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David Weidner's Writing on the Wall
Oct. 5, 2010, 12:01 a.m. EDT · Recommend (3) · Post:
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By David Weidner, MarketWatch
NEW YORK (MarketWatch) "â? After a nearly five-month investigation into the May 6 "flash crash,"? U.S. market regulators have concluded that a single market participant fueled a wave of selling that sent the market into a short-lived confidence-shattering plunge.
Anyone feel better?
MGM "Your stock trade has been executed."? "Hal"? from "2001: A Space Odyssey"?
I certainly don't, for many reasons, not the least of which is the plodding probe by the Commodity Futures Trading Commission and the Securities Exchange Commission, which left the market at risk and highlighted the regulators' lack of understanding. Regulators are at a loss when it comes to knowing who participates and what happens in the market each trading day.
This goes beyond high-frequency traders and whether fast, cheap execution has created a free-for-all of trading confusion.
Waddell & Reed Financial Inc., the Overland Park, Kan., fund company believed to be the trigger man behind the flash crash shouldn't be made the scapegoat. But if such a pedestrian firm can inadvertently trigger widespread panic, then you might say that in today's tinderbox markets any firm out there is holding a gas can and a match.
Dennis Berman discusses tighter bank regulations, which are compelling giant investment banks in the U.S. and Europe to tone down their risk-taking and shift more to plain-vanilla strategies for making money.
What it took the regulators so long to find out, was what anyone who engages regularly in the markets already knew: Retail and traditional buy-and-hold investors have been squeezed out by computer systems modeling other computer models and algorithms that have replaced traditional investing strategies executed by fallible humans.
Program trading has made up 22% to 47% of the weekly volume on the New York Stock Exchange this year. And it was in one of the lower volume weeks "â? just 23% of all volume in the May 3-7 trading week "â? in which all hell broke loose.
And that's understating the level of computerization in the markets. As much as 73% of all equity trading volume in the U.S. market comes from high-frequency traders, according to a report by the Aite Group last year. But that's just a slice of the global market pie. In London, high-frequency traders make up more than half of all volume, according to estimates.
Consider too, that exchange-traded funds are built on the ability of computers to mimic indexes. Companies such as Waddell have to use computers. If they didn't, it would be like stepping up to the plate with a matchstick when everyone else has aluminum bats.
Throw in dark pools and futures and options markets "â? all tied to the equity markets through the magic of electrified silicone and, well, even Stanley Kubrick would have trouble creating a supercomputer villain bigger than what exists in real life.
In other words, the computers are in control, and what the flash crash tells us is that it doesn't take much to make the whole thing go haywire.
David Weidner is the Wall Street columnist for MarketWatch. He formerly covered M&A and financial services at The Daily Deal, American Banker and Dow Jones. He writes the Writing on the Wall column which appears Tuesday on MarketWatch and Thursdays on WSJ.com. He also is a regular contributor to the News Hub.
A trio of economists project that high unemployment could last a long time, maybe even forever. Boy, what a dismal group!
5 min ago2:40 p.m. Oct. 5, 2010 | Comments: 16
- proactivetrader | 11:30 p.m. Oct. 4, 2010
"David Weidner's Writing on the Wall: The markets are broken and it's getting worse: The Securities and Exchange Co... http://bit.ly/aH3R1f" 11:11 p.m. EDT, Oct. 4, 2010 from davidweidner
"Has Bob Benmosche lost Tidjane Thiam's number? http://bit.ly/903uyG" 2:46 p.m. EDT, Oct. 4, 2010 from davidweidner
"If we're going to fix financial reform, it would be nice if the repairmen would at leas show up. http://bit.ly/9Ez6lP" 10:47 a.m. EDT, Sept. 30, 2010 from davidweidner
"Dodd: Where the hell is Geithner?" 10:00 a.m. EDT, Sept. 30, 2010 from davidweidner
"Already Wolin talking stall. More time for studies etc." 9:59 a.m. EDT, Sept. 30, 2010 from davidweidner
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