When Mark Cuban wasn’t winning NBA titles he was predicting exactly what was coming in the stock market on his blog post here. There was also a 60 Minutes piece on it. In essence all of the proprietary trading platforms that make split second trades can cause a market flash crash (or up swing) due to lack of human oversight. The huge influx of capital invested by these platforms and the number of trades they make has created a volatility bubble that is going to drive more and more “regular” people out of the market. How can a retiree or someone close to retirement see swings of 500 or 600 points every day and not panic and pull their money out of the market at a low point? I would go as far as to say this is exactly what Goldman Sachs and the rest of what Cuban refers to as “hackers” want to have happen. They want to create a volatility bubble and buy up securities at a 30-50% discount and then sell them back to all of poor schleps with 401Ks when enough confidence is mustered once the market goes back up 20-30%. So when Cuban asks what business they are in I think I know, their business model is creating bubbles and taking advantage the market swings and in essence working people who are not “in the know”. What can be done from a regulatory perspective? The SEC is useless, I mean Bernie Madoff was the Chairman of the Board of Directors and on the Board of Governors of the NASD for Christ’s sakes. If I were Obama I would put someone like Eric Schmidt in charge of the operation. The argument that he doesn’t have a financial background all the more positive to me, he was the CEO of Google I think he knows enough about finance to get by. What they need is someone who understands extremely complex systems and architecture to decipher what the hell is going on. To prove my point that people get bad advice from people who don’t know shit about finance read this article in the Boston Globe today about investment advisers are like sheep, that may well be true but they aren’t making any of these trades that have caused the volatility over the past week or so. Here are some points Cuban makes in his post:
The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else. To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.
The best analogy for traders ? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing. A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it. A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.
Over just the past 3 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF. Combine that with the leverage of derivatives tracking companies, indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less comfortable playing. It is a game fraught with ever increasing risk.