Glitches to and from Information Cascades
Source: http://www.nytimes.com/reuters/2012/11/12/business/12reuters-nyse-trading-glitch.html?ref=newyorkstockexchange
On November 12, the New York Stock Exchange suspended trading on over 200 stocks. This was primarily due to the failure of a web server, which made it impossible to process any orders to sell and buy stock in these different companies. The problems first began happening Monday morning when there was a build up of orders to buy and sell the different stock, but no completion notifications. After a short while, the NYSE decided to cancel all of these open orders and suspend any trading of these stocks for the day, although they were expected to begin trading again on the 13th.
The stock market, in general, is an example of an information cascade. The idea behind stock exchange is to buy stock when the price is raising (buy it as cheap as possible), and sell when stock prices are at their peak, so the greatest gain is earned. As such, both the professional stock broker and the novice home-bodied stock market players observe the movements and decisions of others. If many people are buying stocks, that probably means that the stock prices are, or are predicted to be, rising. As such, it is beneficial for one who notices this trend to also buy this stock. Along these same lines, if many people are selling a stock, it is most likely indicative of a stock price decline, and could be an indicator for others to clear away from this stock as well. Obviously, someone must buy in order for someone to sell, and vice versa, so there are outliers to this theory, but, in general, paying attention to the overall movements of the stock market can save one a lot of money, as well as earn one a lot of money.
The aforementioned glitch produces an interesting twist to the idea of an information cascade. First of all, for those that were attempting to buy the stocks prior to the suspension of the stock trading but after the glitch occurred, it would have saved them much frustration and wasted time if they would notice that the stocks were not displaying any action, whether being sold or bought. They could simply avoid these stocks altogether. However, this could be an indication of an error in the system, or perhaps just a stagnant market for those stocks. If one were to read it as a stagnant market for those stocks, it could seriously hurt them, because even though those stocks were not being sold on the NYSE, they were being sold on other markets. If people saw that these stocks appeared to not be in any position to make them money and thus disregarded them on other markets, they could have lost money if perhaps those stocks were on the rise. Also, it produces a little bit of an unfair market, because those stocks are only available to people on the other markets, not the NYSE, so for people monitoring the different markets, their information is skewed as in the NYSE there is no motion with regard to these stocks, but there is a possibility of motion on the other markets.
The glitch and the suspension of stock trading on a limited portion of the market (just the NYSE) thus alters what information other people receive as a direct result of information cascades, and therefore affects some decisions made by stock brokers.
-mjk