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'Psychotic' Dow Swings Leave Europe Gun Shy

Wednesday, 12 May 2010 | 5:44 AM ET

Last Thursday’s intraday volatility, which saw the Dow plummeting nearly 1000 points, has left European investors tentative about Wall Street, according to market participants.

New York Stock Exchange
AP
New York Stock Exchange

“The market gyrations in the past several days have been nothing short of psychotic,” Gregg Loshin, independent investor in New York, said.

“I’m not sure if European, or American investors for that matter, have really digested the swings that started last Thursday."

“I think the movements shed light on the fact that all the circuit breakers did not work as they were supposed to work and also brought many rumors to light such as 'cyber-terrorism' or a rogue order associated with a massive input error,” he said.

On Tuesday, the Treasury Department, Securities and Exchange Commission Chairman Mary Schapiro, Commodities Futures Trading Commission Chairman Gary Gensler, and the heads of several exchanges briefed Treasury Secretary Tim Geithner on their preliminary findings to address the issues associated with last Thursday's market tumble.

But as of yet there is no definitive explanation as to what occurred.

“The big issue is that nobody knows what happened,” Rich Gates, co-portfolio manager at TSF Capital, said.

“It may take months to get to the bottom of it – there’s an unbelievable amount of forensics associated with (electronic trading.)” “There’s clearly problems out there," Gates said.

"I think it’s going to be harder to figure out the initial decline, the six minutes when it just dropped. Did it start in futures? Options? Equities?”

(watch video of the exclusive interview with CNBC below)

Investigating Dow's Drop
The House Financial Services Committee meeting htis afternoon to discuss last Thursday's market meltdown, with Adam Sussman, TABB Group and Rich Gates, TFS Capital.

Some Europeans invest in the US markets because there's a perception they are more liquid and more dynamic and also because the US economy is more flexible and a recovery is more likely there.

But after last Thursday’s roller-coaster ride, some might shy away.

“Europeans as a whole are more skeptical to begin with than our friends across the pond," Heini Beretta, European development director for global fund exchange, said.

"But I think the fact that nobody has owned up to a fat finger mistake is rather ominous because it shows that buying volume was exhausted, there were not enough speculative bids in the market to prevent the slide.”

“I don’t think it’s an issue of speed, I think it’s an issue that there’s not the right safeguards in place,” Adam Sussman, director of research at TABB Group, said.

Other investors argue that a healthy respect for the markets has returned.

“I don’t believe that investors have lost faith in the market functioning,” Loshin said, “But everyone has been harshly reminded that statistically there are going to be outlier days of market movement … whereas we have not witnessed them in many months.

Ahead of the swings the VIX -- S&P volatility index -- was at a low 15.5, indicating a low amount of worry in the market.

“This clearly demonstrates that there was a pervasive mindset of no fear,” Loshin said. “I think there hasn’t been a loss of faith, but a healthy respect for the markets and their possible swings has come back into vogue for the time being.”

“I would guess this has a big impact on the retail investor psychology and it does create uncertainty," Beretta said.

"That’s why I would expect we will more gradually move down below (DOW) 10,000 over the next few months.”

Contact Europe: Economy

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