Michael Hiltzik: How to kill a securities market
Most people can accept stock market downturns if they're tied somehow to the natural ebb and flow of market sentiment and the underlying economy. Strike that -- almost nobody accepts losing money in the stock market. But at least when the losses result from an economic slowdown, a correction, or some other cyclical phenomenon, they're understandable.
As my Sunday column observes, episodes like the ridiculous market collapse on Thursday are different. When losses are tied to some insane trading strategy gone awry or to the exchanges' inability to keep up with their own electronic systems, that's a development that can sap investor confidence for years.
Back in the 1980s John Phelan, then the president of the New York Stock Exchange, braved the slings and arrows of his own members and pundits from one end of Wall Street to the other to ready the NYSE floor for what he perceived would be a surge in high-speed electronic trading. He probably saved the Big Board from extinction. His successors seem to be on the road to undoing his achievement.
Let's not be unfair to the NYSE -- it's only one of many exchanges, all competing with one another for the lucrative business of hosting high-speed computerized stock trading. They need to work together, and work with their regulators, to impose consistent rules and sophisticated surveillance systems, or there will be so little confidence in the work they do that they won't have any customers left.
The column starts below.
So much for the biggest, safest, most liquid securities market in the world.
Of course we’re talking about the U.S. equities market, which used to be described in those glowing terms. But now, after Thursday’s trading debacle, the market looks more like a casino — and not just any casino, but one of those smelly joints with sawdust on the floor, ripped felt on the blackjack tables and loaded dice.
I’ve been inside casinos like that. I wouldn’t think of laying a 10-cent bet with the dealer. So why would I buy stock on an exchange emitting the same odor of rancid beer?
The market’s friends, including executives of the various exchanges and some traders with access to turbocharged equipment, would like us to think that the system worked Thursday. This is based on the idea that things could have been a lot worse.
But let’s not sugarcoat the event. When you have the Dow Jones industrial average falling nearly 1,000 points before recovering, including a nausea-inducing collapse of more than 700 points in a matter of minutes; when you have legitimate stocks like Accenture quoted at a penny a share, or about zero percent of their real value; and when therefore you have millions of investors trapped by insane prices, by any rational standard of market performance that’s a sin.