Market fail-safes' validity in doubt

NEW YORK — As regulators sought answers and the main exchanges were on the defensive as to what happened during Thursday's swoon on the Dow Jones industrial average, some veteran market observers questioned whether our modern financial frameworks serve any purpose beyond making money for those involved.
In afternoon trading Thursday, heavy losses for the Dow industrials rapidly transformed into a 1,000-point plunge, while shares of Procter & Gamble Co. plummeted nearly 40 percent and other "unusual" activity was recorded for a large number of stocks.

Unconfirmed reports that large "high-frequency trading" programs generated by computers went wrong made the rounds, while the New York Stock Exchange said it wasn't responsible for activity that occurred after its circuit breakers came in place to slow the flow of trading.

"What have we become?" asked Donald Selkin, chief market strategist at National Securities. "The market has a purpose, which is supposed to be valuing companies so that they can raise capital. But now we have these high-frequency trading programs, these leveraged ETFs and these dark pools," he said, referring to certain exchange-traded funds and unregulated exchanges.

Selkin, a 35-year veteran of the market, lamented the days when specialists were in charge of most trades, which helped to "control the flow."

Indexes say their trading platforms worked

Former Federal Reserve Chairman Alan Greenspan, among others, was known for defending the use of credit derivatives that were supposed to help spread the risk of subprime mortgages. But instead, it was risk that was spread globally and shook not only the entire system, but also entire economies. Some of these structured investments "place double-negative bets on the S&P," Selkin said. "What's the economic value of that?"

The other major U.S. exchanges, the Nasdaq OMX Group Inc. and the CME Group Inc., followed the NYSE in asserting that their trading platforms worked properly during the selloff.

The unreconciled trades and ensuing questions come in the context of civil fraud charges against investment bank Goldman Sachs Group Inc., as well as efforts at reform in Washington to forestall another financial crisis, which roiled Wall Street and helped set off the largest economic recession since the Great Depression.

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