Why we don't know why the Dow fell

Traders work on the floor of the New York Stock Exchange during mid-day trading in New York City.


Bob Moon: Keep your seat belts fastened when Wall Street starts a new month tomorrow. The Dow has had a bad case of nerves, and the past week's headlines don't exactly inspire confidence. Especially this one from Reuters: Regulators may never pinpoint the cause of that May 6th crash. The one that everybody keeps calling a glitch, but nobody can really explain. Nearly a month out, top regulators say we may never know for sure. So what should we, who have money in stocks, make of this? Peter Cohan has some views on that. He's a market analyst and president of Peter Cohan and Associates. Welcome.

Peter Cohan: Thank you.

Moon: Sow how can the regulators after all this time not have any clue as to what happened?

Cohan: Well there's four reasons. I'll try to go through them quickly. First, there are different regulators covering different markets and I think that maybe what happened here was something that it overlapped their jurisdictions. Second of all, computerization creates so much data on a daily basis that sorting through it and figuring out what matters and what doesn't is a huge analytical task. And they can't do it ahead of time, so they only do it when they investigate a real big problem that happened afterwards. Third of all, the people who are doing the trading are just smarter and better paid than they people who are regulating them. And finally, the technology of finance is always staying several steps ahead of the regulators. So it's a very, very difficult job.

Moon: Peter, in one of your columns, you point to a quote of the Fed Chairman Ben Bernanke on May 17th, saying "our financial system is so complicated and so interactive -- so many different markets in different countries and so many sets of rules -- I just think it's not realistic to think that human beings can fully anticipate all of the possible interactions and complex developments." That's from the Federal Reserve chairman.

Cohan: That really, really stuck out to me. Because he is really, really smart. He should know more than anybody else about what's going on in the markets. And he says it's too much for him. So how is the average investor supposed to figure it out?

Moon: What is the deal with today's market that makes it so difficult to pinpoint these problems?

Cohan: Well, one of the things that I think is really important to bear in mind -- and it's not repeated often enough -- is that 70 percent of the volume of trading on the stock exchanges these days is done by something called flash traders, and that's basically computers that buy and sell stocks and hold them for about 11 seconds on average. So all of the discussions that we have the economy, politics, regulations, company earnings -- all that stuff -- there's just no way that a computer holding and selling a stock in 11 seconds is going to be able to do all of that analysis. So it's really all out the window. And there's really no clear-cut explanation for why stocks move up and down every day. And frankly, the fact that we have media trying to make these reports about how it's related to this or that is just not very helpful for the average investor.

Moon: So you're saying Greek debts or the rioting in Greece had nothing to do with this?

Cohan: You know, if this was really the reason -- problems in Greece were known as early as March 25th or March 26th when they passed the first bailout package. So there was a month there where the stock market kept going up, but the Greek problem was out there in the market and it was well-known, everybody knew about it. Why didn't the stock market crash then?

Moon: This is all confusing me about the same way that when I pull the handle on a slot machine, I don't know what they payout is. So with all this craziness, how does that differ from just walking to a casino and taking your chances?

Cohan: When you do that, you know that the house is going to win. When you bet on stocks, you think there's some chance that you might be able to use some intelligent reasoning and make money. But the fact of the matter is that I think the casinos are doing a better job of disclosure of what's really going on than the stock market.

Moon: Not to prove a negative here, but if we don't know what happened -- how do we not know this was a real crash?

Cohan: We don't know. What we don't know, we don't know. And it's really disconcerting and the only thing that's good about it is that it doesn't happen every day. And hopefully the measures that they've put in place will keep this from happening again. And they will keep investigating until they figure out what happened and hopefully they will resolve it.

Moon: Peter Cohan is an analyst and president of Peter Cohan & Associates. His latest book is called "Capital Rising." Thanks for joining us.

Cohan: Thank you, Bob.

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Regulators know exactly what caused that 1000 point drop, but they don't want to say. It is the continuing saga of debt deflation. The Government proclaimed the "recession" to be over by virtue of all the deficit spending and money printing ... but the truth is, it didn't. The recession/depression continues, and the volatility and bear market contractions will prove this assertion correct.

We know several people who left high paying software jobs to program for Wall-E Street traders. They are the ones running the show. The old boys on top are totally clueless as to what they do but they don't care as long as they get their bonuses.
Latency in communications is the big deal - a millisecond is reputed to be worth $100 million a year in profits. See http://www.technologyreview.com/computing/24167/?nlid=2622 on the MIT website.
If you don't have a presence on the co-location floor and good algorithms today, you are a nothing.

Peter Cohan's four-part explanation of why it is that we don't understand what caused the recent stock market crash was astounding. What was even more astounding was that his comments, essentially, were the same as those made by Ben Bernanke. While it should be absolutely terrifying to all investors that we may have developed a trading system so complex that we no longer understand it, I believe it to be highly unlikely that we've actually done so. In fact, I doubt that the mystery is quite what Mr. Bernanke claims it to be and I wonder what, if any, pressures were exerted upon him prior to his statement about the causes of the crash. I'm certainly grateful that the staff at 'Marketplace' thought enough to follow up on this story so long after the original incident. However, I hope that this issue continues to be pressed. Investors are owed an explanation. Anything less is unacceptable and should be cause for grave concern.

An Open Letter from the FED

Fellow Financial Cronies:

A few weeks ago I received a call from some friends in Westport and was told that their firm was critically low on cash. Well, most of the assets were stolen property and replacement theft takes time. I offered an interest only loan at zero percent and went to work. The next day everything was in place and the stock market collapsed.
Of course my friends were front running index futures and were able to nick enough useless widows, low life taxpayers, and working riff raff to replace the money.

This is a bailout product the FED has developed to protect the rich.

When asked what happened I simply say "I no understand".

I stole that from the old Floyd Vivino Show.

Just think of the US financial system as a great big whaling ship and me it's Captain Ahab. I think you don't have to guess what whale I'm chasing (hint: the little guy).

If anybody out there with liabilities over $1 billion needs help they will get it from the New Fed or my name isn't Ben Bumnanke.


Ben Bumnanke
King Pin, The American Culture of Financial Corruption

Since the market is driven by programmed trading - ROBOTS doing most of the trading - why don't we change the name to "Wall-E Street"?

Since about 15 years ago when I & my wife started investing in my 401k plans, I was scaptical about the movement of the market based on corporate performance & fundamentals. But we kept investing based on long term performance theory, tax benifits and we invested fully for all those years.
The result is very clear that I was right when the markets started collapsing in Sept. 08.
I have lost complete trust in the markets.

If the market is too complex to regulate, then it is too complex to invest in, thus it is too complex to exist.

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