A stock market that is abandoned to robots that occasionally go insane is not a functioning financial market, making it harder for companies to raise capital and keep the economy moving.
Wall Street apparently doesn't see it that way.
CNBC on Monday interviewed two executives at financial-services firms that joined a $400 million rescue of brokerage firm Knight Capital, whose high-speed trading robots went nuts and blew a $440 million hole in Knight's balance sheet last week.
Both men, who also happen to sit on the board of the Securities Industry and Financial Markets Association, a Wall Street trade group, declared that their rescue showed that the free market worked just fine and that more regulation would be bad for America.
"Yeah, I think I'm not a big proponent of more regulation," said Curt Bradbury, chief operating officer of Stephens Inc., one of several financial firms involved in the rescue.
"I do not believe that more regulation is in and of itself the answer," agreed Ron Kruszewski, CEO of Stifel Nicolaus, in a separate interview a little later on CNBC. "The best regulator I know is the free market. The free market worked here. There was a loss. It was settled. Capitalism stepped in and did the right thing."
Ah, yes, the free market. The unfettered free market will solve this problem, as it solves so many market problems.
"From the country's point of view, from the regulator's point of view, from everybody's point of view," Bradbury gushed, "this is a good day for American capital markets."
Except in one way it's really a horrible day for American capital markets.
It is true, as both men noted, that Stephens and Stifel Nicolaus and a large group of other vultures, er, investors pooled their cash to rescue Knight, obviating any need for government intervention (though it is doubtful the government would have rescued Knight). And it is also true that Knight shareholders took a nightmarish beating in the deal, which pleases the angry free-market gods. The Vampire Squid fed well.
"What happened here was a Black Swan event," said Kruszewski, in defending the management of Knight Capital.
But "Black Swan" does not mean what Kruszewski apparently thinks it means. A Black Swan event is a rare event that nobody could possibly see coming. This was not that. Anything but. For one thing, Knight should have known that rushing out new trading software, as the New York Times suggests it did, was a risky move.
And the Knightmare on Wall Street is just the latest in a string of high-speed trading accidents, from the Flash Crash in 2010 to the Facebook IPO debacle earlier this year, that have trashed investor confidence in financial markets.
Even before the ink had dried on Knight's rescue deal, there was another technological glitch on Monday, in Spain's Bolsas y Mercados Espanoles SA, that threw stock trading in Spain into disarray for hours. And smaller-scale blowups are happening all the time.
In fact, the free market has pushed high-speed trading further, because it has generally been a money maker for the brokerage firms and exchanges. The robots make trading cheaper and smoother -- more liquid, if you will -- except for the few occasions when the robots make trading horrifically expensive and volatile. Apparently the free market thinks it can handle a few blowups here and there.
And maybe it can. The Vampire Squid has to eat, too, you know, and those Botox treatments aren't going to pay for themselves.
But what the free market maybe cannot handle is the growing disgust retail investors feel with the whole enterprise. They have been pulling money out of stocks consistently since the financial crisis, which may not be a wise investment decision, but is certainly understandable.
And that's why regulators need to do what the free market obviously won't: Find a way to curb these high-speed trading robots before they wreck the whole system.
Below are the most interconnected firms on Wall Street:
The government needs to get out of the way and let failure occur. No more bailouts.
Kai
The proper thing to do is to charge a fractionals cent tax on every single stock market transaction. What most people don't realize is that big brokerage firms have computer buying and selling huge blocks of stock based on momentary fluctuations in their value. Sometimes the same block of stock will be bought and sold thirty times a minute. Putting a minimal tax on each of these transactions would slow down the rate of these transactions happening. The actual profits from every transaction are so slight that it would eventually stop the practice.
My retirement, what's left of it since the last "help" I received from Wall Street during this continuing recession, is parked safely in a local bank, not making much, but losing none.
"Make this" you RICO criminals (issuing the quintessential single finger salute). And America, don't hold your breath waiting for this to end. Washington is absolutely powerless to regulate. They don't have the desire. They don't have the knowledge to even understand the obvious dangers of what is going on. More importantly, they don't have the support of Congress, who feeds their relentless campaign machines at Wall Streets doors.
Because the industry can easily sever all links with government, and provide its own insurance cover any time it chooses . Thereby showing that it assumes both the authority to determine its own rules, and full responsibility for their failure. Obviously assuming the former without the latter would be an irrational state of affairs. Either the market can stand entirely on its own two feet, or someone has to hold its hand.
“a large group of other vultures, er, investors pooled their cash to rescue Knight”
Because as soon as it was seen that government was willing to let it collapse, it would have sent an unambiguous signal to investors. When the system won’t or can’t cover its losses, that’s it.
"What happened here was a Black Swan event,"
Unfortunately, as has been discovered. Black swans don’t exist in isolation. There’s an entire breeding flock out there.
“Find a way to curb these high-speed trading robots before they wreck the whole system.”
Or stand back, and let the Black Swans come home to roost.
A transaction tax of 50% for securities held less then 5 seconds sounds about right to me.
I suppose it depends upon your definition of free market, for the consortium that extended the lifeline were certainly free to choose that course of action, But I always thought the idea was to eliminate your competition when possible, not rescue them.
It used to be that one actually invested in a company to help it grow, today there is no such interest.
Growing the world economy should have the purpose of improving life for the general populace, it shouldn't be just to make more money.
As for that Spain thing, there was no glitch. They suspended trading because, apparently, something has blown up in derivatives yet again. We have only been warned about such occurrences since, oh.... 1996. The contagion of 'glitches' has now spread to Japan where another 'glitch' forced a market shutdown. And the dollar? Dropping like a stone. You never know about FX and the warmongering Israelis forcing up gas prices at the pump.
As for HFTs? They don't really provide liquidity as that liquidity flows back into Wall Street bank accounts. And at 30% of revenue going to bonuses, as can and has happened... the HFTs don't work for liquidity... they work for bonuses.
This article is a sugarcoating over the problems. It soft-balls some of the issues.