High Frequency Trading and the Stock Market Crash: Trust the Computers?

Last week's short sharp shock to the stock market had the usual poorly informed people speculating that the computers had gone berserk.  HAL was doing to investors what it had done to astronauts in 2001.  Although there may have been a computer involved in driving the stock market down, here's an interesting observation:  the highly computerized "high frequency trading" companies pulled the plugs on their computers when the stock market took it's steepest dive.

CNN/Money quotes Rishi Narang of Telesis Capital:  "I do know for sure that high-frequency traders backed off …."

The Wall Street Journal reported: 

A number of high-frequency firms stopped trading Thursday in the
midst of the market plunge, possibly adding to the market's selloff.

Tradebot Systems Inc., a large high-frequency firm based in Kansas
City, Mo., closed down its computer trading systems when the Dow Jones
Industrial Average had dropped about 500 points, said Dave Cummings,
founder and chairman of the firm.

Tradeworx Inc., a N.J. firm that operates a high-frequency fund,
also stopped trading during the market turmoil, according to a person
familiar with the firm.

One person connected with a high frequency trading company says that when the market was down sharply, his computers were screaming, "Buy Buy Buy!"  The company didn't buy, however, because the humans didn't want to trade in such a volatile market.  They left many millions of dollars on the table because they did not buy when the market was crashing.

Maybe computerized trading is not the problem, but rather the solution.