by Jack Lee
Last week the market took a heavy plunge and now it looks like it was an error…a computer error…and it wiped out hundreds of billions of investor dollars in one day…again.
Because of the fast paced trading we have today, it’s been thought absolutely necessary for the major players with billions to invest (we call them market makers) to use computer algorithms to spot trends and react to them, kicking in buy or sell orders as the case may be. More often, this is used as a “stop loss” tool, to bailout before any major damage is done. However, when it’s done in mass, and one computer causes another to sell and so on down the line, then it can be the cause of major damage, it’s not a stop loss – its a cause for loss. The computers start a run on the market and the rest is history as we saw last week.
The Obama Administration has reacted quickly to Thursday’s snafu that sent the market plunging nearly a 1000 points before it recovered and eventually closed down 342 points. Obama’s financial regulators have summoned the heads of major exchanges including the New York Stock Exchange Euro next and NASDAQ OMX Group to Washington on Monday to discuss how some of the conflicting trading rules may have contributed to Thursday’s historic stock market plunge. In other words somebody has lit a fire under the regulators and now Wall Street is going to get a spanking…and it’s about time, unfortunately it took a run on the market to do it.
At the beginning of the stock market’s downturn, when AIG was at high risk due it’s over-indulgence in bundled CDO’s, no less that 400 regulators were supposed to be keeping them in check. In the final analysis, none were. I applaude Washington’s actions that should lead to rules, long in place, finally being enforced and a new look at computerized trading.