After the second expiration of the year and the Russell Index rebalancing, which just occurredlast month, volume at the Exchanges usually starts to dwindle. Traders typically wrap up theirpositions and as the saying used to go, they would setem and forgetem. Then they would starttheir summer vacations and trading usually slows.
But computers dont take vacations, and computers dont know anything about setting themand forgetting them. They just keep trading no matter what. That was true during the flashcrash in 2010, when computers kept selling to zero in some cases, when the businesses theywere selling hadnt changed a thing. During that episode, the humans realized what hadhappened and pulled the reins back on the computers, and the world flipped back to realitywithin minutes.
With the introduction of Artificial Intelligence into the algorithms that run the world, dohumans still have access to the controls in case there is another mid-air correction needed?And if the humans go on vacation this summer, who is watching the computers? Some of thatanxiety can be corralled by having the right policies and procedures in place, even automatedpolicies to override any wacky or non-compliant behavior. But developers need to give accessto the code to do that.
The Consolidated Audit Trail (CAT) is supposed to help in that regard too, but its been sodelayed, one wonders if it will ever be deployed. And if it is deployed, will it look anything likewhat it was supposed? Automation is supposed to make life easier, but trading softwareseldom takes a vacation or sleeps, it just keeps searching for liquidity. So, will this year bedifferent, and will volume continue to grow during the summer right up to the Septemberexpiration?
Whats an expiration you say? Well with the introduction of options and futures that settle inequities, an expiration is a date set four times a year when one must deliver the underlyinginstrument for the option or future. So, you will need to buy or sell stock when the optionsexpire and that typically happens the third Friday of March, June, September and December.
And those days typically represent the days with the most volume in the market. In addition,because the primary markets manage the closing process and therefore closing prices for thesecurities listed on their markets, it means that the lion’s share of volume is done on those exchanges in the last few minutes of the day. It can be quite chaotic to watch that happen.
Although todays closes are less human-driven and more a result of electronic matching, that’s even
more a reason to have controls baked into your systems architecture.
How do you build those controls and how do your systems react when a control is breached arecritical questions. In addition, how do you test to make sure that they all work as designed andprovide a degree of comfort that your systems are reasonable designed to comply with all therules. Well thats what summer is for. To do the design, implementation and testing whenvolume and business slows down a bit, to allow the humans to work on the machines. But willthat happen during the dog days of summer? I guess we will see!
Lou Pastina is Technology Lead atGlobal Markets Advisory Group
