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Robert Schuessler
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A Smarter Monkey

In this contributed piece, TIM noted that some traders do better than others when using data that has been run through certain analysis - that is, have used some form of machine learning to assist them.

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September 1, 2010

Fasten Your Seatbelt

Why slowing down is not the answer

By Dan Mathisson

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"I can't drive 55," sang Sammy Hagar, kicking off the battle to repeal the hated 55 miles per hour national speed limit. As the issue gained steam with the public, safety advocates argued that raising speed limits would lead to thousands of additional deaths. Ralph Nader led the opposition, going so far as to angrily state, "History will never forgive Congress for this assault on the sanctity of human life."

Dan Mathisson

But after the repeal sailed through Congress in 1995, history proved to be more forgiving than Mr. Nader expected. As speed limits were raised, the rate of highway fatalities actually dropped over the ensuing years, a trend which continued to the current record-low level of one death per 80 million miles driven, down 28 percent from 1995. Attributed to engineering improvements like airbags and anti-lock brakes, the decrease demonstrates that we can go fast and still be safe, with the right safety mechanisms in place.

Fifteen years later, Mr. Nader is again championing speed limits, this time in our nation's stock markets. His preferred trading speed limit comes in the form of a 50-basis-point transaction tax, and he has turned up the volume on his advocacy since the May 6 "flash crash."

At an event in Buffalo, N.Y., in early August, he declared that without the transaction tax, "we better start describing the USA as a corporate plantation with 300 million serfs." Others are also opportunistically using the flash crash as a justification for slowing down the markets, with pundits proposing everything from one-second waiting periods for trades, to standardized delays in data feeds.

 

Safe and Fast

Serfdom aside, slowing trading is a nonsensical solution if the stated purpose is to prevent a recurrence of the events of May 6. As with the highways, we can drive fast and be safe with a few well-designed safety mechanisms. The regulators have taken steps in the right direction with the new single-stock circuit breakers that have been implemented for a six-month pilot period.

The breakers trigger when an S&P 500 stock moves 10 percent within a five-minute window, and initiate a five-minute trading halt. Rather than an inefficient speed limit that slows down everyone, the circuit breaker is more like an airbag, a dramatic safety mechanism that explodes open only in the event of an accident.