One simple way to prevent fluctuations like those of last Thursday would be for stock exchanges to prohibit orders to buy or sell at the market.
That wouldn’t mean prohibiting orders that act a lot like market orders. People could still be allowed to place an order to sell at a limit of a penny. But having an explicit limit price would discourage people from entering orders that under rare conditions end up being executed at a price 99 percent lower than expected.
It wouldn’t even require that people take the time to type in a limit price. Systems could be designed to have a pseudo-market order that behaves a lot like existing market orders, but which has a default limit price that is, say, 5 percent worse than the last reported price.
However, it’s not obvious to me that those of us who didn’t sell at ridiculously low prices should want any changes in the system. Moderate amounts of money were transferred mainly from people who mistakenly thought they were sophisticated traders to people who actually were. People who are aware that they are amateurs rarely react fast enough to declines to have done anything before prices recovered. The decline looked like it was primarily the result of stop-loss strategies, and it’s hard to implement those without at least superficially imitating an expert investor.
Seems like this was basically just a coordination problems between the exchanges where prices that weren’t defined became prices of zero. The floor traders have a persuasive-sounding argument, but their finger-pointing to high frequency algo traders is unjustified. First, although algos don’t seem to have stepped up to provide liquidity, that was an effect, not a cause. Second although the presence of floor traders might save you a dollar every now and then (if you use stop market orders), floor traders’ corresponding opacity will tend to cost you a penny two hundred times, so to speak. Usually I don’t want to be short skew, but that is one case where I’ll take my chances.
Also, although it seems absurd that the stock market would go down 10% in one day, if society as a whole has been repressing the depths of its debt mismanagement and demographic problems, and one day there is an “aha” moment, a 10% drop is less absurd. The real absurdity and source of extreme volatility is the deferral of debt.