Friday, June 18, 2010

Wall Street: Video Game or Market of Stocks

Hint: Got a joystick handy? Flash Crash may be here to stay.

I'm going to be commenting from time to time on a phenomenon that's really got me bothered. The recent gyrations and volatility of the market--while certainly caused at least in part by the equally volatile international economy--have been wildly exaggerated. And here in the US, they've also occurred with remarkably low volume on the exchanges.

The already-legendary "flash crash" last month was perhaps the warning shot that finally alerted people to the underlying problem. But they don't understand what that underlying problem is. I do. The stock market has ceased to become a market of investors. It has, in fact, become the playground, the toy of a bunch of video gamers. Using sophisticated algorithms and high speed computing systems, these so-called "high frequency traders" execute hundreds, perhaps thousands of trades in seemingly nanoseconds, profiting by scoring a penny here and there which, given the volume of their trades, makes them a tidy living. 

Problem is, this completely distorts the market mechanism making it difficult for folks like you and I to make money the old-fashioned way: by INVESTING.

The Federal government, which allegedly regulates financial activities, is asleep at the switch. I'll have more to say in successive posts.

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