Yesterday, on 20th April, US oil price felt below zero for first time in history. It may sound crazy for a human being but not for a machine however. So what the hell happened there?
In our days trading at stock market happens at such a high rate that it becomes too difficult to give an appropriate response by placing bids manually. This is a kind of war of algorithms against other algorithms.
Algorithms are trying to overbid each other by putting higher or lower bids. Algorithms can do bids much quicker than humans and when it comes to stocks trading, speed really matters. But the issue is that even if algorithms are much quicker than people, they are not smarter than we are. And it seems that when price fell down to zero, one of algorithms mistook and submitted a negative price to the exchange.
Other algorithms got information about this bid and some of them were confused because they were not designed to trade negative prices. For them it looked like an odometer which switched from 0 to 999999.
Thus, those algorithms interpreted this market event as extremely high price which is much higher than anything happened in the market before and they start selling whatever they had as quick as they was able because it was not likely that price will grow. At this moment price fell like a stone.
There were not too much algorithms however which managed to buy futures at negative prices and even trade a bit! Their owners are really happy now I believe. What all the others learned from this story is how much programmer’s mistake may cost.
In our days candlesticks do not convey opinion of the crowd any longer. Now they express opinion of algorithms written by freelancers.