If Share Declines Continue, Who/What is to Blame?

This morning, I must direct you to the wisdom and sage counsel of one Floyd Norris, who traces trading activity, “innovations” and psychology from 1929 to 1987 to 2008 to today:

“Both the 1987 crash and the 2010 flash crash occurred when markets were under stress for other reasons. It was market structure and trading strategies — related to relatively new financial and technological innovation — that turned what might have been an orderly market decline into a crisis.

The extreme volatility of 2011 began only a few weeks ago, and so far it has not approached the levels of 1987 or 2010. The largest intraday swing — the difference between the daily high and low — in the Dow industrials this year was 640 points, or 6 percent, last Tuesday. The figures were 1,010 points and 10.2 percent in the flash crash. Similarly, the largest declines from one day to the next this year have been about a quarter of the magnitude of Oct. 19, 1987.

Nonetheless, it is likely there will be investigations seeking explanations of volatility in market structures, and it is probable that short-selling restrictions will spread if prices fall rapidly in coming weeks.

There is one other likely response if prices keep falling. There will be assurances that the markets are overreacting, and that the real economy is doing better than stock prices would indicate.”

It is a long Sunday business type of piece, one that I highly recommend you direct your attention towards . . .

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Source:
High & Low Finance: Who Is to Blame if Shares Continue Steep Declines?
FLOYD NORRIS
NYT, August 15, 2011
http://www.nytimes.com/2011/08/15/business/whos-at-fault-if-stocks-continue-to-plummet.html

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