In an effort to boost company profits and make life oh so convenient for us, there has been companies offering these on-line trades and computer initiated trades. It allows a layman like me to be able to read and invest for myself instead of having to pay a large fee to someone else to do it for me. I can do this on my own time 24/7 and it puts me in control. A wonderful concept and quite a money-making tool but is has one major catch.
“A trading firm’s use of a computer sell order triggered the May 6 market plunge, which sent the Dow Jones industrial average dropping nearly 1,000 points in less than a half-hour.” “A report issued Friday by the Securities and Exchange Commission and the Commodity Futures Trading Commission determined the so-called “flash crash” was caused when the trading firm executed a computerized selling program in an already stressed market.” “Powerful computers give so-called “high frequency” traders a split-second edge in buying or selling stocks — based on mathematical formulas.” “The Dow Jones was down about 2.5 percent at 2:30 p.m. when the trader placed an enormous sell order on a futures index of the Standard & Poor’s 500 stock index.” “The trade on the E-Mini S&P 500 was automated by a computer algorithm that was trying to hedge its risk from prices declines.” (Gordon, Marcy, 1/1/2010, Associated Press, One large trader led to May 6 stock market plunge, Retrieved from www.finance.yahoo.com).
As reported in this article above, the real problem was really not the result of a trader executing ‘a computerized selling program in an already stressed market” but a direct result of a “computer algorithm that was hedging its risk from price declines”. That to me was the culprit and many could argue that these algorithms and hedging is essential to making money on the market. This article spoke of the younger years where computers were not used and it was mostly pen, paper and human factors which for many allowed then to make their wealth on Wall Street. Expanding on that point I would say that it was about selling or buying and taking your chances of whether it was a good choice or not. Today with these computers and algorithms, it makes a sure thing much easier to see. I would have to say that this plunge may not have ever happened if the computers were not equipped with algorithms to hedge risks but were only able to buy or sell at the keyboard operator’s command only. I would also argue that as long as hedging and these algorithms exist whether you use computers or not, the market will continue to be vulnerable to this type of mistake and next time it could be more costly.
I do not have much wealth to play around with the stock market as much as some and it does not hold my attention to long to even try but I am aware as a small business owner who may someday wish to be a part of the New York Stock Exchange and the Nasdaq that my wealth could be even more fleeting if someone trying to hedge stroke the wrong key.