Trust is hard to gain, and is easily lost

Early on in my professional career, an accountant told me that money is symbolic of a deeper relationship between two parties. For before any monetary transaction, each party must have trust. Trust that each will follow through on their end of an agreement.

Today I see this as important at it was twenty years ago. In fact with electronic transactions, even more trust is required.

Take for example an online auction. You, the purchaser must trust that the item you bid for is described correctly by the seller, you can't touch the item yourself. Then you must trust that the seller will get the item to you AFTER you have paid for it. You even have to trust the payment mechanism you use, gets the funds to the seller.

I do have to say, after this week, some of my trust for the markets have been shaken.

First I heard of it, was when Alan Kohler told us that on 20th February this week the ASX experienced a "flash crash". Last I heard of this phenomena was 2010 when the DOW spiralled down 9% in a matter of minutes, then bounced back. The ASX experience was much milder, but just as devastating in my levels of trust for a system that should be, above all trustworthy.

ASX Mini Flash Crash, 20 February 2012

The post-mortem over the May 6 2010 DOW flash crash was put down to High Frequency Trading Algorithm (HFT) being executed with an agressive set of sell parameters. Then competing HFT systems began buying, then on-selling those positions. This became a perfect storm to crash an already volatile trading day.

I see no reason why the ASX experience could be put down to anything other than HFT systems creating a perfect storm. My understanding is that the HFT systems shovel thousands buy and sell orders into a target exchange with the vast majority never ever being executed. These orders are wildly askew in their pricing requests to ever get traded on the day.

Most online brokering systems allow us end users to execute an order just like this, but that single order can last up to a month.

But my question is: Why are exchanges allowing their markets to be manipulated in this obvious way. These examples of the ASX and the DOW degrade our trust in a system to accurately price  stocks at a given time. Moreover why is the exchange even accepting millions of bogus orders from supercomputers stationed physically next door to the exchanges themselves.

As a value investor I'm beginning to distrust speculative trading systems conspiring to upset the pricing of stocks I invest in.

And its the exchanges that need to reign in this activity. Lest us small investors walk away, and find more trustworthy mechanisms to invest our money.

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My Sketchy Life