World markets retreated Wednesday after a disappointing survey of the U.S. services sector rekindled worries that the recovery in the world's largest economy will be anemic.
After losses across most of Asia, major indexes in Europe traded lower. Britain's FTSE of leading shares was down 0.7 percent at 4,929.73. Germany's DAX was 0.6 percent lower at 5,904.99 and France's CAC-40 was off 0.8 percent to 3,395.91.
U.S. futures augured a weak open on Wall Street. Dow futures were down 0.2 percent at 9,663 while the Standard and Poor's 500 futures lost 0.3 percent to 1,020.70.
After rallying Tuesday due to bargain-hunting, markets reversed course after a U.S. survey showed the services sector there was growing at a weaker pace, mostly because of concerns about a slowdown in the global economy — particularly due to the European debt crisis.
Paul Ashworth, an economist at Capital Economics, said U.S. economic growth was already expected to be hurt by the withdrawal of stimulus measures and a relapse in the house market.
"It now appears that the slowdown in global growth will be an additional restraint on the U.S. economy," he said, although he does not forecast this will be severe enough to cause a double-dip recession.
In Europe, investors will be preparing for a European Central Bank policy announcement on Thursday. While interest rates are expected to be left at a record low, the focus will be on any comments about lending conditions and the results from the EU's stress tests on banks.
Those results, due to be published later this month, will be parsed for hints about the health of the European banking sector and its exposure to the debt crisis — the value of some government debt has fallen sharply — and tight liquidity.
In Asia, Japan's Nikkei 225 stock average closed down 0.6 percent at 9,279.65 as a strong yen kept pressure on exporter shares. Hong Kong's Hang Seng lost 1.1 percent to 19,857.07 and Seoul's Kospi lost 0.6 percent to 1,675.65.
Benchmarks in Taiwan, India and Australia also declined, while those in Thailand and New Zealand were higher.
"There are not many people buying stocks right now," said Francis Lun, general manager of Fulbright Securities in Hong Kong.
"I have given up hope on Europe. Europe will be mired in recession because of deficit-cutting."
Lun also called the U.S. economic recovery "anemic" and said softening export orders in China hit market sentiment hard.
The exception was the benchmark Shanghai Composite Index, which edged up 0.5 percent to close at 2,421.12 on reports that the government social security fund was buying shares to help boost the market.
Strains on liquidity also eased as Agricultural Bank of China wrapped up subscriptions for a record share offering expected to raise a total $22.1 billion.
In currencies, the dollar was trading at 87.25 yen, down from 87.54 yen late Tuesday. The euro fell to $1.2572 from $1.2625.
Benchmark crude for August delivery was up 26 cents to $72.24 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 16 cents to settle at $71.98 on Tuesday
World stocks finished mostly lower Monday amid worries that the economic recovery in the U.S. will slow down, with trading light as Wall Street remained closed for the Independence Day long weekend.
A disappointing jobs report from the U.S. on Friday suggested the world's largest economy is stuttering, while other figures indicate China — which booked good growth during the recent years of financial and economic turmoil — could also slow down.
European markets found some support during the session in a report showing retail sales in the region rose modestly in May, but ended slightly lower. The British FTSE 100 and Germany's DAX both finished down 0.3 percent at 4,823.53 and 5,816.20, respectively. France's CAC-40 was down about 0.5 percent at 3,332.46.
Asian markets were mixed at the close, with the Shanghai index down but Japan's Nikkei up.
"Growth fears have in particular been centered on the U.S. in the wake of a run of disappointing data," said Mitul Kotecha, an analyst at Credit Agricole.
While some investors may be quietly buying back into the market after heavy losses last week, overall sentiment is cautious. Besides the weak jobs data, U.S. indicators have recently shown a drop in home sales, a fall in consumer confidence and a slide in manufacturing activity. That spooked investors already fretting over the European debt crisis and its impact on major trading partners like the U.S. and in Asia.
Volumes remained light, with trading closed in the U.S. European indexes were buoyed slightly by a report showing eurozone retail sales rose 0.2 percent on the month in May. However, consumer spending in Europe remains well below long-term averages and is considered a weak link in the 16-nation eurozone's recovery.
Howard Archer, an economist at IHS Global Insight, noted the rise in May did not make up for a sharper 0.9 percent slump in April.
"The signs are hardly encouraging for any significant sustained pick up in the near term at least," he said.
In Asia, some investors worried that massive bank lending in China last year, intended to support Beijing's stimulus program, may spark a wave of defaults. Chinese companies that overspent on factories and other assets may be unable to repay their debts.
