Felix Salmon has the gory details of what actually happened in the flash crash yesterday. Yes, Apple stock got mispriced for a time, the IPO of BATS was withdrawn (not all that much of a surprise really. Revealing that a problem in your trading system will crash the price of the world's most valuable company right on the day of your IPO will tend to do that).
But, umm, that's about it. At most we've had a few hours' worth of confusion as a result of the amplification by high frequency trading of an underlying problem in a market offering. That is, HFT certainly trashed BATS share price pretty quickly: but there really was a problem with BATS' trading platform as well. We can even make the argument that HFT just made everyone realise that problem faster: and yes, we do want markets to reveal such information as fast as they can.
It's this last bit that really confuses me though:
And the second bit of good news is that we have a lot of valuable real-world information about exactly how markets fail in today’s high-frequency precincts. I just hope that we’re going to be able to learn from what happened today, and put in measures to prevent it from being much worse next time. Can anybody say Tobin Tax?
Yes, a Tobin Tax (or a financial transactions tax, or FTT) would indeed kill HFT. However, this is the original paper in the current round of arguments in favour of such a Tobin or FT Tax.
The declared aim is to raise $400 billion a year from such a tax. The usual supposition is that this money will then be given to Third World kleptocrats or possibly used to make the world safe for sea kittens.
Felix, don't you think, just possibly, that raising four hundred billion dollars in taxes to send to do gooders might just be a very slightly expensive method of preventing a few of Wall Street's finest from being inconvenienced for an hour or two?
Maybe?
