equally correct headline could be "Large Institutional Seller set off May 6 flash crash.