“One Fat Finger From Disaster!”

Living in a scary over-leveraged, under-capitalized global economy!

As everyone is well aware, on Thursday afternoon, panic struck like a lightning bolt on the trading floors of the stock markets.

Twenty minutes of feverish chaos exposed the vulnerability of the markets. World markets have embraced a model that teeters on tremendous risk. So much so that it has abandoned its purpose; its reason for existence. This leaves them vulnerable to the terrifying moves that occurred globally on Thursday.

Like the Big Banks, the markets have become giant casinos putting everyone’s money and financial stability at risk. That couldn’t have been more apparent than the meteoric fall near the end of the trading day on Thursday.

Some blame a ‘fat finger,’—a trader hitting a ‘b’ for billion instead of a ‘m’ for million—for triggering the events that sent markets spiraling to investment hell. But that wasn’t the only problem the market encountered in that brief, illuminating moment in time.

Human error could conceivably be at the center of Thursday’s sell-off, but technology could prove to be the market’s nemesis rather than its friend. Orders set in motion by high speed, market gaming, computers sent the market tumbling at a record pace as each triggered event triggered another round of events. The two, individually or together, may be the nexus for the eventual destruction of global markets. For whatever reason stocks went on that wild ride, it created a lot of excitement on the trading floors.

So what do investors do after such a frightening occurrence?

Investors should prepare for the worst. In this volatile high frequency world we live in, things can change instantly. As shown in vivid technicolor on Thursday: fortunes can evaporate in minutes, pensions trashed in a single day, lives forever changed in less than a week, and thirty years of hard-work can be lost within a month.

One thing became abundantly clear in just 20 short minutes of turmoil. It’s the game that matters, not the people. The use of computers has made stock trading more of a game and less of an investment. It is less about investing in the future and more about trading in the moment; gaming the system. The ability to buy and sell based on automatic computerized programs with the use of complex mathematical models has taken all human emotion out of the equation and made the markets less stable rather than more.

Traders have become more detached from their clients; and less responsible for any positions they may have taken in their behalf.

There are some important lessons to be learned from the market’s scary volatility and near crash last week:

  1. The risks are probably not worth the short-term rewards.
  2. Lives can be destroyed in a heart-beat by an over-leveraged market pushed higher by over-zealous traders.
  3. Traders and analysts know less about the markets than they pretend to know.
  4. That the lemming mentality in the markets put the entire financial system in extreme jeopardy.
  5. And, finally, that many traders suffer from some level of Attention Deficit Syndrome.

Despite the rebound yesterday, driven mostly by European countries, the IMF, and the European Central Bank’s agreeing on the package to save Greece and other Southern European countries from insolvency, investors should be constantly vigilant; aware that volatility will be even more prevalent with the intrusion of high speed computers. What is even more evident is that it’s no longer a level playing field.

The heart-stopping excitement on Thursday should be a wake up call for Congress as they debate financial reform. Strong visionary legislation must be enacted to stabilize not only domestic, but the global financial system.

Anything less could spell doom for the financial world as we know it.

Tags: , , , ,

Comments are closed.