Are you kidding?
A near-meltdown and freeze-up in the stock market in which billions of dollars of value evaporated, blamed by many on hands-off, computer-driven trading – but no one knows for certain what happened?
How 1987 of you.
It has long been a guiding axiom of your business columnist that newspapering is a lot like watching a carousel: If you stand in the same place long enough, you’ll see the same gaudily painted wooden horse come around again and again.
Sometimes those horses come with their own documentation that they’ve been by before.
The May 6 market debacle saw the Dow Jones industrial average drop by 1,000 points in minutes and some stocks, on absolutely no news, suddenly trade at prices close to zero. The “flash crash,” as it’s already been dubbed, is now being picked over to find out what might have caused such aberrant behavior.
So far much of the analysis can be distilled in a passage like this: “We expect the true cause of the crash will never be known. The crash was probably caused by the confluence of many events, some quite unexpected. More than likely, no single cause will emerge after the dust settles.”
Interestingly, though, that quote didn’t come from a news story or analyst report issued in the past week and a half. It comes from a column written by your columnist in 1988, in a previous stint with The News Tribune, on a report issued by what was then known as Frank Russell Co. on the possible causes of the Oct. 19, 1987, stock-market swoon in which the Dow lost 508 points or nearly 23 percent.
The headline on the yellowed clipping could be cut-and-pasted onto a story that appeared in the last week: “Who was really responsible for market’s meltdown?”
The perceived villains at the time were, to borrow from the column, “exotic new investment instruments such as index futures and index options, and exotic new trading strategies (which often use index options and futures) such as program trading and portfolio insurance.”
The argument was that the smart guys on Wall Street had devised a system in which computers would monitor the market and automatically order trades to protect positions or take profitable advantage of pricing and valuation discrepancies. The inadvertent, unintended consequence of this system, critics added, was that such hands-off rapid-fire trading could accelerate a market downturn into a nose dive.
The 1988 report prepared by Russell analysts was skeptical of the conventional wisdom that blamed runaway, out-of-control computerized program trading.
“There is no trading machine that is turned on in the morning and commanded to find arbitrage, after which the trader leaves to play golf,” the analysts said.
They leaned toward a breakdown in an overwhelmed trading system, “not a panic-stricken rout caused by a pernicious investment strategy.”
They also cautioned against knee-jerk regulatory reaction. “We believe that our clients and other pension funds using derivative instruments would be hurt if these markets are legislated or regulated into extinction.”
Any of this sounding familiar?
We can certainly relate to the notion of conflicting and unconvincing theories.
Already, we’ve heard that what happened this time was the result of increased anxiety about Greece. But Greece has been publicly circling the economic drain for weeks. It’s not as though market traders woke up one Thursday, slapped their foreheads and exclaimed, “Greece could take down the European Union? Who knew? Sell everything!”
Then there was the Legend of the Fat-Fingered Trader, which blamed the market collapse on a hapless somebody who typed billion on a sell order when he meant million.
Oh, c’mon. Rare is the business reporter who hasn’t, in a career of slogging through hundreds of quarterly earnings reports, hit “b” for billion instead of “m” for million, or vice versa.
But consider what checks there are on mistakes on your typical consumer computer. If you go into a document created by Microsoft Word and so much as delete a comma, you’re asked upon exiting if you want to save the changes. Yahoo e-mail asks if you really intend to delete the contents of your spam box. Certainly there must be something at least as sophisticated on a computer linked to the world’s financial system, perhaps a pop-up box that asks “Are you sure you want to collapse the stock market? OK/Cancel” before entering a trade order.
The issue isn’t just that the market plummeted, although that’s part of it. It’s not just that we don’t know why but we suspect many of the same factors that caused the October 1987 crash, but that’s a big part of it too. It’s not just that 23 years and untold advances in computer technology later, we don’t seem to have made much progress in preventing market calamities, although that contributes as well.
It’s all of those, plus this: The hit to the market’s stability, and to the public’s trust in it, comes at a time when credibility is already at as low a point as it’s possible to get and still have a functioning system.
Presuming, of course, that we still do. There are certain situations and certain people from whom you do not want to hear the word “oops,” from the surgeon rummaging around your innards to the pilot of your plane at 30,000 feet. Or the person with a finger on the launch button of the nuclear warhead-tipped intercontinental missiles.
To that list add: The traders with immediate, computerized access to the world’s financial system. Maybe they don’t have the power to send the markets spiraling out of control with a few typed (or mistyped) instructions. But confidence in the system is difficult to maintain when the answers to the questions “what happened?” and “why?” are “I dunno,” and “beats me.”
Bill Virgin’s column on business and economics appears Sunday in The News Tribune. He is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. He can be reached at firstname.lastname@example.org.