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Why we don’t know why the Dow fell

Marketplace Staff May 31, 2010

Why we don’t know why the Dow fell

Marketplace Staff May 31, 2010


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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