Another stock exchange glitch amplifies calls to curb short-term speculation

Remember the NASDAQ glitch during Facebook’s IPO (initial public offering)? The new stock (symbol: FB) didn’t begin trading until late morning, hours after the markets had opened. And in 2010 there was the “Flash Crash” on the NYSE (New York Stock Exchange) which caused the exchange to drop 1000 points and then recover completely within minutes.

On Wednesday, we had the latest stock market glitch when a “technology issue” caused dozens of stocks to swing widely in both directions.

The problems began when dozens of stocks started moving up and down by wide margins for no apparent reason. Abercrombie & Fitch jumped 9 percent within minutes, hitting $36.75 after closing the night before at $33.80. Harley-Davidson suddenly fell 12 percent, to $37.84 from $43.23. Wizzard Software shot up above $14 after closing the night before at $3.50, according to data compiled by FactSet.

The culprit was Knight Capital Group. Knight, which takes stock trading orders from big investors and routes them to exchanges, said in a statement that a “technology issue” had occurred that affected the routing of about 140 stocks to the New York Stock Exchange. Later in the day, NYSE said it was canceling faulty trades in six smaller stocks, including Wizzard. – NPR

Short-term, computerized trading is the culprit and it is increasingly putting a strain on the exchanges as well as increasing the likelihood that rogue data can cause chaos in the financial markets.

High-frequency trading does not lead to productive long-term investment, nor does it allocate resources efficiently. Rather, computer-based algorithmic trading stresses markets and shatters investor confidence in the economy.

It’s obvious that human oversight is desperately needed to ensure the stability of our financial markets. Yes, people can make mistakes, but they don’t repeat them thousands of times per minute. Computers, on the other hand, operate at lightning speed, and can wreak exponentially more havoc. – CitizenVox

Short-term speculation doesn’t need to be outlawed, instead we can put sensible controls in place to stabilize the financial markets. We need rules that promote long-term investment over short-term trading. If our stock markets do not show favoritism towards long-term investment then they are nothing more than casinos.

This ongoing problem calls for a lasting solution that changes incentives so that short-term speculative trading is diminished and traditional long-term investment is encouraged. A miniscule tax on financial transactions, as called for by the Wall Street Trading and Speculators Tax Act (H.R. 3313, S. 1787), introduced by Sen. Tom Harkin (D-Iowa) and Rep. Peter DeFazio (D-Ore.), would accomplish these goals. It would “throw sand in the gears” of high-frequency trading operations by making their activities less profitable and ultimately removing many distortions in the market. – CitzenVox

A financial transaction tax would have the dual purpose of limiting casino-style gambling on the major exchanges as well as raising revenue that can fund better oversight of the financial markets. / photo by Julien GONG Min

related: Trading Program Ran Amok, With No ‘Off’ Switch

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EconomyFinancial Regulation

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