Another month, another high-frequency trading algorithm gone wild. Although investigations are still ongoing, what seems to have happened is an algorithm trading for Knight Capital Group, a market maker (a company which provides liquidity to the market), went a bit mad around 10am EST.
Business Insider’s Eric Platt gives us this chart, of Vanguard Utilities ETF, as an example of what went wrong.
The green circles are best bids – the price people are willing to buy at – and the red circles are best asks – the price they’re willing to sell at. Until around 9:59, the two were roughly in sync. A slight divergence then happens, but comes under control a couple of seconds later. But at 9:52:21, the two prices fly apart.