Blame the computers! Blame the trader with the “fat finger.” Blame the marketplace whose rules define a fast price as more important than a fair price.
People looking for the villains of the May 6 “Flash Crash” want answers. Plain and simple from my perspective, 80 market centers all trading the same stocks were each playing by different rules. When that happens, a stock like Accenture can trade from $41 to a penny and back to $41 in about 20 minutes.
However one defines a fair and orderly market, not even the most creative minds would call that anything but a free market gone wild.
Yet some say that on that disastrous day — a nearly 1000-point Dow Jones industrial average decline followed by an immediate six hundred point reversal all within about an hour, the free market was operating at its best! I say nonsense.
May 6 had many fundamental drivers for a sharp selloff: Greece; Portugal, Spain, Italy, and Ireland contagion; a market correction reining in the 80 percent rise off the March ’09 lows.
Yes, lots of reasons could be found for a selloff, but nothing, neither fundamental, nor rational, could support a thousand-point drop and 600-point rally by the markets’ close. Nothing, except the lack of common sense and common rules, and a misguided belief that a quick price is better than a fair price.
For my entire career (35½ years at the NYSE), having risen from clerk to the longest-serving chairman and CEO, I have firmly believed that a fair and orderly market is one with great technology for speed and efficiency, strong regulatory oversight and competent marketplace professionals charged with maintaining fair pricing that puts the customer’s interest first.
In October of 1987, when the market fell 22 percent in one trading session (more than 2,200 Dow points measured against today’s market), the rallying cry from the floor was shoot the “program” traders whose strategy labeled as portfolio insurance was thought by many to be the root of the market collapse.
But banning the strategy or the black boxes that generated the trades was not the answer.
Then, as today, it wasn’t the tool or the strategies, it was the lack of appropriate rules to reflect a new dimension of market participant.
Consider that a Ferrari is capable of speeds well in excess of 100 mph — but it is the wisdom of our traffic laws that prohibit such speeds on local streets, particularly in school and hospital zones.
On May 6, two side-by-side Ferraris, the NYSE and the NASDAQ, were both traveling in excess of 100 mph on a high-speed racetrack.
Then the NYSE driver realized the two had gone off the racetrack and were traveling on a local street in a school zone. The NYSE driver appropriately slowed down to reflect the hazardous conditions.
The rules of the markets (all the markets trading identical securities) should be harmonized and under such circumstances everyone should slow down to reflect hazardous market conditions.
Under that scenario, while prices may be a bit slower to determine, they will be infinitely more fair for investors. Human judgment and algorithmic market making formulas must be overseen by the regulators and the markets for the protection of public investors with harmonized rules that will produce the type of market our country has long been so proud of.
A market that has grown since the end of WWII from fewer than 3 million participants to almost 100 million. A market that directly or indirectly is owned by almost every household in the US and most importantly one that is admired and envied by free markets around the world.
Common rules with appropriate timeouts when trading becomes disorderly, coupled with strict oversight and punishment for those who violate these principles, will keep America’s markets the freest, fairest, and most competitive in the world. Anything less will transform our free market system into a free-for-all market system, which will jeopardize capital formation, economic growth and higher standards of living for all people.
The Securities and Exchange Commission has already proposed new rules to deal with conditions such as May 6. Proposals initiated in record-setting time.
The markets, marketplace commentators and public investors should applaud and support these and other changes. They will keep America’s great markets the greatest markets in the world.
Dick Grasso was the chairman and chief execu tive of the New York Stock Exchange from 1995 to 2003.