IF 200 -- August 29, 2011 -- 9/20

Fast-forward to 1975, when the global financial world was hit by a major event that no one seems to remember any more.    It had the effect of a “tsunami”, which marked the beginning of a multi-decade period when global finance interests were, more and more each day, distancing themselves from the “real” economy.    On May 1st of 1975, modern finance was energized when NYSE “fixed commissions” charged on financial transactions were abandoned at the altar of “negotiated commissions”.    The aim was to encourage a larger public participation in Wall Street, so that liquidity would be enhanced and risk be spread throughout all investors, institutions and individuals.

As a result, financial engineers multiplied their efforts, with intelligence and innovation, to create sophisticated financial instruments for investors.    The financial industry made larger use of debt, securitization and proprietary trading.    Incidentally, “High Frequency Trading” has already claimed the “flash crash” of May 6, 2010!    In plain English, the message given out to the world by the 1975 shift in the NYSE commission system was that ...every American and world’s citizen had the right to own a piece of the national and global economy.    The untold message, however, truly was that ...upstairs trading needed a larger trading base on which to build successfully its creative investment strategies!

Financial sophistication is not privy of major consequences.    The individual investor is not in a position to effectively compete with algorithm-based financial trading systems, which remain only available to the happy few, who command a large and growing share of the overall trading volume.    As a consequence, “human” traders are becoming a rarity while “supercomputers” continue to trade with each other!    But, for how long?    And, how big is the resulting systemic risk of modern day finance?    In a nutshell, since the 1970s and under the complacent eyes of governing authorities (governments, central banks and financial regulators) the bearing of financial risk has consistently and systemically slipped from the hands of the global financial institutions onto the shoulders of individuals, less able to cope with it!

1971 and 1975 were also the years when the global liquidity spigots were left wide open “ad infinitum”!    All subsequent events just filled the pages of a financial history book that was already in the works since August 1971.