Foul or no foul?

May 6 2010's dramatic drop triggered investigations and regulation on whether the market been manipulated by some force, either human or mechanical. So far, no official conclusions have been reached. Materialized corrections include trades are provoked if they are over 60% trading range. It may take a while to figure out what the root causes are even though essays after essays have described how the liquidity dried out during the a few minutes.

This "unacceptable", as the SEC head labelled it, could very be caused by trading systems or human authorized trading systems. Sooner or later we will find out. The more fundamental question is that, regardless what actual trading systems are used, is the drop acceptable? In fact, before May 6, the market has inclined to correction mode for a couple days, on and off. Such weaving may train trading systems all over to the sell side. Note that many trading systems don't have human visibility. No one knows what the systems are actually buying and selling as long as there are such signals. After setting parameters, they just run.

Trading analysis tools are not new. In the 90s, there were quantitative trading (the Quant) and evolve to high frequency trading. PhD's try to find out what trading models can be used to predict market trends. Once they find that, jackpots are hit. The lucrative business model supports many trading firms. Articles on such algo trading or high frequency trading appeared in the media frequently. One founder of a firm simply put in this way, it (the firm) is just me and my partner and our computers.

The systems made correct prediction indeed, given that large overshoot also occurred. Note that investing strategists have warned in April that the market was due for a correction. But such predictions were mostly shrugged off. So when it is actually realized, it is hard to swallow. Circuit breakers are intended to stop the overshoot but they can't stop the trend, no matter how the trend is predicted by human or machines.