If algos can mis-value a book by $23.7m…
… how might they be mis-valuing equities?
So asks Themis Trading on Tuesday after discovering this curio of a story from CNN about algo-bots gone wild on Amazon.
The story relates to the listing of a book called “The Making of a Fly” by Peter Lawrence on Amazon.com on April 18 for no less than $23,698,655.93 (plus shipping) — seemingly the result of an algo price war.
The price anomaly itself was unearthed by Michael Eisen, an evolutionary biologist and blogger, who logically observed this couldn’t be a one off situation.
As he noted on his blog:
What’s fascinating about all this is both the seemingly endless possibilities for both chaos and mischief. It seems impossible that we stumbled onto the only example of this kind of upward pricing spiral – all it took were two sellers adjusting their prices in response to each other by factors whose products were greater than 1. And while it might have been more difficult to deconstruct, one can easily see how even more bizarre things could happen when more than two sellers are in the game. And as soon as it was clear what was going on here, I and the people I talked to about this couldn’t help but start thinking about ways to exploit our ability to predict how others would price their books down to the 5th significant digit – especially when they were clearly not paying careful attention to what their algorithms were doing.
Cue in-depth analysis of third party vendors providing pricing algorithms for independent traders on Amazon and Ebay.
As CNN points out, individual booksellers on Amazon and other sites pay such companies for services which automatically update prices. Some work very well, “getting sellers up to 60 per cent more sales because they underbid the competition automatically and repeatedly”.
Some, as the case above illustrates, lose touch with reality altogether.
Now, as Themis Trading points out, all of this does bear an uncanny resemblance to what’s going on in financial markets thanks to the algo strategies deployed by high frequency traders.
These sorts of algos, after all, are equally prone to losing touch with the fair value of the equities they are pricing, as the notorious flash-crash of May 6 proves. Now, if you keep the parallel going, that means the example of the $23.7m fly book is nothing more than Amazon’s own equivalent of a market flash or dash.
As Themis’ Sal Arnuk observes:
So, now we have Flash Crashes and Flash Dashes outside the stock market! Is everything being priced in the universe today, not with forethought, but rather as some relation to another price, which in turn is set in relation to yet another price? All without human intervention? Is this wise? Is anyone doing the thinking? Is anyone doing “the work” in our stock markets, as well as on AMAZON? On the eve of the May 6th Flash Crash, perhaps it is wise to think about that question.
Of course, while most ‘flash crash day’ trades were cancelled in the end, we wonder how many Amazon buyers who realise they’ve been had via algo mispricing end up cancelling their trades. And how often it happens.
Secondly, does this make Amazon and Ebay the dark pools of the retail sector, with John “never knowingly undersold” Lewis the equivalent of a market exchange?
And last – is it time for a retail versus financial market structure comparison diagram? We think yes
FT Alphaville » If algos can mis-value a book by $23.7m…
A Million HFT Algos Suddenly Cry Out In Terror And Are Suddenly Silenced As Citi Announces 1 For 10 Reverse Stock Split
March 21, 2011 13:19: CET
While the wacky desperation antics of America’s nationalized bank (that would be Citigroup for the cheap seats) enter the surreal zone, after the bank just announced a 1 for 10 reserve stock split (finally returning the stock price to Al Waleed’s cost basis, if not entrance market cap) and a 1 cent dividend (which effectively means the Fed can now exit the prop each failing bank game… but won’t), the bigger question is what happens to the momentum algos that traditionally traded 500 million shares of Citi stock, providing a supporting base for the market courtesy of massive momentum surges that provided a buying feedback loop mechanism driven out of pure churn volume. Those days are now over, as the volume will plunge pro rata from half a billion to a measly 50 million shares. Furthermore, with algos receiving liquidity rebates on a volume basis, it is conceivable that the biggest piggy bank to the 3 man Ph.D. HFT operations is about to break, as exchanges cut their rebate payouts by 90%. And with the stock market these days being far more a function of volume churn than technicals or, heaven forbid, fundamentals, what happens with the natural HFT support to the market is anyone’s guess. One simple assumption: the next time the S&P does a May 6, or a USDJPY flash crash, the liquidity providers will pull out that much faster, leading to a massive freefall without any of the foreplay.
NEW YORK–(BUSINESS WIRE)– Citigroup Inc. today announced a 1-for-10 reverse stock split of Citigroup common stock. Citi also announced that it intends to reinstate a quarterly dividend of $0.01 per common share in the second quarter of 2011, following the effective date of the reverse stock split.
“Citi is a fundamentally different company than it was three years ago,” said Vikram Pandit, Chief Executive Officer of Citigroup. “The reverse stock split and intention to reinstate a dividend are important steps as we anticipate returning capital to shareholders starting next year.”
Citi anticipates the reverse stock split will be effective after the close of trading on May 6, 2011, and that Citi common stock will begin trading on a split adjusted basis on the New York Stock Exchange (NYSE) at the opening of trading on May 9, 2011. When the reverse stock split becomes effective, every ten shares of issued and outstanding Citigroup common stock will be automatically combined into one issued and outstanding share of common stock without any change in the par value per share. This will reduce the number of outstanding shares of Citigroup common stock from approximately 29 billion to approximately 2.9 billion. Citigroup common stock will continue trading on the NYSE under the symbol “C” but will trade under a new CUSIP number.
No fractional shares will be issued in connection with the reverse stock split. Following the completion of the reverse stock split, Citi’s transfer agent will aggregate all fractional shares that otherwise would have been issued as a result of the reverse stock split and those shares will be sold into the market. Stockholders who would otherwise hold a fractional share of Citigroup common stock will receive a cash payment from the proceeds of that sale in lieu of such fractional share. Additional information on the treatment of fractional shares and other effects of the reverse split can be found in Citi’s definitive proxy statement filed with the Securities and Exchange Commission on March 12, 2010.
Citi is executing its strategy of focusing on its core businesses in Citicorp to support economic growth including banking, providing loans to small businesses, making markets and providing capital, while continuing to wind down Citi Holdings in an economically rational manner. At the end of 2010, the U.S Treasury sold its remaining shares of common stock, earning in total a $12 billion profit for taxpayers on its investment in Citi. 2010 was Citi’s first year of four profitable quarters since 2006, with $10.6 billion of net income. Citi’s capital strength is among the best in the industry and the bank is focused on putting its unmatched global network to use for its clients to foster sustainable and responsible growth.
Posted in Finance, HFT, News, stocks, trading, United States
Tagged Citigroup, Finance, HFT, News, stocks, trading, United States