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Wall Street's new gamble

A financial professional works a phone on the floor of the New York Stock Exchange near a screen showing the day's losses near the end of the trading day in New York, N.Y.

TEXT OF STORY

Tess Vigeland: Deep breath... Ahhhhhh. A week without stock market mayhem. You know, we talked about dealing with the big plunge on last week's show, but nobody really knew what had happened. So we decided to wait a week.

Meantime, you wrote in with questions like this one from Tom McCoy in Burnsville, Minn.: "How large does the computer share of the market have to get before it ceases to be a market and becomes a sophisticated computer game?"

And this from Oscar Ramos in San Diego: "If the stock market is so out of control that years of gains can be wiped out in one day, doesn't it make more sense to just put all your money into paying off your mortgage?"

So here we are a week later. You've got questions, we've got, frankly, few answers.

Our senior business correspondent Bob Moon has been looking into one specific aspect of what happened on May 6th.
Here's what he found.


Sound of marble rolling in roulette wheel

Bob Moon: We've all heard the phrase, "All bets are off." At a casino, the dealer might cancel any wagering should a card accidentally fall to the floor, or if the marble jumps out of a roulette wheel.

Sound of marble rattling

When Wall Street seemed to lose its marbles the other day, leaders of some of the major exchanges came up with their own rule: Some bets are off -- but others will stand, even if they, too, might well have been swayed by a technical glitch that nobody seems to be able to explain.

Rochelle Rittmaster: As a careful investor, as a conscientious investor, it makes me want to run for the doors.

Rochelle Rittmaster is a scientist who lives near Boulder, Colo.

Rittmaster: I was at work, and the whole thing kind of came and went before I even knew it. I came home, was listening to Marketplace and said, "Oh, here we go again with these crazy glitches."

It was only when she checked with her financial advisor that Rittmaster learned Wall Street's "crazy glitch" had cost her big time. She lost thousands of dollars when the sudden plunge triggered a stop-loss order. Her stock was then automatically sold once it dropped below a pre-determined price.

Rittmaster: In a day of legitimate trading, what's fair is fair, and if I ended up having my stock sold, then what's fair is fair.

What's not fair, she complains, is blaming a technical glitch, but then canceling only trades deemed 60 percent or more out of whack. Rittmaster says all trades during that time should be erased.

New York lawyer Bill Singer represents investors in claims against Wall Street brokerages and exchanges. He says they've rigged the game.

Bill Singer: You can place a "buy" order, you can place a "sell," but we're not going to necessarily honor it -- we'll see how the market does today and we'll let you know later.

Not everyone is so sympathetic. James Angel is a leading professor of finance at Georgetown University. He suggests reversing too many trades would reward investors for their own bad decisions.

James Angel: They had to draw the line somewhere. It's a messy process, and what it shows is that we need to prevent these kind of problems from occuring in the first place.

Angel says there could still be losers even if all trades during that time were canceled. What about some buyers who might have snapped up shares and then sold them after the market recovered -- only to find themselves on the hook for a sale they can't back up?

Angel: Somebody thinks, "Hallelujah! I just bought some stock cheap!" And then they sell the stock to pocket their profit. Then, the exchange says, "Oops, sorry, that first trade was a mistake." And they cancel the "buy" order, but not the "sell" order. Uh-oh, he sold stock, but he hasn't bought any. Oops.

Angel worries that could make buyers who rushed in and helped the market recover this time hesitate to get burned again -- which could lead to a lack of buyers and a sustained crash if it happens again. And Wall Street attorney Bill Singer says that's exactly the point.

Singer: When some third party arbitrarily decides to take my profit or to impose a loss upon me, I've lost confidence in the market. And the more people who lose confidence in any market, the less people that are in that market, the more illiquid it becomes, and the more risky it becomes.

All this uncertainty, Singer warns, is doing more and lasting damage to the whole financial system.

VIGELAND: That's Marketplace's Bob Moon reporting, and he's still with us here in the studio, and, Bob, I think we wanted to take this out to a bit of a broader view of what happened. First and foremost is this question of whether we have an explanation for what happened, and I think still a week-and-a-half later the answer is no.

MOON: The head of the SEC Mary Shapiro was before Congress saying we don't know what happened. We're still looking. They have literally millions of electronic trades to go back through. They are already working on a fix even though they don't know exactly what happened, which sounds a little backwards to me, but they want to impose these marketwide circuit breakers that would kick in when a stock falls by a certain level.

VIGELAND: Well, you know on this show we try not to get too hung up on daily market gyrations, but this was 1,000 points in a mere few minutes, and I think it makes you wonder why anyone should have their money invested in something that can go completely haywire at a moment's notice.

MOON: Some of the people I spoke to this week said listen if you can't sleep at night then you shouldn't be investing. That, of course, speaks to investing your money with either the experts, somebody who can advise you more professionally, and you really have to diversify your portfolio. Where have you heard that before, Tess?

VIGELAND: Yeah, every week.

MOON: And you also have to think long term. And we have seen the market recover almost all of its losses from May 6 in just the past few days, and so we're back basically to where we were.

VIGELAND: But I think there is still this sense of unease that we as investors, particularly those of us who are only in the market with 401(K)s, with 529 college plans, that we have no control over the system.

MOON: Well, there has been a renewed debate to increase regulation, particularly of these big investors who basically go into the back room and do their trading in the back room with not a lot of transparency, and we don't know exactly what effect that might be having on the market at any given moment.

VIGELAND: Some of the reaction to this has been wait a minute, what does this mean for the economy? Does this mean that the market's rise over the last year or so has been a bit of a head fake, and that there really isn't anything underpinning some of the positive feeling that we've had because the market has been on such a tear.

MOON: Well, let me underscore that we think what happened on May 6th was a aberration, was a technical glitch, and is not likely to happen again. On the other hand, I can't vouch for just how deep this market recovery is, I can tell you that trading volume has been uncharacteristically thin.

VIGELAND: So that mean not a lot of people...

MOON: Not a lot of people have been trading, and when not a lot of people trade, it can move the market up or down in big jolts, so you have to keep that in mind as you're watching this stock market.

VIGELAND: And should we expect for this roller coaster just to continue?

MOON: Fasten your seatbelts.

VIGELAND: All right, so I think the lesson here is take a Xantax or a Xanax, maybe both?

MOON: It might be a good idea, Tess.

VIGELAND: All right, our Senior Correspondent Bob Moon, thanks so much.

MOON: Thanks.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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