From the June 01, 2010 issue of Futures Magazine • Subscribe!

Pointing the (fat) finger

It's hard to keep up with so many dramas on the business front. I'm surprised Congress has time to do anything other than grill captains of industry and regulators about what happened, how did it go so wrong and what can be done to fix it.

Let's start with BP Petroleum. The firm has been associated with multiple disasters, including the Texas City refinery explosion (due to poor maintenance), the Alaskan pipeline leak (due to, well, more poor maintenance) and the current debacle happening in the Gulf of Mexico. BP especially stands out for me as it has requested to pollute Lake Michigan more than it already does. Perhaps I should admire the full disclosure, but this is a firm with a questionable record. So what happened in the Gulf of Mexico wasn't a surprise, but the response was. Now BP is pointing the finger at its rig operator, Transocean Deepwater Horizon drilling company, who is pointing the finger at Halliburton (a favorite villain), who allegedly supplied bad materials. Halliburton says it followed BP's directions.

Meanwhile, more than 5000 barrels (a low estimate) of oil has gushed into the Gulf of Mexico daily since the explosion (which killed several workers), potentially ruining livelihoods and killing wildlife across the Gulf region and threatening to penetrate the Atlantic Ocean. The Three Stooges' solutions for trying to stop the gush has only accomplished shutting down the effort to expand offshore drilling in the United States. How, after drilling for decades, does the industry not have a solution to fix a breached oil rig pipe?

Then we have the Greek tragedy in Europe, which actually stepped up to bail out its southern neighbor as well as promise help to other troubled European nations, with close to a $1 trillion life line. When Greece's troubles first surfaced, who did it point its finger at? Goldman Sachs (another favorite villain). Apparently due to Goldman's fast talking bankers, the country that brought us Socrates, Aristotle, Homer and even Euclid, fell for its own Trojan Horse.

In the United States, we have finger pointing with the so called "flash crash." On May 6, with oil gushing in the Gulf and the Greco wrestling match happening in Europe, the stock market fell dramatically -- close to 1,000 points on the Dow Jones Industrial Index -- before coming back almost as fast as it fell. It ended the day down "only" 350 points (see Liquidity anyone?). Why did this happen? At first the "fat finger" reason was opined -- some large trader hit a 'b' instead of an 'm' when inputting a large trade. This was discarded as soon as it came around.

Fingers also were pointed at the futures markets, echoes of the 1987 crash and a desperate move by some in the securities industry. The most recent explanation, provided by Mary Schapiro, Securities and Exchange Commission chairman, at a congressional hearing, was a "confluence of events, which, taken together, exacerbated what already had been a down day." That makes sense, and seems to happen regularly. However, both she and Commodity Futures Trading Commission Chairman Gary Gensler noted that two factors might have been special exacerbaters: the fact the NYSE hit its mini-circuit breakers, which slowed trading on the Big Board, but not on other stock exchanges; and second, trading by high frequency traders (yet another favorite villian), which seems to have a large hold on the stock market (it's estimated the volume done by HFTs is above 60% of all stock exchange volume; on the futures side, the CME Group estimates it's close to 40% of exchange volume). Suffice it to say that no one knows why the market did what it did -- yet -- but we certainly have a long list of villains of who did it.

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