Wednesday, February 28, 2007

Concerns in a digital marketplace

Everyone is writing, talking, worrying and thinking about the 460 point stock market drop that took place Tuesday. Many had been calling for this type of correction for some time, and the components are so varied and global in nature that it may be difficult to pinpoint one root cause. Was it inflation and market response in China? Or another negative housing report, with a skyrocketing sub-prime mortgage default rate? It was all of these things and more.

The market had not dropped more than 2% in over 45 months. That is nearly 4 years without a significant correction. Corrections of this magnitude once occurred with some regularity. Complacency is the word that keeps popping up. Complacency for one of the longest bull markets in history, and ignorance to the risk inherent in a digital free market system.

Bob Pisani, NYSE Analyst with CNBC, attributes the nearly 200 point drop that took place at 3pm, in less than two minutes, to a technical error within the messaging system. Pisani says the "trading delays resulted from problems with the New York Stock Exchange's messaging system, not a failure of the new hybrid trading system". Orders got clogged up upstairs at the NYSE for 40 minutes and when they all hit the messaging system it caused an overload. Our first digital stock market crash, probably not our last.

The Chinese market start going down, and adversely affects all of the other global markets. At the same time imagine that the Dollar is weakening against the YEN and Yuan which is then tipping the interest rate of the 30 year T-bill down, and just for good measure commodities like gold and oil are going in the dump too. This is exactly what happened yesterday, and we would be fools to ignore such a broken system, when all of the self correcting measures seem to fail and we teeter on the brink of oblivion.

Ah, but Wednesday was better, up 100 points and looking bright overnight. Fed chairman Ben Bernanke made a statement to the congressional budget committee that the market was stabilizing and his people did not foresee an extreme failure of the system, but the longer term issues of social security reform and a national personal savings average in the negative were major concerns that demanded timely resolutions.

The digital market crash was not political or religious; it demonstrates a need to safeguard our economic operating system. The free market economy 2.0 may need some more time in Beta before we announce that it is the system of the future. One thing most observers noted was the lack of experts available to place the orders once the system had broken down. This is where the complacency word comes back into play. Granted any amount of manpower would have had difficulty with a seamless pickup of the clogged orders. What does this say about our reliance on machines and how we cannot expect machines to operate perfectly at all times? Margins of error and doomsday events should be planned for and contingency plans developed. Without backup even the best system is vulnerable.

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