This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
$1 buys you full access to ALL of TheStreet's Subscription Services! Learn More

The 5 Dumbest Things on Wall Street: Oct. 1

Stocks in this article: BPAAPLHALDISCADTVCBSCMCSAPGNCVCTWDR

2. Investors Still in the Dark on Flash Crashes

There's been a lot of talk about "fat fingers" this year, what with all the mysterious flash crashes bedeviling the best minds of the markets. This week, after the latest flash crash hit shares of Progress Energy (PGN), investors may have reached the point where the only fat finger they're thinking about is their own middle finger, being raised in the face of the SEC and the exchanges.

There were actually two mysterious news items this week about Progress Energy. On Monday, more than 4,000 Progress Energy customers were left without power after a snake slithered into a switch and shorted the circuitry. In the curious case of the snake and the circuitry, Progress Energy restored service in about two hours.

Investors, on the other hand, are still left in the dark about the latest flash crash, when shares of Progress Energy slid from $44.50 to $4.57 in a millisecond early Monday afternoon, making the company's stock chart look like a Robert Downey Jr. EKG printout during a night of partying.

These days, the slithering is coming from the exchanges and market regulators. There was much fanfare about the new circuit breakers after the events of May 6, yet the Progress Energy "mini-flash crash" shows that it's the markets breaking down and the circuit breakers still malfunctioning. Even the Securities and Exchange Commission's preliminary report on the May 6 flash crash, released on Friday, offered few assurances that anybody knows exactly what happened.

According to the SEC, the whole thing may have been caused by a single trade. Apparently, a single trader, reportedly from Waddell & Reed Financial (WDR), entered orders only to sell e-mini S&P 500 futures. The trader had a short futures position that represented on average 9% of the volume traded during that period. The trader sold on the way down and continued to do so even as the price level recovered. Still, that's only being cited as a possible cause.

It's not too much of a stretch to make this analogy: many people are afraid to fly, but few are afraid to fly because they doubt the control mechanisms of the air traffic control system. Many investors have their doubts about the latest biotech stock, but few are afraid to invest as a rule because they don't trust the markets to function effectively. Well, that's not the case anymore with the latest flash crash in shares of Progress Energy.

"I think it has reached the point where the public is so fed up that something has to be done," said Eric Hunsader of market research firm Nanex, who has become a go-to guru in the science of detecting suspicious trading patterns in the era of high frequency trading. "There's no doubt that manipulation is going on to an extent far greater than I've expected, and the exchanges need to dismiss it outright because any exchange that puts out enforcement loses that business to other exchanges," Hunsader said.

Of course, the talking points from the markets about high frequency trading is that it's made for a more efficient market -- except, of course, when the flash crashes are cratering shares, and exchanges like Nasdaq are having to decide on arbitrary trade-cancel policies. In the case of Progress Energy, it was any trade 15% below the National Best Bid and Offer (NBBO). Why 15%? Because Nasdaq decided on 15%. There is no formal exchange policy on what to do when trades need to be canceled because of a flash crash, and that's just one minor frustrating wrinkle in the growing market dysfunction.

For better or worse, the markets are electronic. Machine has conquered man, the battle's over, end of story. But that's not the issue. The average investor has already been forced to wave the white flag when it comes to a man on the trading floor versus an unthinking machine running algos. The problem is some investors are getting ready to wave the white flag about investing in general.

If Joe The Investor could just get a decent quote, the whole man versus machine thing wouldn't be a problem.

TheStreet Says: If you're an investor, get ready to use your fat middle finger when the stock drops from $100 to $1 in a millisecond, while the regulators and exchanges twiddle their thumbs.

4 of 6

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,810.06 +91.06 0.51%
S&P 500 2,063.50 +10.75 0.52%
NASDAQ 4,712.97 +11.1030 0.24%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs