BY DARA ALBRIGHT
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.
Join us in Atlanta on August 21st for our upcoming Evolving Capital Markets & Crowdfunding Symposium and learn how the amalgamation of new regulation resulting from the passage of the “Jumpstart our Business Start-ups Act” (JOBS Act), social media and the rising private company marketplace is transforming our financial markets and leading America toward a new era of economic prosperity. Registration is only open for another few days. Click here to register today.
Article points out the major concern, whether the software ‘glitches’ or ‘breakdowns’. I have few points to highlight. Firstly, computers are used by NASDAQ or any other stock markets for carrying out the routine work at a faster pace than a human. Secondly, the whole process is designed by a human brain. So, I find no reason for some sci-Fi environment. Thirdly, these constraints for new, small and unknown firms are undertaken in order to safeguard the innocent investors. Finally, I find the urgency in solving the issue of Software breakdown rather than abandoning the stock exchanges.
Actually… Crowdfunding is about to be partitioned by the politicians. If Romney gets elected it may just get overturned. The public markets, combined with FINRA, the SEC, and NASAA, do not like this legislation, and they’ll do just about anything to prolong its validity… I predict it will keep getting pushed back until they can figure out a way to get rid of it.
Wall Street is just pure evil…
It illuminates and rewards those companies who over-produce, yet find a way to push the over-produced goods on the public. These goods end up in our landfills.
Wall Street demands over-production and profits, even when profits are not possible… E.g., prices rise on corn when a draught occurs…
If we had a truly sustainable system we would keep prices level and balance production to meet the needs of consumers… But our current system allows financial markets to profit from the destruction of the farmers, who will lose millions on the current draught in the Midwest….
Nobody should profit from a draught… Everyone should lose money, and everyone should chip in to help…
However, the stone cold, freaks of nature, known as stock traders, have grown too powerful and need to be removed from the equatation… So the rest of us can survive…
Their stupidity has convinced them that the advent of software and algorithms will bolster their profits and thus help ALL markets to balance in a more sustainable fashion… However, their stupidity has blinded them to the “bottom line” of human existence … Which is… BALANCE…
Actually, HR 2930, AKA The Crowdfund Act, was introduced by Rep Patrick McHenry (R-NC) and embedded in the JOB Act which Ryan voted for. Crowdfunding has strong GOP support. In fact, every single republican voted in favor of the JOBS Act and there were only 41 nays (all democrats): http://www.govtrack.us/congress/votes/112-2012/h132. I do not see it getting overturned by a republican administration.
Oh… I’m aware of the votes… I was one of the few people who started getting people motivated behind the bill…
I didn’t say anything in my post about “Republican” or “Democrat,” because this entire JOBS Act (including Crowdfunding) issue has a much deeper implication… and to fully understand its impact one needs to have studied securities and the markets and have read the “entire” JOBS Act, as I’m sure you have and I have as well.
Here’s a blog that talks about the “other” JOBS Act details that are being given precedence over Crowdfunding… http://www.ppmlogix.com/blog
There’s a reason why Romney is running… Romney is a Wall Street guy… He knows the players… and they know him…
Wall Street owns “BOTH” parties… Not just the Republicans…
E.g., the Dodd-Frank Act is a piece of legislation that should never have been passed, and although those who don’t understand the full scope of the problem will undoubtedly say that bank reform was needed, those of us in the private capital industry understand, and we’re ALL ticked off!!
The Dodd-Frank Act raised the standard for people who want to invest in private businesses (non-Wall Street businesses). Before Dodd-Frank any investor could use the equity in their personal residence as a qualifier for being stamped as an Accredited Investor which allowed them to partake in any private investment offering for a small business. Many of these investors were Angel Investors who invest in start up businesses. When Dodd-Frank was passed it eliminated the use of the equity in ones personal residence, no longer allowing investors to claim this in the net worth requirement of $1M. This shrunk the number of Accredited Investors in the U.S. by as much as 30%… giving CONTROL to the wealthiest individuals who could now invest without competition allowing them to CONTROL the growth in the start up business industry…
Dodd and Frank and others, GOP and Dem alike, are part of the system… owned by Wall Street!
The JOBS Act was not passed for “Crowdfunding,” it was passed for sweeping changes to Regulation A… bringing the total amount of capital raised from $5M to $50M… And, it has MANY other caveats that bolster IPO’s for PUBLIC COMPANIES…
The Politicians are smart… they realize that the mob is pissed about Wall Street… so they threw us a bone… CROWDFUNDING! They wrapped it in RedTape and then said… “This will take us awhile to figure out, so y’all start having conferences and pay-for-view video how-to’s and we’ll start figuring out the rules for this CROWDFUNDING thingamajig…
Meanwhile… while you/me/and everybody else is busy trying to guess at what the rules “MIGHT” be… The SEC has already passed the rules for Regulation A… and the Reg A Rules were handed down EXACTLY on time, as stipulated in the JOBS Act… Not pushed back like Regulation D Solicitation and Crowdfunding, which is now being targeted for release by mid-summer 2013.
My prediction is… Crowdfunding will slowly be swept aside. It will be vilified as the land of fraud and abuse and it will lose its luster as people are fed more and more false propaganda about investing in private business…
Our job… to save Crowndfunding from the idiots on Wall Street…
Read Deeper my friend…
Nicely well put write up. It is so relevant and timely. Too bad I will miss your show but will make up for it another time, Dara.
Thanks, Tony. Look forward to seeing you at the next one!