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The 2010 flash crash was caused by "blackhat" HFT traders trying to game the system. It was shown that one, some, or many HFTs were involved in "quote stuffing" which is bidding for stock and then pulling the order, something like 100k times per second. This gave the appearance of liquidity and demand, but it was fake, because as soon as someone would bid for the stock, they would pull their order. But another use of this was to essentially slow down the "ticker tape" of the NYSE. What was happening was that the "ticker tape" that showed the current bids and asks was slowing down, and by doing this, some HFTs could make use of the latency arbitrage. Colocated HFTs got their quotes for the best bids and asks directly from the exchanges, but other people were getting their quotes from the NYSE, so they were behind. I believe they were something like 30 seconds behind, so what would happen is that the HFTs had full reign to take advantage of others being blinded like this. Of course, the side effect of this was that they "broke" the markets. Because of this latency, the NYSE suspended the markets temporarily, which then had the unintended consequence of forcing all the bids and asks to flow into the smaller exchanges, which didn't have the liquidity to handle the orders. There were so many sell orders, that basically all the buy orders for some stocks got taken out, causing the prices to plummet down to 1 cent or something like that. I'm expecting another flash crash to occur at some point, so whenever I see heated market action, I place a bunch of trades around 25% below the current stock price, which I believe is just above the limits that the exchanges would use to roll back bad trades. (Un)fortunately, it hasn't happened yet, but I'm sure at some point it will. |
Batches of buy and sell orders which are in the money should be executed hourly. The fundamental values of companies don't change more quickly than that. The rest is noise, not signal.