The great outrage and now search into the reasons for last Thursday's stock plunge is all about a correction long overdue and the collision of two trading architectures. Placed side by side, electronic trading systems are able to take advantage of legacy trading structures left in place for the benefit of specialist and floor traders who are the primary owners of traditional exchanges. As for volatility, veteran traders have all been witnesses and or participants in the past when particular markets had quick violent down drafts. They are unavoidable but apparently harsher when trading structures cross and allow, in this case, the speed of electronic trading to hit all available bids and offers.
The other element of the of Thursday's death dive was about a thirteen month rally where bears for months repeatedly tried to work their angle only to be mowed over my countless late session rallies. Then, in a series of events magnified by the rumors of a sovereign debt contagion, a small tear turned into a breached levee.
Blaming computer black boxes for breaks and never understanding their upside contributions, as in the recovery from the lows on Thursday, is an argument delivered by floor trading types like specialist, who found themselves in a position of not being able to react fast enough because the electronic market moved faster than their ability to screw someone. Yes, different models employ various strategies which may at times exacerbate both upside and downside moves, but competing directional and value algorithms contribute trades which benefit price discovery.
Oddly the resulting concerns of price action in these markets will spawn another coordinated intervention among governments and regulators which will inherently buoy and distort the upside values. As we have seen, getting too bearish about macro conditions is a sure way to miss the fact that interventions have been great for the bulls.
