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If there's one thing a trader fears most, it's a lack of information… especially when it comes to the most basic of all: price.
So I wasn't surprised when all hell broke loose last week when the entire Nasdaq exchange shut down for three hours. "Technical issues" related to price quote dissemination.
Officially, of course, things were under control. But behind the scenes, you've never heard so many creative strings of four-letter words. Between the twitter, chats, instant messaging, and phone calls, the cacophony was telling.
Something big had happened. And the rumor mill ran amok…
Early information suggested it was nothing more than some unsuccessful computer updates. But by afternoon, the "tin-foil hat club" had jumped in, suggesting cyber-terrorism and high-speed-trading misfeeds.
The truth is we may never know what really happened, for two reasons.
That's why I'm going to show you a few simple actions you can take in your brokerage account today, before the next shutdown occurs.
As you'll see, topping off your "stock-market antifreeze" isn't just a defensive move…
The "Battle for Pennies" Accounts for 70% of Volume Now
An estimated 70% of total stock market volume is now computerized. The screaming and shouting you see on TV behind earnest-looking newscasters is but a fraction of what really goes on. Every exchange these days has electronic offshoots, and the combination of floor trading and electronic trading makes for some mind-boggling gyrations.
For example, thanks to the advent of computers and the speed at which they trade, there are roughly 7 to 10 bids and asks placed for every single trade. This means that on a billion-share day, there were roughly 7 to 10 billion orders placed, then taken down, moved, or changed as computers do battle with each other – often for mere pennies.
Then there are the dark pools.
These are special exchanges that never see the light of day. Originally intended for large institutions to "cross" huge positions at specific prices that would otherwise disturb the normal transactional balance of the public exchanges, they've morphed into highly secretive exchanges characterized by large block trading that's total invisible to the investing public.
But first, let's return to last Thursday's freeze.
There are two reasons we may never know exactly what caused the crash:
- Nasdaq has no idea what actually caused it, and – as of press time – is grasping at straws. Right now, they're pointing fingers at a "connectivity" problem with the NYSE's ARCA – a rival exchange. If this is accurate, techies should have been able to control it. If it's not, something else is at work. Nasdaq CEO Bob Greifeld's bumbling appearance on Fox Business Network didn't exactly inspire confidence.
- The breakdown exposed critical flaws and vulnerabilities in the electronic mess that regulators have allowed to flourish behind our exchanges in the name of innovation. This moves the findings squarely into the national security ballpark, which means that at some level the specifics of what actually went down are going to be classified.
My own personal belief is that this was no accident.
The events leading up to the freeze are consistent with a classic "denial of service" attack. Perhaps it was some eight-year-old programmer playing games or something far more sinister. We'll never know – unfortunately, the world is filled with folks who would love to send America over the edge, and they're getting more and more clever about finding the Achilles' heels that make their twisted dreams possible.
I also believe that this calamity reinforces the need for comprehensive, fundamental market reform, as well as comprehensive safeguards against electronic trading that goes awry, regardless of why.
Naturally, the financial exchanges and electronic firms are mounting loud arguments against both, so I'll be curious to see what they say in the next few weeks. It's hard to imagine they'll have a leg to stand on, given that this is yet another in a long string of technology-related failures ranging from the BATS IPO to the Facebook (Nasdaq: FB) debacle and "flash crashes."
Either way, here's what this means for your money. Our money…
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About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.