China, High Frequency Trading to Blame for Stock Market Tumble

What started out with cheers, quickly changed as the Dow Jones Industrial average fell more than 1,000 points this morning.

Stocks tried to rebound throughout the day, but could not overcome the huge hole they started in.

Today was one of the worst days on Wall Street in almost four years.

The DOW finished the day at 15,871, which is 588-points down.

The NASDAQ lost 179-points, closing at 4,526.

And the S&P 500 lost 77 points, ending at 1,893.

China’s economy is to blame for this tumble, but it’s the type of trading we rely on that creates the sudden shifts in the market.

“What’s triggered this economy crisis is the reduced demand for their product,” says Central Michigan University Finance Professor Dr. Pawan Jain.

Last week China made the decision to devalue their currency because their economy has slowed down.

Professor Jain says the decision created a global ripple effect almost instantly.

“The growth rate has been double digits compared to the United States. [Our] average growth rate is 3%. The Chinese economy has been growing over 10,11% so if all of a sudden that slows down there’s concerns among investors,” says Professor Jain.

While the professor doesn’t think those concerns will last, the sudden plummet and partial recovery today is a sign of our vulnerable market. It’s relying heavily on technology.

“In the U.S. markets right now 75% of trading is done by computers,” says Professor Jain.

This “High Frequency Trading” is done faster than speed of light. Computers analyze new data and buy or sell instantly.

China’s currency move triggered a red flag, so these automated systems sold all at once and created the sudden plummet.

Professor Jain says High Frequency Trading is similar to tons of cars on the road but no laws. An accident is inevitable.

“If you don’t have any traffic signals or rules it would be a mess. That’s what’s happening right now we’re trading on this super highway of trading floors but it’s not regulated. There’s no safety switches,” says Professor Jain.

The professor says this won’t last long term, but the sudden and big movements could be the new normal if we don’t regulate the fast trading.