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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

October 4, 2010 at 10:15 AM

Small investors find little peace from ‘Flash Crash’ probe

If Wall Street wonders why small investors are staying away, consider this statement from the head of the Commodity Futures Trading Commission on the 600-point nosedive May 6th, otherwise called the Flash Crash:

“One key lesson is that, under stressed market conditions, the interaction between the automated execution of a large sell order and trading algorithms can quickly erode liquidity and result in disorderly markets, especially if algorithms use volume as a proxy for liquidity. The events of May 6 demonstrate that, in volatile markets, high trading volume is not necessarily a reliable indicator of market liquidity.”

So said CFTC Chairman Gary Gensler to the Wall Street Journal. He was discussing the commission’s report on the event, which found it was caused by a super-fast computerized trading program by a large investor. The regulatory response? They don’t know. As for Gensler’s “huh?” comment: Feel safer about your nest egg?

Like much in our world, stock markets have become much more complex. But as we learned in the great panic of October 2008 and subsequent recession, complexity can conceal fraud and danger that extends beyond the sharpies and their games. Many average Americans are in the stock market whether they want to be or not, because of their workplace 401(k)s. Some think they’re as smart as the big playerz. They’re not.

The economy worked well for everyone when Wall Street, in the decades after the Great Depression, was run by a largely sober and careful bunch, overseen by sober and careful regulators. Under that ethos, fancy programs designed by leading MBAs to give big investors advantages over others would be outlawed, period. But such a simple solution seems beyond us.

If Wall Street wants more average investors back, it needs to clean its house. Because it’s clear that a Washington owned by special interests can’t act on behalf of citizens.

Today’s Econ Haiku:

Big firms hoard their cash

But don’t expect much hiring

It’s the new normal

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