Archive for the ‘Flash Crash’ Category

Dog Days Not So Slow

Monday, August 6th, 2012

Another near-miss “flash crash,” more European craziness, buzz about more action from The Federal Reserve Board and a stock market that rises along with the unemployment rate … who says things slow down during the summer?

Goodnight, Knight?

Whenever a terrorist is caught, it’s natural to have a queasy feeling and wonder what would have happened if the terrorist had not been caught.  Worse still is the fear that maybe the next terrorist will succeed.

Knight Trading’s runaway algorithm last week caused a similar reaction.  Wednesday opened with heavy trading in 150 stocks.  Fortunately, the glitch was traced to a rogue algorithm fairly quickly (but not quickly enough).  Such algorithms are programmed to buy or sell stocks based on certain criteria.  The rogue acted more like a day trader than a Knight trader.

As Dennis Dick, a trader for Bright Trading LLC told The Wall Street Journal, “The algorithm just kept trading.  There are algorithmic errors every day, but they’re caught immediately – this went on for nearly half an hour.”

Think about that.  If algorithmic errors take place every day, how long will it be before we experience another “flash crash?”  You likely remember the “flash crash” of May 6, 2010.  It erased $862 billion of share value in 20 minutes, briefly sending the Dow Jones Industrial Average plummeting 998.5 points.  The age of electronic trading has brought investors many other stress-inducing errors.  The most recent example before last week, of course, was the malfunction on the NASDAQ exchange during the first day of trading.  It certainly isn’t entirely NASDAQ’s fault, but Facebook’s share price has yet to recover.

Doing “Whatever It Takes”

European Central Bank (ECB) President Mario Draghi spurred a rally in late July by promising to do “whatever it takes” to save the euro.  To the financial world, it sounded as though dreams of European bond buying, ala America’s quantitative easing, were finally coming true.  But then the ECB met … and did nothing.

Of course, buying bonds to keep borrowing costs low so that troubled countries can borrow more money at lower rates doesn’t really address the problem, given that spending too much money has been the cause of Europe’s problems in the first place.

Fed Signals

Ending a two-day policy meeting on Wednesday, the Federal Reserve Board made statements that indicate additional stimulus (i.e., more quantitative easing) is in our future.  The Fed said it will “closely monitor” the economy and “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions.”  Based on a Wall Street Journal translation, “The Fed will move if growth and employment don’t pick up soon on their own.”

Unless Ben Bernanke pulls a Mario Draghi.

Unemployment Rate and Market Rise

The good news is that the American economy produced 163,000 new jobs in July, significantly more than the 100,000 predicted.  However, the bar was set low.  There weren’t even enough new jobs to keep up with population growth and jobs being eliminated, as the unemployment rate inched up from 8.2% to 8.3%.  The labor force participation rate slipped to 63.7%, down from 66.4% in 2007, according to the Bureau of Labor Statistics.

As Zerohedge.com pointed out, there is plenty of confusion about what’s happening in the economy.  The blog noted that the Institute for Supply Management reported that the employment index dipped below 50 for the first time since 2011 (down to 49.3 from 52.3), so “in other words, the employment in the U.S. services sector is now contracting.”

However, this is what passes for good news these days.  The Dow Jones Industrial Average responded with a 217.29 point gain (1.69%), its third largest percentage gain this year.