Thursday, September 11, 2008

Event Processing Example - Turbulent Markets 2

In my previous post on Turbulent Markets, I answered a rhetorical question posed by Bob Giffords and Mark Palmer ("Can Real-Time Profit and Loss Tame the Turbulent Markets?"). Mark has now followed up with a proposal to Regulate News Market Data Sources.

The story starts with a large fluctuation in the stock price of United Airlines (UAL), which dropped from $12 to $3 in just 15 minutes, apparently in an over-reaction to an incorrect news story. Some journalists blamed computers. In response, Brenda Michaelson pointed out that "Shiny technology alone doesn't guarantee better decisions. Just faster decisions."

Of course, as Mark points out, what counts as a "better decision" depends on your perspective. The people who reacted fastest to the incorrect news story probably made lots of money. In the very short term, a market trader doesn't care whether a news story is true or false, because a false news story can have just as strong an effect on prices as a true one. In the longer term, true (or at least well-corroborated) stories usually (but not always) win out over false (or poorly corroborated) stories; but by that time the market may be chasing a completely different rumour.

But Mark acknowledges that such wild fluctuations are "just not right" - in other words wrong for everyone else, and probably for the stability and integrity of the market as a whole. So Mark's proposed solution is to regulate rumour - "automated trading based on unregulated sources of information should be prohibited".

Apart from the fact that the control of rumour sounds like one of the twelve labours of Hercules ...

(in fact Agatha Christie adopted exactly that interpretation of the Lernaean Hydra when she wrote twelve stories for Hercule Poirot based on the twelve labours)

... the notion of regulating sources of information seems to inhibit many of the supposed benefits of real-time event processing in financial markets. Unless of course you plug some real-time regulation (in other words, a real-time event-driven information filter, directly controlled by the regulator) into an event-driven system architecture. Now that would be an interesting challenge.

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