News, analysis and personal reflections on the markets & the financial sector

Saturday, October 9, 2010

'Flash Crash' Questions Defy Real Answers For Investors

An electric utility stock like Progress Energy is supposed to be a retiree's dream: dependable and stable. So it was shocking to watch the company's worth inexplicably plummet at 12:57 p.m. on Sept. 27. In minutes, shares dropped from $44.60 to $4.57 - an 88 percent decline - only to bounce back within seconds to just under $44.

The Nasdaq Stock Market, where much of the plummeting trades occurred, stopped Progress Energy trading for five minutes.

It was a technical glitch - known as a mini-flash crash - that zapped only Progress Energy's stock. It wasn't the company's fault. But it was the latest shudder afflicting U.S. stock markets and rattling individual investors.

Investors fret over all the talk about computer-driven stock manipulation measured in milliseconds. They sense a fraying fairness in market trading. They wonder whether regulatory agencies are even capable of policing - much less understanding - a growing complexity of variables with names such as "trading algorithms" or "high frequency" trades behind severe stock price swings that otherwise defy explanation.

Investor confidence was strained well before Progress Energy's September blip.

On May 6, the market's big flash crash happened when the Dow Jones Industrial Average plunged 1,000 points before recovering 20 minutes later.

Last week, federal regulators released their analysis of the cause of May's flash crash. They blamed, but did not identify, a large trader's use of a computer trading system to sell futures contracts. That action led to rapid and sudden selling that, in turn, triggered additional sell-offs in an already unstable market.

A Kansas City area mutual fund investment firm called Waddell & Reed was separately named as the culprit. But now even that disclosure is being contested as the real cause of the flash crash.

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