IDENTIFICACIÓN DEL PROBLEMA
HERRERA Inadecuados
Automation began arriving on the stock exchanges in the 1970s in the
form of automated executions for small traders. The NYSE implemented
a Designated Order Turnaround (DOT) system in 1976—and in 1984, the
Super DOT system—that provided for the automated execution of small
customer orders, namely, orders of 2,000 shares or less, at the bid and ask
prices posted by the specialist.
246This advanced the speed execution of
those customer orders, but the specialist was still compensated by the
spread between those bid and ask prices.
247242. See Jerry W. Markham & David J. Gilberg, Stock and Commodity Options –
Two Regulatory Approaches and Their Conflicts, 47 ALB. L. REV. 741, 744–45 (1983)
(describing this process). 243. See id. at 745. 244. Id.
245. Id. at 746.
246. Jerry W. Markham & Daniel J. Harty, For Whom the Bell Tolls: The Demise of Exchange Trading Floors and the Growth of ECNs, 33 IOWA J. CORP. L. 865, 897 (2008).
In 1978, the SEC authorized the Cincinnati Stock Exchange to operate
an electronic trading system in which agency and principal limit orders
would be matched by computer. However, it had a very low volume
exchange with only limited participation by a few large broker-dealers.
248However, other traders were discovering that the computer could be used
as a tool for trading. The advent of algorithmic trading brought numerous
active traders into the markets. For example, so-called “program trading”
appeared in the 1970s, which employed computer software programs to
generate automated orders through algorithms cued to react to market
events.
249“Index arbitrage” traders also appeared. These were traders
who tried to take advantage of small differences in the prices between a
basket of stocks traded on NYSE and a parallel commodity futures index
covering that basket.
250In response to program trading and arbitrage trading of index products,
NYSE specialists began to offer “baskets” of securities that allowed
institutional investors to trade all 500 stocks in the Standard & Poor’s
Index in a single trade of a minimum of $5 million. Customized baskets
of fewer stocks were also permitted.
251This allowed program traders and
Index arbitrage traders to hedge and trade positions in both the derivative
and equity markets.
Concern arose that these computer driven traders were adding volatility
to the market.
252Critics also warned that a “cascade” scenario could result
from algorithmic trades that would automatically generate sell orders in a
declining market and push prices lower, thereby generating more sell
orders and so on until the market crashed.
253Those concerns seemed to
have been justified by the Stock Market Crash of 1987, which witnessed
248. BRUCHEY, supra note 154, at 63. One of the leaders in that experiment was Bernie Madoff, who later became the world’s largest crook through a massive Ponzi scheme that was exposed in the market downturn during the Financial Crisis in 2008. See
DIANA B. HENRIQUES, THE WIZARD OF LIES: BERNIE MADOFF AND THE DEATH OF TRUST 68 (2011) (describing that involvement).
249. See Jerry W. Markham & Rita McCloy Stephanz, The Stock Market Crash of
1987––The United States Looks at New Recommendations, 76 GEO. L. J. 1993, 2000
(1988) (describing program trading). 250. Id. at 2001.
251. William Power, Big Board To Launch ‘Basket’ Trades Today, WALL ST. J., Oct. 26, 1989, at C1.
252. SENIOR SUPERVISORS GRP., ALGORITHMIC TRADING BRIEFING NOTE (2015), http://www.newyorkfed.org/newsevents/news/banking/2015/SSG-algorithmic-trading 2015.pdf [http://perma.cc/367C-USG4].
a stock market decline in excess of the crash in 1929. NYSE stocks lost
$1 trillion in value during the 1987 crash and the Dow Jones Industrial
Average dropped 508 points on a single day.
254Studies by the SEC, the
CFTC and others of the Stock Market Crash of 1987 concluded that
computerized trading had played a large role in adding volatility to the
market.
255A Presidential Commission also studied the trading of those
institutional traders and suggested reforms, hardly any of which were
implemented.
256Instead, the markets quickly recovered and computer
trading became an accepted part of trading in both the futures and stock
markets.
The causes of the Stock Market Crash of 1987 were much debated, but
the inability of the NYSE and Nasdaq markets to handle the execution of
large volumes of orders in a volatile market was disturbingly clear. A
report by the Government Accounting Office found that thousands of
customers had complained about the October crash and that most of those
complaints related to difficulties in trade executions. An investor hotline
received some 6,700 calls from investors who lost $450 million in the
market, an average of $172,000 per caller.
257It was also determined that
specialists on the NYSE had been unable to cope with the trading volumes
during the October 1987 crisis and that many Nasdaq market makers had
fled from the market, abandoning their market making obligations in the
258
process.
Like the NYSE, Nasdaq developed an automated “Small Order Execution
System” (SOES) that executed smaller orders automatically at bid and ask
prices set by Nasdaq market makers.
259That SOES system became a
target of the so-called “SOES Bandits” who traded for their own account
and used computerized access to the SOES to take advantage of the failure
by Nasdaq market makers to keep their electronic quotes updated to reflect
current events.
260The SOES bandits traded often and broker-dealers gave
them office space as well as training programs on how to trade frequently
and at high speed.
261The NASDAQ market makers responded to those
attacks by widening their spreads and engaging in prohibited collusive
254. PRESIDENTIAL TASK FORCE ON MKT. MECHANISMS, 88-32-P, REPORT OF THE
PRESIDENTIAL TASK FORCE ON MARKET MECHANISMS 1 (1988).
255. See Markham & Stephanz, supra note 249, at 1993–2043 (describing those studies).
256. PRESIDENTIAL TASK FORCE ON MARKET MECHANISMS, supra note 254, at 2. 257. U.S. GEN. ACCOUNTING OFFICE, GAO/GGD-88-38, FINANCIAL MARKETS: PRELIMINARY OBSERVATIONS ON THE OCTOBER 1987 CRASH 50 (1987).
258. MARKHAM, supra note 201, at 219–20. 259. Id. at 219.
260. Id. at 219–20.