Puts and Calls: A stock market crash is beyond algorithmic
The glitch: Nasdaq Chief Executive Robert Greifeld has said several factors contributed to last week’s near-1,000-point drop in the Dow: “I think it was a confluence of factors led by the marcro-economic environment, the futures market and then the listed market for those stocks.” Regulators originally thought a trading glitch may have caused the market to freefall, but Greifeld believes that was only one aspect. The fear that financial unrest in Greece could be spreading to other European countries, and heightened activity in the futures market that spilled into the equity market contributed to the issue. On Thursday, 27 U.S. stocks dropped more than 90 percent as U.S. equities tumbled, before recovering by the close. More than 285 securities rose or fell more than 60 percent during the stock-market’s plunge and will have these trades canceled. On Sunday, Nasdaq added another 12 stocks to the list of trades it was canceling following Thursday’s sudden market plunge.
What caused the glitch? Nobody knows: Various market commentators made the point that while human error may have triggered the volatility and algorithmic trading fanned the flames, regulators had little clarity on what exactly happened. In fact, some suggest that high-volume traders were the main reason that the market recovered as quickly as it did. The one sure thing is that U.S. regulators plan to examine whether securities professionals triggered the stock-market plunge or exploited the turmoil to profit illegally. The SEC aims to determine whether market participants accidentally or maliciously entered orders that derailed normal trading, and if malicious, for financial gain or for other reasons. “Other reasons” has a particularly ominous tone to it, but the White House’s homeland security and counterterrorism adviser says there is no evidence that a cyber attack was behind the chaos that shook Wall Street last Thursday.
What political hay can be made from the glitch? Two Democratic senators are calling for federal regulators to report to Congress on the cause of the sudden stock market crash. Senators Kaufman, Delaware Democrat, and Warner, Virginia Democrat, asked for an addition to the financial regulatory reform bill that calls for the SEC and the CFTC to investigate and report what happened on May 6, according to a release and letter to Senate Banking Chairman Chris Dodd, Connecticut Democrat, on Friday. One thing’s for sure, if Wall Street was looking to minimize government intervention and thwart new regulations, the timing of this glitch couldn’t have been worse. At the same time, those who think government intervention provides more protection are not encouraged by the fact existing regulation did not stop the problems, and existing regulators are still stumped.
Climate bill revival: According to the New York Times, Sens. John Kerry, Massachusetts Democrat, and Joe Lieberman, Connecticut Independent, will unveil their long-awaited energy and climate bill this Wednesday. The senators had planned to release their bill April 26, with Senator Graham, South Carolina Republican, but when Democratic leaders had pushed the immigration ahead of climate change on the Senate agenda, Senator Graham withdrew. Senator issued his own statement saying he still agreed with the need to pass a climate and energy bill, but he was not sure now was the right time to push ahead. White House adviser Carol Browner disagrees and thinks that the oil spill in the Gulf of Mexico may help galvanize support for climate-change legislation to overhaul U.S. energy policy, said. But the oil spill may be the “death knell” for Obama’s proposal to expand offshore drilling, according to industry experts, and also may have doomed the compromise climate measure that was to include comprehensive drilling plans.
Goldman settling? Goldman Sachs lawyers met with SEC representatives last week to explore a potential settlement of the controversial Abacus transaction. While talks are preliminary, Goldman’s willingness to discuss settlement is a change from the initial response of Goldman to mount an aggressive defense to the SEC’s charges. The SEC is said to open to settlement but will require a heavy cost to Goldman to serve as an example for markets, investors and politicians. Some analysts have speculated that the total cost of a settlement could be as much as $1billion, making it one of the largest in U.S. history. Senior figures in the Obama administration may be supportive of a settlement, with the Treasury secretary and Federal Reserve favoring a settlement that would support the pending banking reforms. Goldman shareholders, who reelected Goldman’s chief executive with a 95 percent vote on Friday, may be open to settlement as well. Continual bad news has lead analysts to downgrade the stock from “outperform” to “market perform.” An analyst from UBS AG, states: “Given the uncertainty regarding the downside risk, we are moving to the sidelines. Current owners of the stock should assess their comfort level bearing this significant risk.”