Avon Hoax Yet More Evidence of Our Fragile Capital Markets

NEW YORK (TheStreet) -- Last Thursday's announcement that Avon (AVP) 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.

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