Black Monday

Was looking at the historical stock market crashes and this one was particularly interesting.

Black monday refers to Oct 19th, 1987. The stock markets around the world crashed on this day, starting from Hong Kong. It was the largest percentage of one-day-decline in stock market history (declining over 22%).

The mysteriousness was as bad as the crash. For many years after the event, debates as to why the crash occurred reached no conclusion. One major reason quoted by many is the faulty program trading.

The programs performed rapid trades and engaged in arbitrage strategies. This resulted in a bubble where stock prices went up which made the crash imminent. The programs that engaged in portfolio insurance strategies took advantage of this and were forced to sell every time the stocks went down. This led to panic selling and a stock crash.

The concept of circuit-breakers was introduced post this to curb this proportion of panic selling. The idea is that the circiut breaker period will help cool off and dissipate the panic sentiments.
At the start of each quarter, the NYSE sets three circuit breaker levels at levels of 10%, 20%, and 30% of the average closing price of the Dow Jones Industrial Average for the month preceding the start of the quarter, rounded to the nearest 50-point interval.

Algorithmic Trading

Aloha!

We are back after a loooong break. A lot of water has flown in Ganga since the last post. For starters, both authors changed have changed their workplaces, locations et al. Lots of brainstorming as to post topics etc (we also wanted to change the looks a bit, add some features, but I guess you’ll have to wait for sometime for that to happen) … So here we start with our first post on algorithmic trading.

Ok, I was not aware of this concept till Akshay briefed me about it. I was blown away when I got to know that more than 50% of trading in US and UK markets are automated. Yes, human programming and a computer execute over 50% of the trade in these markets (read this). So thought I should get a primer on how this works.

Market makers and some hedge funds, provide liquidity to the market, generating and executing orders automatically. In this “high frequency trading” (HFT) computers make the decision to initiate orders based on information that is received electronically, before human traders are even aware of the information.

Many different algorithms have been developed to implement different trading strategies. These algorithms or techniques are commonly given names such as “Iceberg”, “Dagger”, “Guerrilla”, “Sniper” and “Sniffer”.

Might just go in depth of each of these strategies in future posts.

An example of Algorithmic Trading in Indian markets

A program could be to sell the stock futures of a particular company and buy the stock if the futures price is x% higher than the stock price. Also, it could be to compare a set of variables — if rupee is more than 45 to the dollar, and crude oil is less than $60 per barrel — then the software would sell Infosys futures and buy HPCL shares.

Read this economic times article to see how it effects the Indian markets.

Bombay Stock Exchange

Have been dealing in stocks for more than a year now. Thought I might as well look up the history of the exchange I so frequently trade in. The Bombay Stock Exchange. Staying in Mumbai, I pass by BSE every other day. This tall BSE structure had very humble beginnings.

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning three centuries in its 133 years of existence. What is now popularly known as BSE was established as “The Native Share & Stock Brokers’ Association” in 1875.

It also has the greatest number of listed companies in the world, with 4700 listed as of August 2007 (Not many companies have been added post it, people dreaded releasing IPOs in recession you see).

Some landmarks in its 133 year old history were

1830’s Business on corporate stocks and shares in Bank and Cotton presses started in Bombay.

1860-1865 Cotton price bubble as a result of the American Civil War

1870 – 90’s Sharp increase in share prices of jute industries followed by a boom in tea stocks and coal

1978-79 Base year of Sensex, defined to be 100.

1986 Sensex first compiled using a market Capitalization-Weighted methodology for 30 component stocks representing well-established companies across key sectors.

The BSE traces its history to the 1850s, when stockbrokers would gather under banyan trees in front of Mumbai’s Town Hall. The location of these meetings changed many times, as the number of brokers constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as ‘The Native Share & Stock Brokers Association’. In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure overall performance of the exchange.

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning three centuries in its 133 years of existence. What is now popularly known as BSE was established as “The Native Share & Stock Brokers’ Association” in 1875.