The financial crisis, from which the global economy is still rebounding, demonstrated a variety of systemic risks associated with the practices of financial institutions.
While most regulatory reform efforts have focused on the mortgage industry and lending practices, there are other significant threats to the financial system that remain unregulated and threaten the stability of global markets.
Of particular concern is the investment industry’s reliance on computer-driven, high-frequency trading on global stock exchanges. As an Accredited Investment Fiduciary®, my role is to identify investments that have perceived long-term value. But the majority of trades on the exchanges today are conducted by high-frequency traders using enormous computers and sophisticated algorithms to buy and sell individual stocks multiple times in a fraction of a second. This approach is designed to maximize micro-profits with each trade, and aggregating them over time can yield positive results.
The problem with this approach is that a company’s fundamental financial value is completely overlooked by this type of investor. The threat to society from this activity is not hypothetical. Two years ago, the so-called "flash crash" took the Dow Jones average down more than 1,000 points in a matter of minutes.
While these glitches are eventually identified and explained, they illustrate the vulnerability of technology and its impact on investor confidence in the markets. For when the markets are volatile, investors park their money in cash. The purpose of investing is to raise capital in pursuit of enterprise, profit and economic growth, and this is simply not possible when investors are afraid of the infrastructure and an environmental of stability that facilitates such investment.
Photo of growth in pennies provided by Martin Kemp via Shutterstock.
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