The current sway, within market systems, of what journalist Thomas Friedman called “the electronic herd” has revolutionized the way in which retail investors must approach the market. No longer are the benchmarks of financial statement analysis and technical analysis sufficient to judge the attractiveness of equity offerings. Rather, because of sudden and turbulent shifts of interest by the herd’s “short horned” cattle—- the multi-intentioned mass of daily market participants including hedge funds, mutual funds, individual investors, banks, and governments— all reacting to contingencies both related and external to specific equities and markets —we have entered a turbulent world of grazing and stampede.

Just follow the pronouncements of market analysts employed by brokerage houses. With an upgrade or downgrade of stock— usually published on Google or Yahoo Finance, the cascade of investors mistaking opinion for hard data in an otherwise inconsistent world of dubious information, serves to fulfill the analysts’ prophecies.

Recently, journalists have commented on “bond vigilantes”—- often demanding interest levels beyond the payment ability of national governments—like Ireland’s during November and December, 2010.  Because governments are dependent upon the electronic herd to subsidize debt funding, the herd (now operating demandingly as vigilante—- however aware or unaware— ) exerts a political impact upon sovereign states.  In fact, what this interaction mirrors is a shift in the form of organization characterizing financial markets.

Globalization has brought with it a shift from governments as relatively closed systems to governments as relatively open systems in interaction with other open systems— such as the markets of the Electronic Herd. Interactions from one system may have direct effects on the entities within the other. The news is full of them.

Last summer, President Obama’s frustrated denunciation of BP Chief Executive Tony Hayward provided a focus of blame for the Electronic Herd. Obama furnished a discernable target for national rage, and a brief period of anti-British xenophobia ensued, as did the market’s assault upon BP stock values.

Last fall, Irish Finance minister attempted to guarantee the value of Allied Irish Bank shares by a huge cash infusion from Ireland’s pension fund. The continuing hemorrhage of banks’ assets together with the flight of the Herd’s short horned cattle to other institutions hastened the crisis of confidence in Irish solvency; and in interaction with the Herd’s misinterpretation of the plan floated by Angela Merkel and Nicolas Sarkozy for a 2013 change of investment rules to penalize senior bondholders (as well as taxpayers) for failures of national banks, precipitated the EU-IMF Irish bailout.

For shareholders of BP and AIB, the interaction of governments and market participants facilitated a wild roller-coaster to the outer limits of the normal curve. This, for the retail investor, is the emotional and financial experience of what markets call “tail risk”:  the movement of investment values beyond three standard deviations from the mean. Of course, mean regression meant that there was also a reciprocal ride up: but these were the trips that ulcers are made from.

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The Electronic Herd and the Market as Open System


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