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'Flash crash' questions defy real answers for investors

An electric utility stock like Progress Energy is supposed to be a retiree's dream: dependable and stable. So it was shocking to watch the company's worth inexplicably plummet at 12:57 p.m. on Sept. 27. In minutes, shares dropped from $44.60 to $4.57 — an 88 percent decline — only to bounce back within seconds to just under $44.

The Nasdaq Stock Market, where much of the plummeting trades occurred, stopped Progress Energy trading for five minutes.

It was a technical glitch — known as a mini-flash crash — that zapped only Progress Energy's stock. It wasn't the company's fault. But it was the latest shudder afflicting U.S. stock markets and rattling individual investors.

Investors fret over all the talk about computer-driven stock manipulation measured in milliseconds. They sense a fraying fairness in market trading. They wonder whether regulatory agencies are even capable of policing — much less understanding — a growing complexity of variables with names such as "trading algorithms" or "high frequency" trades behind severe stock price swings that otherwise defy explanation.

Investor confidence was strained well before Progress Energy's September blip.

On May 6, the market's big flash crash happened when the Dow Jones Industrial Average plunged 1,000 points before recovering 20 minutes later.

Last week, federal regulators released their analysis of the cause of May's flash crash. They blamed, but did not identify, a large trader's use of a computer trading system to sell futures contracts. That action led to rapid and sudden selling that, in turn, triggered additional sell-offs in an already unstable market.

A Kansas City area mutual fund investment firm called Waddell & Reed was separately named as the culprit. But now even that disclosure is being contested as the real cause of the flash crash.

So where does all this market hand-wringing leave us? The flash crash was bad enough. The inability to identify with certainty what actually caused it may be more alarming.

With the Dow up and flirting with 11,000 this week, flash crash fears and computer-dominated trading may seem long ago and far away. The market's up. All's well with the world, right?

No way.

May's flash crash and Progress Energy's nose-diving shares are symptoms of new stock trading systems and strategies that outstrip the capacity of the markets or regulators to control.

Does it really boil down to this: Whoever owns the faster computers (and more doctorates) wins?

The much maligned Securities and Exchange Commission wants to shed past blunders that let Bernie Madoff run a world-class Ponzi scheme for years and that failed to anticipate the 2008 meltdown of our financial system.

Unfortunately, it's mostly window dressing. Washington's regulatory and legislative zeal to look tougher while remaining cheap means the SEC has no added budget or staff to tackle a much more complex role of oversight of U.S. and, increasingly, international stock markets.

Where does that leave basic investors?

Like mushrooms, they are left in the dark and fed shiny reports about market crashes nobody seems quite able to explain.

Robert Trigaux can be reached at trigaux@sptimes.com.

'Flash crash' questions defy real answers for investors 10/06/10 [Last modified: Thursday, October 7, 2010 10:34pm]
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