Question of the Week: Readers Respond to Money Morning's "Flash Crash" Query

[Editor's Note: Last week we asked readers how the market's "flash crash" had impacted their investment behavior. Readers' responses are listed below - along with next week's question, "Are U.S. consumers finally willing to spend again? Are you?"]

The May 6 1000-point drop in the Dow Jones Industrial Average triggered a roar of theories on the cause of the "flash crash." Was it a "fat finger" that entered an incorrect trade, leading automated trading systems to hit a high-frenzied sell mode? Did the initial sell-off fuel panic that escalated sales before manual corrections could be implemented?

As the New York Stock Exchange slowed trading, orders were routed to electronic exchanges that were not operating under the same safeguards and some companies' stocks were briefly valued at just pennies.

The exchanges have agreed to revise circuit breakers designed to stop trading during periods of extreme volatility, and to develop standards for handling erroneous trades. Almost all exchanges admitted that the markets' varying policies on halting trading contributed to the roller coaster ride.

Question of the Week
But now some investors who got caught on the downside will have to live with their losses - and decide if they can trust the system again.

"I suspect lawyers will circle around the situation, and the idea that trade cancellations cannot be appealed will get thoroughly tested in the courts," James Angel, a finance professor at Georgetown University, told Reuters. "You may have a negligence case against your broker for mishandling your order. But if you put in a market order and it happened to be filled at the wrong time, such as at a penny, you're stuck."

These events prompted last week's installment of Money Morning Question of the Week: How has the market's "flash crash" affected your investment behavior? Do you like the steps taken so far to prevent this from happening again?

Here is a collection of readers' responses describing their thoughts on the event as well as what they've done as investors since the reality of a rapid sell-off has been brought to light.


I had no response to the "flash crash" as I don't use trailing stops. I review my investments daily instead. I have invested in quality companies that should have had the same underlying business qualities hours before the crash as days after it. My investments in the large-caps went unscathed, and even improved a few days after the crash. My smaller caps were hurt, but are slowly coming back.

Overall, I'm ahead now.

- Liz L.

That's The Risk You Take

For me the effect of the flash crash was positive. I had a feeling we'd go down at some point, so had lots of low-ball bids in since I've been on vacation and haven't had ready access to trade all the time. Most were 20% below market price and many got filled. Ended the day up 5%-15% on all orders that went through. Did get stopped out of two positions, but managed to buy one back lower, so I can't complain.

My previous positions made up their lost ground the next day for the most part. When you're in the market you have to be prepared for up and down days. Though no one expected a 1,000-point down day, this risk comes with being in the market and it's hard to sympathize with people who get in without understanding the risk.

- "Worldexplorer"

Wall Street and Washington At It Again

The "flash crash" had no direct effect on me. I moved my money out of the stock market several months ago.

I also believe the recent "flash crash" was a manipulation. A beta test if you will, to gauge the reaction of the American public. I don't expect we will ever know the truth.

With banking deregulations and the1999 repeal of the Glass-Steagall Act, U.S. financial institutions (e.g., Citigroup Inc. (NYSE: C), JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC), etc.) became excessively greedy and spread their wings into markets previously prohibited. An example is the Citigroup/John Reed and Travelers Co. Inc. (NYSE: TRV)/Sandy Weill fiasco.

It is my opinion the large financial institutions (including Goldman Sachs Group, Inc. (NYSE: GS) and American International Group, Inc. (NYSE: AIG) control the stock market and exert their influence not only in Congress but into the Executive Office as well (like the 1999 Bill Clinton and Sandy Weill discussions).

With this in mind, I can't help but to believe the 2008 stock market crash was totally manipulated to benefit the institutions that had everything to gain from a crash and nothing to loose. After all, they got bailed out and their executives still got huge bonuses.

- Meri

Investors Need Discipline

"Where are the customer's yachts?" has been the question since the beginning. Any serious investor "knows" he is not going to "out-trade" Goldman or Bank of America or the "Street." A rigorous, highly disciplined strategy is the individual investor's only hope.

Getting in is easy and can be done at any time. Exits are crucial; it is where most win or lose. I prefer a guerilla-style ambush investment where I stake out a position, wait for the market to come to me, and exit quickly as the tide comes in.

I learned as a young man Wall Street was not my friend.

- John K.

Survival of the Fittest

In all my experience investing, the market has always had it's shakeouts, getting rid of the weak stockholders, and forming a base of stronger, long-term investors for the next up-tick. I stayed put last week - and even bought Ford Motor Co. (NYSE: F) stock...

- John T.

Turning to Silver

I am purchasing more physical silver and waiting for the long-term increase to benefit me. I don't care if the price fluxes after I have it in hand. There just is not enough in the world supply for it and the users are going to drive up the price more so than gold, and all stocks will suffer because of it, I believe. And I am switching to more mining related stock, too.

- Posted on Money Morning's Facebook page by Blue Duck

Not Buying "Fat Finger"

The "fat finger" reason does not seem to fly with me. It could be true, but the message I heard was "fat finger" went to press "M" but pressed "B." Isn't there a letter in between?

Oh well, the SEC is digging into it.

- "Leased"

Now Making More Stable Investments

We purchased municipal bonds yesterday - state and federal-tax free - so we have even more stable tax-free income for retirement. We are retired now so are only investing the dividends and interest from the current portfolio. If the market tanks we have funds set aside to buy some worthwhile stocks too; dividend income would be the goal.

- Chuck D.

Headed Down Again...

I prefer a crash to be a little more gradual so I can make some more money off it. Like the one that's coming...

- Posted on Money Morning's Facebook page by Andrew W.

[Editor's Note: Thanks to all who responded to last week's installment of the Question of the Week feature regarding the market's "flash crash." Be sure to answer next week's question: What is your consumer-spending outlook for the rest of this year? What are you seeing? Compared with this time last year, has consumer-shopping activity picked up in your household or community? Have you adjusted your personal shopping habits? Why or why not?

Send your answers to [email protected]!

Is there a topic you want to see covered as a Question of the Week feature? Then let us know by e-mailing Money Morning at [email protected]. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.

Thanks to everyone who took the time to participate - via e-mail or by posting their comments directly on the Money Morning Web site.]

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