Wall Street Hits Air Pocket – Two Must-See Videos (Part 2)

Sunday, May 9, 2010

No news is bad news. The lack of a clear, informed, logical report on Thursday’s air pocket shows that trading ran amok. Like those science fiction films where the machines take over, the stock exchanges became simply arenas in which the automatons could wreak havoc.

This is not to say that we should sell and run away from owning stocks. Far from it. To get to what we should do, let’s first look at the one reliable source of information…

… the New York Stock Exchange (NYSE). “What?” you say. “Aren’t they part of the problem?” No. They are the one place that has well-established rules, governance, controls – and a sound tradition. Executives know and act to serve Wall Street’s needs and all investors’ interests. That cannot be said of any other exchange, including the at-times popular Nasdaq.

Here are two must-see videos from CNNMoney

First, the NYSE CEO discusses what happened.

NYSE Euronext CEO, Duncan L. Niederauer, says his exchange slowed trades of stocks including 3M, Accenture and P&G during the 998 point drop.

Importantly, the trading slowdowns or lulls introduced by the NYSE are the result of the first time we had a trading mess brought on by the computerized trading programs: 1987. From that crash, the lessons learned led to “circuit breakers” to prevent sell-offs from occurring faster than humans could react. By doing so, the NYSE, then the center of stock trading, reestablished investor confidence.

Over the years, however, much of the trading has moved away from the NYSE to other trading systems, even some secret “dark pools.” They were not required to adopt the circuit breaker rules. And they chose to ignore the NYSE’s actions last Thursday, allowing a trading free-for-all. As the SEC and US government launch investigations, you can expect that the main result will be relearning the lessons of 1987 – and that is especially frustrating to everyone except those that took advantage of Thursday’s mess.

Second, interviews with two NYSE traders – the latter is key [*]

The first interview is a good synopsis of why traders didn’t simply bid the market back up on Friday. (In many articles, this is being pointed to as a sign of the market’s weakness, but you’ll see that it’s simply good trading tactics.) He then explains a bit more about the fundamentals (Greece, etc.). However, take that lightly. Remember that traders think one week is long-term, so they are always focused on current events, leaving true long-term trends to long-term investors.

The real jewel is the second interview with a 41-year veteran trader, Ted Weisberg. His start in 1969 matches the year I entered the business. EVERYTHING HE SAYS IS EXACTLY RIGHT. I cannot emphasize this enough. What’s happened, why it’s happened and how it affects investors is dead on. (Ted has been an active spokesperson and you can find his many interviews by searching for his name). This interview bears watching at least twice.

The video interview (May 7) is contained in the article “Stocks: After the avalanche” (CNNMoney, by Alexandra Twin, May 9). [*]

[*] September 15, 2010 update

Unfortunately, CNNMoney no longer has the NYSE traders interview video available. In its place I have substituted these two items:

Trading Day: May 10, 2010: Mood of the Markets” (BNN, May 10) has an interview with NYSE trader Ted Weisberg, who shares some of his perspective from the deleted video. (Missing are his criticism of the SEC for removing the short-selling “uptick” rule and allowing “naked” short-selling, as well as the hidden computerized trading now heightening volatility.)

High frequency trading: Why the robots must die” (Fortune Magazine, by Managing Editor Daniel Roth, May 7)

Subheading: “The robo-stock market blew a fuse Thursday. Now is Washington’s chance to rewire the joint for good.”

Caption under trading floor photo: “Humans? How quaint!”

First paragraph: “The exact causes of Thursday’s stock market short-circuit remain unclear [because at that early date – May 7 – there were still rumors of bad trades and other causes, since disproved], but the lesson is unmistakable. The regulators and the major exchanges have drifted from their original duty: to run a market that gives small companies a way to raise capital and mom-and-pop stock buyers a way to invest for the future on fair terms.”

So… Thursday’s “flash crash” was a repeat problem suffered in 1987: computerized trading in an uncontrolled environment. What next? A combination of fact-finding and face-saving that leads to fixing what is broken. More importantly, what do we do now? That is in my next write-up…

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One Response to “Wall Street Hits Air Pocket – Two Must-See Videos (Part 2)”

  1. UPDATE BY JOHN TOBEY–

    The Wall Street Journal today has a good article that discusses the subjects of NYSE versus other exchanges and the use/non-use of circuit breakers. “Exchanges Point Fingers Over Human Hands – Man vs. Machine: Questions Mount on the Better Way” (By Aaron Lucchetti, May 10) (http://online.wsj.com/article/SB10001424052748704307804575234682245507858.html?mod=loomia&loomia_si=t0:a16:g4:r1:c0:b0#articleTabs%3Darticle)

    The article likely will boost your frustration with the SEC and others for meddling with working systems and for an inability to foresee problems and plan solutions. Rather, they relied on “competition” to be the watchdog and problem-solver. Now, it’s back to 1987’s cures:

    “One idea to help fix similar situations is to have uniform rules on circuit breakers, which pause trading in an individual stock after that stock falls by a certain amount. At present, the NYSE is the only major exchange with such features.”

    #32

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