Also, local government finance agencies borrowed heavily for infrastructure and other projects, and the World Bank and Chinese regulators say lenders might face losses if those agencies default. Premier Wen Jiabao, China's top economic official, said over the weekend the nation's recovery is facing more problems than expected. Indicators from manufacturing to auto sales suggest economic growth might slow.
The benchmark Shanghai Composite Index lost 18.95 points, or 0.8 percent, to close at 2,363.95, the lowest level in 15 months.
Japan's benchmark Nikkei 225 stock index added 63.07 points, or 0.7 percent, to 9,266.78.
Kazuhiro Takahashi, an equity strategist at Daiwa SMBC Securities Co. Ltd., said the Nikkei climbed on bargain-hunting following earlier losses.
"Investors chased gains in exporters, but many took a wait-and-see stance as the U.S. financial markets are closed Monday," Takahashi said. "The disappointing U.S. jobs report was a fresh sign that the pace of the U.S. economic recovery is slower than expected."
Investors in Asia also were reluctant to chase gains after the Dow Jones industrial average fell 46.05 points, or 0.5 percent, to 9,686.48 Friday, the seventh straight day of decline.
It was also the longest losing streak since the height of the financial crisis in October 2008.
South Korea's Kospi increased 0.2 percent, to 1,675.37, and Australia's S&P/ASX 200 was down 0.4 percent at 4,222.1. Elsewhere, Hong Kong's Hang Seng index fell 0.3 percent to 19,842.20. Markets in Taiwan and New Zealand edged up.
Benchmark crude for August delivery rose 17 cents to $72.31 a barrel in electronic trading on the New York Mercantile Exchange. The contract lost 81 cents to settle at $72.14 on Friday.
The time it takes to read this sentence is all it takes for nearly 2 million stock trades to flash through the stock market.
Most of those trades aren't coming from trigger-happy day traders and mutual fund managers with billions of dollars at their disposal. It's a flood of machine-gun speed fury coming from an army of computers programmed to obey complicated algorithms that are hyperactively buying and selling.
What does that mean to you, the individual investor? The next time you buy or sell a stock, forget the quaint idea that there is a living, breathing human being on the other side of the transaction. You're trading with a computer.
Not only are the markets completely computerized, more than half of the market's volume is churned by computers programmed to spot certain patterns in trading. These machines see stocks not as securities used by companies to raise money, but rather, symbols, numbers and bits that are traded, swapped and exchanged.
And now, traders say, humans are responding to machines rather than the other way around. Increasingly, too, the machines are reacting to each other, trying to second-guess what their next moves might be on how to take advantage of an edge that might be gone in milliseconds.
"There are no real buyers or sellers," says Joe Saluzzi, trader at Themis Trading. "It's all about the machines."
Never was that as clear as May 6, the day the Dow Jones industrials plunged nearly 1,000 points and then recovered in Wall Street's most volatile half-hour ever. Two months later regulators and stock-exchange officials haven't been able to explain what caused that panic-packed period — except to say that computers likely were to blame.
Given the level of computerization of our lives, from how we play to how we work, it's not surprising technology is how the stock market can handle, process and route the billions of trades that flow through it each day. And computerization is the reason individual investors can buy and sell stocks for less than $10, sometimes even free with some discount brokerages.
But following the May 6 "flash crash," investors are beginning to understand there's a serious and often hidden downside to letting the machines run the markets.
Perhaps most troubling is how computers are giving sophisticated investors with the best digital access to the markets a leg up over regular investors in ways modernization was supposed to do away with. Meanwhile, technological advances are making it nearly impossible for regulators, who play a critical role in maintaining a fair market, to monitor the system that by its very nature has no paper trail and buries transactions in mountains of data.
"It's a war of information," says Gibbons Burke of Morningstar's MarketHistory.com, which compiles statistics of market movements. "Lots of games are being played."
Increased computerization of the stock market is raising troubling problems that have the potential to harm individual investors in the form of:
•Digital "painting the tape." One of the ways traders misled investors in the past was by conducting sham trades with themselves. A trader might enter orders to buy and sell shares of a stock between two entities it controls, giving the false impression there's strong investor interest for the stock at certain prices. This is called painting the tape.
The intent is to fool other investors into thinking this false trading was real, and tempt them into trading based on that information. It's similar to how a crooked eBay seller might improperly use another username to bid on an item, misleading legitimate buyers about the true value of the item.
Painting the tape is illegal. However, modern technology allows traders to essentially perform the same trick in a way that's hard for regulators to detect, says Eric Hunsader, founder of market data feed provider Nanex.
