We still don’t know what scrambled U.S. equity prices for a few minutes last May. A few stocks soared to $100,000 a share, while others plunged to a penny, instantaneously vaporizing roughly $1 trillion in market capitalization. A few minutes later, everything was back to normal...except investor confidence.
Regulators will try to build circuit breakers that will stop trading in individual stocks that jump or plunge too far during a 30-second period. But critics argue that until we know exactly what caused the problem, there’s no way to guarantee this solution will keep the market from crashing again. In fact, there has already been another incident in India, in which a single bad trade knocked the Bombay benchmark down 3.6%.
Computerized trading programs have evolved to where they can buy and sell countless times before the circuit breakers kick in. Another flash crash could crush flesh-and-blood traders caught between the programs and the circuit breakers.
For now, at least, it’s best to leave split-second trading to the hedge funds. As your advisors, we provide a longer-term view on financial markets, looking at how they may affect you over the course of a lifetime. We recognize the difference between a computer glitch and a real shift in fundamentals.
We are not infallible, but the trading programs have proved that they’re not, either.