The July 31 trading session was marked by unusual activity in 148 stocks listed on the New York Stock Exchange, many of which swung sharply in the first hour of trading due to an apparent error in a newly installed software program developed by seventeen-year-old Knight Capital Group Inc., one of the country’s largest market-making and trading firms.
For some, the incident was an unwelcome reminder of the so-called “flash crash” on May 6, 2010, which saw the Dow Jones Industrial Average plunge over 700 points in fifteen minutes. Wall Street Journal columnist Jason Zweig sounded out a number of individual investors for their thoughts on the market gyrations and got an earful. A New York lawyer observed that the investors he talks to are convinced “the game is stacked against them” and that earning a pittance in safe fixed income investments was preferable to “losing it all on a roulette-wheel stock market.”
Incidents such as the “flash crash” are often cited as a contributing factor to investor skepticism of equity investing. One can sympathize with investors who fear that the investment industry machinery somehow places them at a disadvantage, but we think such concerns should be placed in a proper context. We live in a complicated world, and it’s unrealistic to expect power plants, airliners, or stock exchanges to work perfectly 100% of the time. The lights go out, flights are canceled on short notice, and computers freeze up just when we need to print that important document. These malfunctions serve to remind us that technology is a mixed blessing, but few of us would prefer a permanent return to the era of spinning wheels and candlelight.
Some of us are old enough to remember the commission schedule at NYSE-member firms in the days before negotiated commission rates and high-speed trading algorithms. A 100-share order of IBM or Procter & Gamble used to cost $80.73. These days, a customer with a meaningful checking account balance can execute one hundred trades a year for free. More traders and more trading paves the way to greater liquidity and lower transaction costs.
We do wonder how many investors were even aware of the trading gyrations as they were taking place. We suspect those expressing the greatest alarm were accustomed to watching market developments minute by minute.
In this regard, we cannot improve on Jason Zweig’s observation, so we’ll quote him directly: “It’s harder than ever for long-term investors to ignore the trading madness of Mr. Market. But ignoring it remains the very essence of what it means to be an investor.”