Rapid-fire computer systems allow sophisticated traders, including the giant Wall Street firms, to post bid (buy) and offer (sell) prices they have no intention of actually following through on, he says. For instance, a firm might post a bid for a stock showing they want to buy at a certain price. But by the time investors interested in selling at that price get their order to the market, the false buyer yanks the electronic bid literally faster than a blink of the eye, Hunsader says. This interplay happens in milliseconds, making it difficult to detect.
The computerized trickery is enabled by physics. Since trades move over computer networks at roughly the speed of light, the firms that are physically located nearest the market centers in New York and pay market-access fees get a leg up.
The reason? Each 186 miles a trader is physically located away from the New York trading center, about a millisecond is added to the time to execute a trade, Hunsader says, because that's the speed of light; data can't travel over fiber-optic networks faster than the speed of light.
A millisecond might not sound like much, but it's an eternity for traders who can put up bids or offers for stocks and yank them before other investors located away from New York or with slower connections to the markets can respond. "Trading has gotten to the point where the speed of light is now the major source of latency," Hunsader says.
•Swamping the market with trades. If your e-mail box is filling up with spam, you've already experienced another distortion technology is bringing to the stock markets.
Thanks to low-cost and automated trading, trading firms can swamp markets with a deluge of buy and sell orders in a way that gives them an advantage, Hunsader says.
As other firms must parse through the extraneous trades, slowing them down, the firms behind the pseudo bids and offers can ignore them, saving them milliseconds of analysis time. This gives their computers valuable extra milliseconds to parse true trends in the market and gain an advantage, Hunsader says.
Think of it this way: Imagine that a winning lottery number is e-mailed to two people at the same time, and whoever reads the message first wins the prize. Quickly, one of the people cleverly e-mails millions of spam messages to the other person who also received the e-mail. The spam recipient will need to sort through those e-mails to find the one with the winning lottery number, giving the spam sender time to claim the prize.
The sheer volume of trades is staggering. During the day of the May market meltdown, for instance, more than 19 billion transactions moved, according to regulators. It would take a person more than 100 years to simply count to 1 billion, he says, so anyone who knows some of those trades can be ignored gets a huge advantage.
•Derivatives overwhelming the cash market. Trading firms with the best systems already get a leg up on other investors. But savvy firms can push the market around even more, thanks to other electronic markets that connect with the stock market.
Over on futures exchanges, instead of buying stocks, traders can buy bets on where they think stocks will be in the future. For instance, a trader who thinks the S&P 500 will rise can just buy the so-called e-mini S&P 500 futures contract, rather than buying all 500 stocks in the S&P 500 index.
What makes these contracts so powerful is that they allow traders to make enormous bets with little upfront money: Just $500 in cash can control $50,000 of stock. So a small risk can give traders tremendous sway in the market.
Trading in e-mini contracts has swelled to the point that this speculative market, under the right circumstances, can drive the market for the actual stocks, says Fane Lozman founder of ScanShift.com, a trading firm.
It works like this. Several computer-based trading systems, simultaneously, might load up on large positions betting the S&P 500 will fall. Computers do this by selling e-mini contracts in the futures market at the same time.
But a flood of these robotic sells can have a disastrous effect on stocks on days when the market is already weak. These large e-mini orders will spook the stock market, causing traders and their computers to pull orders to buy the actual stocks on the New York Stock Exchange and Nasdaq. As the market goes lower, selling begets selling. The result is a flash flood of selling and no buying.
"As all these orders from all over the country pile up, no buyer is going to stand in front of that freight train," Lozman says.
Leo Melamed, chairman of CME Group, says market distortions caused by futures are rare and that computer systems offer many more advantages than disadvantages. The explosion of trading makes it easier and cheaper for individual investors to buy and sell stocks.
Technology was supposed to even the field between professional traders and individuals. In reality, though, the rise of the machine on Wall Street shows individual investors are even more outgunned than before due to factors many will never see or perhaps understand, Hunsader says.
But rather than giving up, individual investors need to adjust to a world where computers run stocks, says Larry Harris, professor at the University of Southern California. At the very least, he says, investors should stop using market orders, which is the way most investors buy and sell stocks at the current market price. Instead, he says, investors must use limit orders, which specify a price to buy or sell and can protect them from computers going haywire during high volatility.
It's time now for human investors to adapt to computers, instead of the other way around. Problems do arise from a highly electronic market, but it's here to stay, Harris says.
"The world is a different place because of computers, but there's no hope of returning to manual trading, and you wouldn't want to," he says.
source:ustoday.com
