With all of the recent financial scandals and trading losses, the last thing Wall Street needed was another humiliation, but those black eyes just keep on coming for public trading markets. Last week, Knight Capital, known for its electronic execution and high-frequency trading algorithms, suffered massive losses when a software glitch sent out a stream of unintended trades. This debacle came just weeks after Knight posted dismal quarterly earnings, in part, due to Nasdaq’s technology malfunction that slaughtered Facebook’s IPO.
Nasdaq’s technical “glitch” cost market makers upwards of $500 million in losses. Knight’s trading “glitch” triggered an estimated loss of $440 million (nearly four times its last year’s profit). Some estimate that the losses incurred by JPMorgan’s London Whale could total as much as $9 billion. With billions vanishing into thin air, I was wondering when we could stop sugarcoating the mutilation of the financial markets by referring to some of these computer failures as “glitches” and start labeling them, more appropriately, “breakdowns”.
Today, Wall Street looks worse than Rocky Balboa’s blood-drenched face when he delivered his “Yo, Adrian!” speech. How many more market capitalizations do we need to watch disintegrate before we can admit that our public markets are no longer functional?
Instead of fearing Grandma receiving a stock cert in exchange for doling out $2000 to a Crowdfunding campaign, we should be terrified of the high frequency trading that continues to destroy the markets and impede economic growth.
And why the hell are we allowing computers to run amok with our capital markets anyway? Soulless machines should not be “investing” in human-run businesses. Sometimes the brain is more adept at making decisions than the appliance. Geez, didn’t we learn anything from the movie, WarGames?
Now, I am not prejudice against robots, or to be politically correct, “Automated Americans”. In truth, I treasure technology and value how it advances global communications. However, there is nothing to be gained by de-humanizing the investing process. Computers get it wrong. And they get it wrong a lot. Otherwise my mobile phone’s spell-corrector would not be directing me to Whore Foods for my organic kale.
America’s businesses extend far beyond ledgers and trading volumes. You can’t see creativity, ingenuity or personality in a balance sheet. You won’t find vision on a “confirm”. The next world-changing product may at this very moment be lurking in the mind of an employee of a company whose stock continuously drops through its support level. Apple (AAPL) was once on the verge of bankruptcy and Steve Jobs was written off as a failure.
We can no longer afford to allow machines to dominate the financial markets. While it may enable a guy named Al (Al Gorithm) to vastly increase his wealth, American businesses will continuously lose their ability to expand, compete in a global economy and innovate.
Since becoming Al’s electronic playground, the public markets are incapable of facilitating growth investing. Once upon a time companies went public and used the capital they raised for expansion. Public market investors were able to capitalize on that expansion. 99% of Microsoft’s appreciation occurred after it had gone public. All of Facebook’s appreciation was realized in the private markets before ever going public. Today’s IPO just ends up becoming another one of Al’s play toys at the expense of the small retail investor who is legally prohibited from investing his own money in emerging private companies.
From 1990 to 1999, the S&P averaged a 19% annual return. From 2000 to 2009, it averaged a mere 1%. Treasuries are yielding a whopping 1.5%! You can generate more interest keeping your money under your mattress than in a bank savings account. With inflation over 3%, unless smaller investors are given the freedom to invest in growth opportunities, America is going to be facing an entire generation of retirees with zero savings and no social security to fall back on.
Fortunately, a Knight in shining armor has come to our rescue. He has arrived in the form of a nascent marketplace for private company stock which is being fueled by unprecedented advancements mass communications and the most economic restorative legislation in modern history.