On or around the time of the July-August 2011 debt deal negotiations in Washington DC and the Standard & Poor’s downgrade of US treasuries we watched the US stock market, and stock markets around the globe responding to what was going on deal with extreme volatility. Under such conditions, are generally times when investors lose big time, or make incredible gains. Generally it is the market professionals who are in the game, and understand the game, that end up with all the prize winnings.
At one point the Dow Jones industrial average went down 632 points in one day. It was the biggest drop since the 2008 market crash in a one-day period. The amount of volume being traded that day was in excess of the number of small time investors in the market. That is to say, those numbers were impossible, or so unlikely and highly improbable to make one wonder. What was going on? Well, it’s simple; the high-frequency trading computers using their sophisticated artificial intelligent algorithms were making trades in microseconds, and thousands of them per every 10 minute period.
On Larry Cudlow’s “Free-Market Capitalism” show on CNBC Larry was talking to a guest and suggested that it was getting a little out of control, and things were not fair to the little guy, the individual investor. Worse, it was completely eroding confidence in our stock markets. If the smalltime investor doesn’t feel safe, or feels that the game is rig, just like a slot machine in a casino, then why would they play?
I laughed because I was in the middle of writing this article when I listened to his condemnations of high frequency trading schemes, and I completely agree with what he was saying. Of course, this is not the first time, if you’ll recall last year there was a significant flash crash, when the machines took over, and that also rocked investor confidence, and yes the authorities and SEC has looked into the problem, but obviously hasn’t fixed it yet. To have 10% market swings within just a few days of trading keeps people up at night, it causes stress, and even heart attacks.
When smalltime investors who have their life savings and their retirement monies at risk, all that they’ve ever earned that uncertainty takes a toll. Not only on them, but also on the overall confidence, and that’s not good for our nation because our stock markets are to help capitalize American businesses. If they are working, that causes a huge problem. It’s too bad no one is addressing this problem or fixing it. Indeed I hope you will please consider all this and think on.