The Beast on the Stock Exchange

The mood was already nervous on Wall Street last Thursday. The problems in Europe, a sharply rising dollar and insecurity about the economic recovery and the course of the monetary policy in the U.S. did not promise much good for the trading day.

But that did not justify the sudden and panicky decrease of the Dow Jones Industrial Average that took place Thursday afternoon. The rates slumped almost 10 percent in half an hour. Some stocks were not worth more than a cent for a short while. All trades were put on hold. In the end, New York closed with a slight loss. But the event remains significant. Apparently the stock market is capable these days of generating extreme stock rates in no time. The last of this kind, in speed and size, occurred during the crash of 1987.

Initially, human failure was thought to be the cause of the panic. But a so-called fat finger — in which a trader types in a wrong and much too large order — seems unlikely after an initial investigation.

That is unsettling. A human error is an apparent and also controllable fault. Yesterday, however, the Securities and Exchange Commission (SEC) informed the American Congress that it has not yet found the reason of the stock fall. Now that is truly alarming. Apparently, there is something wrong with the system itself and even the most powerful supervisors, including the futures stock authority CFTC, still have not discovered what four days after the fact.

The system itself has dramatically changed over the past few years. The New York Stock Exchange and Nasdaq are not the only places where trading occurs. At this moment in the U.S., there are about 50 platforms on which stock trade takes place. These trades are dominated by computer-guided brokers who place a constant, massive stream of orders. More and more in splits of a second. These high frequency traders make up for two-thirds of all trading profit.

Financial derivatives drive forward the trade here, as well. The order that possibly started everything on Thursday contained so-called mini futures on the Standard & Poor’s trading index. That is an instrument that normally gets traded on a large scale, but this one order managed to cause, like a butterfly, a hurricane.

The event is once more proof of the fact that the current financial system is a watershed for the real economy. It is heavy, big, predominating and no longer a reproduction of reality, but having the biggest influence. A sound-working, open and liquid financial market is of great importance for the free economy, and it should be possible to speculate up and down. But there are, especially with an eye on the credit crisis, signs that the sector is raging through society like a frantic bull.

Taming the beast, without it losing its character and impulses, is now one of the large tasks.