Friday, May 07, 2010

Stock Market Rollercoasters and Other Thrill Rides

Yesterday's heart stopping stock market dive left several investors and market gurus in a total panic.  When I saw it I suspected it was a glitch and didn't get too excited and now it looks like I was right.  Even though the NYSE first denied that the problem was computer-based, it turns out it might have been.

There is a "safety net" built into the trading program of the market that should have stopped a panic and instead it triggered one.  As best I can understand the big casino that is Wall Street here's what may have happened.

Proctor & Gamble stock dropped close to 10% mid afternoon.  That drop triggered what is known as a "circuit breaker" that is designed to pause trading so things don't go south.  That pause lasted for only 80 seconds when trade opened up again on other exchanges.  That coupled with a mini-panic about Greece put the Dow off about 200 points.  It put lots of people in the mood to sell, and more specifically the computer trading programs.

When these programs saw noting to sell on the NYSE, they switched to other exchanges and found the pause looked like there were no bids for the paused stocks.  The programs are set to bid 1 penny more than the last price, and they interpreted this as 0.  Bingo!  Stocks suddenly sell for pennies and everyone dives off a cliff.

Like I said, it is only how I understand it, but there has to be some truth in it because NASDAQ is canceling almost 300 trades though there are losers in the mess.

This whole thing firms up my belief that Wall Street is a really badly rigged casino where "whales" get the deals and everyone else gets a raw deal.  Heck in Vegas, the big money might get more perks, but the rules of the table don't change for anyone.  My portfolio, if I had one would include lots of money on Craps, at least in that game you can get true odds!

1 comment:

Anonymous said...

Great way to break down what happened, but can't quite agree with your view on the markets. ;o) Thanks for sharing. You are making me think a lot today.