Support Marketplace

A year on, flash crash still spooks investors

A trader rubs his eyes on the floor of the New York Stock Exchange before the closing bell May 7, 2010 in New York City.

Tess Vigeland: So it's no surprise ordinary investors are having trouble trusting the market post-flash crash.
But they're not the only ones who are disillusioned.

Even professional investors, the folks who manage our retirement and college funds, are wondering if the market is rigged against them. You'd think these grizzled veterans would've seen it all. But the flash crash made them feel outnumbered and outgunned by a market where computers are just faster.

Our New York bureau chief Heidi Moore has that side of the story.


Heidi Moore: Themis Trading in New Jersey signals every stock trade with a distant blip. It sounds like the ping of underwater sonar. Since last year's flash crash, Sal Arnuk, the firm's co-founder, say he's in another kind of marine environment. He compares professional investors like him to guppies. Their profits are being devoured by much faster sharks: high-speed computer traders.

Sal Arnuk: If you sit down at a table and you don't know who the patsy is, guess what? You're the patsy. Institutions have been the patsy.

Jim McCaughan is the CEO of Principal Financial, a big manager of mutual funds and 401ks. He said the flash crash was a psychological turning point for professional investors. It made them realize that the markets have become a game of man versus machine.

Jim McCaughan: Institutional investors, some of them felt that the market was moving away from a long-term allocation of savings towards more of a short-term betting mentality.

The fear isn't another flash crash, but the way high-speed computer trading can skew the market daily. The machines see the trades that professional investors are planning, the way only banks and exchanges once did. McCaughan warns that the high-speed computers often cut in line to get a better price.

Michael Yoshikima, the founder of investment firm YCMNET advisors, says the legions of computer programs can easily jolt the markets.

Michael Yoshikima: Institutional investors have strategies that we're employing and we certainly don't want those derailed just because a computer put in one extra zero.

Advocates of computer trading say that they're more rational -- and humans still program them. Even so, the legacy of the flash crash is shaken confidence among professional traders. Sal Arnuk told clients this week that trading in today's markets was like this line from the movie "Dirty Harry":

"Dirty Harry" clip: You've got to ask yourself one question: 'Do I feel lucky?' Well, do ya, punk?

In New York, I'm Heidi Moore for Marketplace.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...