Wednesday, August 29, 2007

Tales from the 20th Century: Shutting Down the Stock Exchange

As reported earlier, the Senior Assistant Blogger spent his pre-college summer of 1949 working on Wall Street. Yet at 3:30 on a hot August weekday afternoon, we find him forty miles away in Connecticut. He's sitting on the sand sipping a Coke, watching kids jump off the high board at the Noroton Bay Beach.

Why wasn't he at work? Because much of Wall Street wasn't yet air-conditioned. On that August day, the heat became so unbearable that The New York Stock Exchange closed after lunch and everybody went home.

Air conditioning was a transforming invention of the 20th century. The way the market's been acting lately, that transformation may have a down side.

Yesterday, August 28th, was another of those now familiar occasions when program trading sent stock prices plummeting in the last hour of trading. Some Wall Streeters, including Muriel Siebert, blame the SEC's recent elimination of the uptick rule on short sales:

This regulation was put in place in 1938 to defang so-called bear raids on stocks, when sellers ganged up on companies' shares and profited by driving them down.

The uptick rule required that anyone shorting a stock - selling shares he or she does not own in hope of making a profit - can do so only on an uptick in its price. But the SEC got rid of the rule July 6, after it concluded that such restrictions "modestly reduce liquidity and do not appear necessary to prevent manipulation."

The commission drew its conclusions after years of study, analysis and discussion, of course. But Siebert said that with the rule no longer in place, it was easier for sellers to overwhelm stocks on down days.

* * *
Her second concern relates to the influence of electronic trading in big-name stocks. The specialist system - in which a human being with capital at stake is obligated to use it to maintain orderly markets - has been in decline for years. But Siebert said that the recent down days in the stock market might have a lot to do with the fact that the New York Stock Exchange is now dominated by computerized trading. Unlike specialists, machines that match orders don't have to put up capital to stabilize disorderly markets.
Usually the computer-driven plunges in stock prices are followed by a bounce back up the following morning. Looks like that's happening in the early going today. Mindless volatility is good for traders, Siebert admits, but she believes it scares individual investors.

Maybe The New York Stock Exchange should take this afternoon off. Better yet, declare a long weekend and reopen after Labor Day.

All in favor say, "Hit the beach!"

Previous Tales from the 20th Century:

Good Brokers
"Going Out of Business"

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