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When Machines Take Control

Today it was reported that Knight Capital had a problem with their trading and market making algorithms which caused the NYSE to review the trades of 148 stocks earlier in the day.  Their review concluded that trades in six stocks would be canceled if they fell outside of a 30% band (either high or low from the day’s open).  Bottom line, a machine ran amok. Days like today make us feel glad we hedge.  Just as we did on May 6th, 2010…the flash crash. We didn’t see any problems in the market and in fact our hedging strategy was adding exposure.  We got 60% exposed (80% long and 20% short) on 4/5/2010.  It looked to us according to all our core indicators that this was a rally that might stick.  Then during the week of of April 26th 2010 our market risk indicator flashed.  It closed the week with a Market Risk Warning so on Monday the 3rd our portfolio was fully hedged.  The first few days of the week

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