Go to PDF Version | Go to Recent Issues
To save time in the future, you may select one of the preferences below. You may update your eIBD preferences at any time by going into My IBD and selecting Update Your eIBD Preferences.
Set Web-Based Version as Default Set PDF Version as Default Set Recent Issues as Default
Get QuoteSearch Site
Daily Graphs Online
Traders work on the floor of the NYSE on May 7, the day after the Dow industrials plunged 700 points in minutes. Regulators still don't know what... View Enlarged Image
Congress and regulators finally understand the damage that elevated volatility of fragmented electronic platforms does to public trust in our markets, but their circuit breaker solution by itself will not prevent a repeat of the May 6 "flash crash."
Their proposal imposes a temporary trading halt in individual stocks that are up or down 10% in a five-minute span. This will help to prevent a catastrophic plunge in a single security like Accenture, which in a matter of minutes on May 6 went from 41.48 to .01 (yes, one cent) and then back to 40.99 in a matter of minutes.
Don't get me wrong; circuit breakers are an important first step. But controls on marketwide "program trades" must also be addressed. While an official "cause" of the flash crash has not been determined, there's strong evidence that most severe damage was derivative-related.
Many of the "canceled trades" apparently were in ETFs (exchange traded funds). Derivatives such as index futures and sector ETFs generate offsetting transactions that instantly and automatically send a large wave of sell or buy orders in baskets of stocks that mirror the related sector or the market as a whole.
For example, dozens of short and ultrashort ETFs are tied to various market indexes and industry sectors. When these experience large price swings, the resulting offsetting basket of orders in individual securities influence other derivatives to react similarly, creating a snowballing effect.
Further, large equity baskets related to the unwinding of carry trade transactions can exacerbate the problem during periods of drastic currency fluctuations (as with Greece and the euro). These computer-driven avalanches of orders are triggered in fractions of seconds and in large volume and can thus result in the kind of instantaneous price gaps in the indexes we saw on May 6.
Such marketwide and seemingly inexplicable meltdowns are the most damaging to public trust and should be the focus of any proposed reform.
Derivatives such as ETFs and index futures are important and useful innovations of our modern markets and are here to stay. But they can have dramatic though unintended ripple effects. We learned this after the October 1987 crash, when program orders related to "index arbitrage" and "portfolio insurance" were seen to be the primary snowballing cause of that dislocation.
In many ways the same scenario played out May 6 — with one important difference. In early 1988, regulators enacted the program trading "collars," or Rule 80A. They realized that program trading sell orders were exempt from the uptick rule on short-selling since they were considered hedged arbitrage transactions. The uptick rule required that a short sale be made only at a price higher than the last different price.
As a kid, an abiding fear, reinforced by movies and comic books, was that I would die on some foreign battlefield. I would become a casualty of the war that every generation of American men seemed destined to fight: World War I for our grandfathers and World War II for our fathers and Korea for our ...
My sentiments on immigration are expressed by the welcoming words of poet Emma Lazarus that grace the base of our Statue of Liberty: "Give me your tired, your poor, your huddled masses yearning to breathe free." Those sentiments are probably shared by most Americans and for sure by my libertarian ...
The sadly-not-surprising negative stories regarding Indiana Republican Rep. Mark Souder and Connecticut Democratic Attorney General Richard Blumenthal (Souder admitting an affair with a staffer, Blumenthal misrepresenting his lack of service in Vietnam) had me rushing to my keyboard to e-mail a ...
In May 2008, Sen. Barack Obama delivered a commencement address at Connecticut's Wesleyan University that called for sacrificing in order to build a fair and socially just society. "We may disagree on certain issues and positions," he said, "but I believe we can be unified in service to a greater ...
One of the many shallow statements that sound good — if you don't stop and think about it — is that "at some point, you have made enough money." The key word in this statement, made by President Barack Obama recently, is "you." There is nothing wrong with my deciding how much money is ...
To participate in Community areas, please Sign In or Register
Register
Heavy-volume declines often signal trouble.
Get QuoteSearch Site
Read Full Article »
