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Don't give up the day job...ever

Just stumbled across this jaw-dropping anecdote from a NY Times article on the May 6 Flash crash:

The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said.

Tradebot, incidentally, was one of the auto-trading outfits that decided to shut up shop when the Dow fell off a cliff early this month.

As Finextra concluded at the time: The HFT's routine defence against regulatory restrictions is that they provide a valuable source of liquidity during times of extreme market distress. This deep well of liquidity suddenly seems a little shallow.

In their first joint report into the cause of the crash, the SEC and CFTC pointed merely to market dislocations and had little to say about the influence of machine-based trading programs on the Dow plunge.

This caused democratic Senator Ted Kaufman to issue the following statement: "Why on May 6 did our markets for 20 minutes stop performing their essential function: discovering the prices of securities based on a balance between buyers and sellers?  The answer, I suspect, remains wrapped up with the fact that 70 percent of the daily trading volume is by black-box computers that, for the most part, do not care about the intrinsic value of the stocks underlying their trades."

It appears that the global stock markets have moved away from their original remit and mutated into a grotesque hi-tech casino, over which the regulators have Canute-like influence.

One thing's for sure, a market that can suffer an intra-day 1000 point swing is no longer a safe place for small investors - unless the ability to buy Apple shares at $100,000 a pop floats your boat.

So, with equity premiums looking like a thing of the past, near-zero interest rates for savers and the bond markets an accident waiting to happen, small investors may as well put their retirement funds in the mattress. For those of you counting the days to retirement and a comfortable pension, my advice would be: Don't give up the day job...ever.


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Paul Penrose

Paul Penrose

Head of Research


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06 Oct 2006



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