Long-Term Investors’ Fears Driving Increased Volatility

Posted on August 29, 2011. Filed under: Economy, Financial Crisis, Flash Crash, Strategies, Technology | Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |

The Speed Traders' Edgar Perez with BNN's Kim Parlee

The Speed Traders' Edgar Perez with BNN's Kim Parlee

For Edgar Perez, author of The Speed Traders, An Insider’s Look at the New High-Frequency Trading Phenomenon That is Transforming the Investing World (http://www.thespeedtraders.com), increased volatility experienced by financial markets is being driven by long-term investors’ fears. Mr. Perez, who was recently featured on BNN’s Business Day and interviewed by Kim Parlee, reflected that similar concerns drove volatility to record heights during the Great Depression and Black Monday.

The stock market crash on October 29, 1929 set in motion a series of events that led to the Great Depression, but in fact, the American economy and global economy had been in turmoil six months prior to Black Tuesday, and a variety of factors before and after that fateful date in October caused and exacerbated the Great Depression. While America prospered during the 1920s, most of Europe, still reeling from the devastation of World War I, fell into economic decline. America soon became the world’s banker, and as Europe started defaulting on loans and buying less American products, the Great Depression spread. With only loose stock market regulations in place before the Great Depression, investors were able speculate wildly, buying stocks on margin, needing only 10% of the price of a stock to be able to complete the purchase. Rampant speculation led to falsely high stock prices, and when the stock market began to tumble in the months leading up to the October 1929 crash, speculative investors couldn’t make their margin calls, and a massive sell-off began. While the great rise in the stock market (from 181 points in early 1928 to 381 points in September 1929) was fueled by optimism and false hope, the plunge was flamed by stark fear.

Similar situation happened on Black Monday, the name given to Monday, October 19, 1987, when stock markets around the world ‘crashed’, shedding a huge value in a very short period. The crash began in Hong Kong, spread west through international time zones to Europe, hitting the United States after other markets had already declined by a significant margin. At the time, economists feared that if the U.S. economy faltered, the entire world economy would stumble and fall into recession again, as it had in 1981–82. Many observers now believe the panic of Black Monday simply reflected a spreading fear that the world situation was rapidly becoming unmanageable.

Fast forward to 2011, CNN’s Richard Quest concludes too that the causes of this latest crisis are fear, worry and concern, three uncomfortable bedfellows that have wreaked havoc on the world’s financial markets. “What pushed everyone over the edge was the debt ceiling debacle and the downgrading of U.S. debt by ratings agency Standard & Poor’s, that was followed by a 630 point fall in the Dow Jones index.”

Fear that the world situation is becoming unmanageable is driving long-term investors to dump equities and look for protection in less risky instruments, ironically, recently S&P downgraded U.S. treasuries. Economists at JPMorgan, in their weekly reprise of economic developments, blamed the recent global stock selloff on “a sense of policy paralysis in the U.S. and Europe, which has driven home the point that there is no cavalry to ride to the rescue.” While the sentiment is the same as in the 20s, 1987 and now, certain market participants will always look for a culprit, role played by high-frequency trading this time. No doubt if another crisis comes our way in the future, another group will receive the blame, only to be absolved by financial historians.

The Speed Traders' Edgar Perez on Canada's BNN's Business Day

The Speed Traders' Edgar Perez on BNN's Business Day

BNN’s Business Day puts a spotlight on the stocks and stories expected to move the markets, and then switches to minute-by-minute coverage throughout the trading day in Canada and the U.S. Kim Parlee, Marty Cej, Frances Horodelski, and Martin Baccardax along with BNN‘s team of reporters and expert guests provide comprehensive reporting along with the best background and analysis in the business. Business News Network (BNN) is the Canadian English language cable television business channel; BNNbroadcasts programming related to business and financial news and analysis.

The Speed Traders, published by McGraw-Hill Inc., is the most comprehensive, revealing work available on the most important development in trading in generations. High-frequency trading will no doubt play an ever larger role as computer technology advances and the global exchanges embrace fast electronic access. The Speed Traders explains everything there is to know about how today’s high-frequency traders make millions—one cent at a time. In this new title, The Speed Traders, Mr. Perez opens the door to the secretive world of high-frequency trading. Inside, prominent figures drop their guard and speak with unprecedented candidness about their trade. For more about The Speed Traders, readers can visit its Facebook and Twitter pages, as well as the most popular online retailers, including Amazon, Barnes & Noble and Borders, among others.

Mr. Perez is widely regarded as the pre-eminent networker in the specialized area of high-frequency trading. He has been featured on CNBC Cash Flow with Oriel Morrison (http://video.cnbc.com/gallery/?video=2023403523), BNN Business Day with Kim Parlee (http://watch.bnn.ca/business-day/august-2011/business-day-august-19-2011/#clip519647), TheStreet.com with Gregg Greenberg (http://www.thestreet.com/video/11144274/high-frequency-traders-not-the-enemy.html), and Channel NewsAsia Cent & Sensibilities with Lin Xue Ling, and engaged as speaker at Harvard Business School’s 17th Annual Venture Capital & Private Equity Conference, High-Frequency Trading Leaders Forum 2011 (New York, Chicago, Hong Kong, Sao Paulo, Singapore), CFA Singapore, Hong Kong Securities Institute, Courant Institute of Mathematical Sciences at New York University (New York), Global Growth Markets Forum (London), Technical Analysis Society (Singapore), Middle East Hedge Funds Investors Summit 2012 (Riyadh, Saudi Arabia), among other global forums.

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