Apocalypse How?

Glitch in the system? Bad trade? A finger typed “B” instead of “M”? Or, did somebody scream “Fire!” in a crowded theater and everyone ran to the exits at the same time? How else to explain yesterday’s nearly one-thousand point intraday decline on the Dow Jones Industrial Average. Welcome to the 21st century of electronic trading.

The Wall Street of today is no different than the Wall Street of yesteryear. In the old days, after work, traders from the various brokerage firms would congregate at Harry’s Bar & Grill, located in the basement of the American Stock Exchange. They would talk about what they did for the day, but more important, they would talk about what they were going to do for the next day. They would compare notes, discuss, argue, and like lemmings, would be swayed by the person with the strongest argument. Fast forward to the present. The traders may congregate once in a while at a bar, but more importantly their computers are congregating every single day. High frequency trading, the centerpiece of Wall Street today, is the current example of what yesteryear was all about. If one proprietary trading desk is moving in a certain direction, every other computer knows it, and will adjust their positions accordingly. Yesterday, for whatever reason, one computer moved in a massive negative direction, and like lemmings, the rest of the computers followed along.

For us to believe this was a one-time event, that this is not symptomatic of what will happen in the future, might be a monumental mistake. This could happen again, again, and again. The reality is that economics usually catch-up and dictate the directions of markets. Whether its employment, foreclosures, or a Greek tragedy, economic data will eventually be reflected in the marketplace. With high frequency trading it will be reflected in the blink of an eye.

As I’ve continually been saying, get ready. The rollercoaster ride has just begun.

Till next time,

Bill


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