Your Great Grandfather’s Stockmarket

Wednesday, March 18th, 2009

Since the summer of 2007,  the stock market has exhibited an unusual amount of volatility. Two percent swings in the broad market indices such as the Dow Industrial Average and the S&P 500 have become commonplace as are double digit swings in individual high profile names in the banking and technology sectors. In 2007, for example the Dow Jones Industrial Average moved two percent or more on 15% of the trading days, most of those coming in the final quarter of the year.  In the final quarter of 2008, 2% moves occurred a whopping 61% of the time and in  the most recent quarter ending March 31, 2009 there were 2% or greater swings on one third of the trading days.  Perhaps we are heading back in the right direction.  Less would certainly be more on this front.

This kind of volatility in the financial markets has characterized periods of extreme economic unrest such as the Great Depression of the 1930’s and the Panics of 1907 and 1870’s. Those  debacles supposedly resulted in some financial market reforms that were designed to mitigate such extremes.  The NYSE,AMEX and NASDAQ all tell us that their specialists and dealers are charged with maintaining a “fair and orderly market.” In prior periods of extreme volatility such as 1907 and 1930, there was no such expectation.  There was no  Federal Reserve regulation, margin requirements did not exist, corners on stocks and underlying  commodities were frequent,  and large moves were the rule, not the exception.   We, however, are supposed to be in a brave new world with state of the art trading systems on the exchanges which maintain a “fair and orderly market,” automatic circuit breakers which close the NYSE in the event of a 10% swing and wise men such as Richard Grasso and Bernard Madoff who have served as the respective heads of the NYSE and NASDAQ boards. 

We hear many cries for more regulation, more transparency in derivatives such as credit default swaps and House Financial Services Chair Barney Frank saying that the uptick rule for short sales should be reinstated. These are excellent ideas and perhaps such measures will help.  But our markets reflect the ultimate global democratization of capital and as New York Times columnist Tom Friedman has said a world made flat through technology.  Our world is jittery, on edge and in a manic depressive state.  Our markets will reflect that with or without additional regulation.

1 Comment to Your Great Grandfather’s Stockmarket

Kylie Batt
April 16, 2010

Это очень ценная фраза…

Since the summer of 2007,  the stock market has exhibited an unusual amount of volatility…..

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