NEW YORK (TheStreet) -- Last Thursday's announcement that Avon (AVP - Get Report) was subject to a bid from a so called "PTG Capital" turned out to be a hoax, yet it hit the New York Stock Exchange hard with long-lasting effects, revealing once again vulnerabilities in our financial markets. 

First, the electronic nature of modern trading and modern money has created both a highly efficient, but also a highly vulnerable system. I have argued in detail in my book that the electronic nature of most money means that today we have this incredibly efficient system for processing value, and yet one that is now uniquely vulnerable to hacking and electronic manipulation.

With the hoax Avon bid, we have another example of the ease by which widespread market confusion can be caused through the electronic dissemination of entirely fictitious information. It all creates not less, but more volatility in markets. And indeed the interconnectedness of the financial system to mass media and electronic systems is something that Robert Shiller has also noted as being a contributor to greater market volatility today than historically.

Second, the hugely cumbersome U.S. financial services regulatory system proved itself (again) quite ill-equipped to deal with the crisis. The regulatory bodies write micro-managing rules on the basis that they believe they can legislate for every possible eventuality in life (rather than being more principle-based rules). Of course, when irregularities happen (as they do much more often than we tend to think), suddenly the manual, the rule book, that must be slavishly followed is of limited use.

How could a hoax announcement get into the SEC Edgar announcement system in the first place? Why didn't the company halt trading in its stock (which it has the right to do)? When the NYSE failed three times to get hold of the so-called bidding company, why didn't the NYSE act more promptly? Volatility trading halts did hit in through the day, but, basically, the stock price swung about throughout the day as the fiasco unraveled. As usual, the huge burden of fine filigree rules under which the NYSE and the SEC functions are far too prescriptive and do not allow flexibility for all of life's little, all too common oddities. There's no one with good old human discretion (or no one left who's allowed) to react to a situation in a rational and pragmatic way.

Third, the inevitable wild swings in the stock price created curious and quite irrational arbitrage opportunities. Even by the afternoon, well after the bid announcement had been clearly identified as a hoax, the price of Avon was still roughly 6% up on the day. But there was no longer any possible logical reason for their being some bid speculation in the price, so this price rise made no rational sense. Of course it did not -- it was just the very trading mania, the very trading volume around the stock, the interest the whole fiasco had brought to Avon that was now sustaining the increased stock price. Nothing here that efficient market theorists could explain and everything that the behavioral finance school could start to explain.

Jeremy Josse is the author of Dinosaur Derivatives and Other Trades, an alternative take on financial philosophy and theory (published by Wiley & Co).

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.