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How electronic trading has added to market's volatility

More than anything else, raw fear has been driving the huge declines in stock prices over the last seven trading days.

More than anything else, raw fear has been driving the huge declines in stock prices over the last seven trading days.

But also adding fuel to the Wall Street bonfire has been the proliferation of online trading and electronic trading, which have accentuated the hair-trigger reactivity in the markets, according to market experts.

"Before, you had to call a broker; now, you can see the pain" on laptops or television screens, said Bruce Rader, assistant professor of finance at Temple University's Fox School of Business. "So you are sitting here and you are down and you see that immediately. So I tend to think it makes people more reactive."

Said James Jablonski, professor of finance at Villanova University: "It is easier for the individual investor to see the news and react to that immediately."

Rader said signs of growth in online and electronic trading were widespread. On commodity exchanges alone, electronic trading has grown from near single digits in the mid-to-late 1990s to 90 percent today, he said. The actual number of traders on the floor of the New York Stock Exchange also appears to have declined as traders instead do their work on personal computers.

When markets turn sour, the impulse to check on account values is all the more powerful.

Patrick Lane, president of Wachovia Securities Direct, said that his company had noticed in recent months that there had been an increase in the number of clients logging in to check on accounts and to trade stocks.

However, he said it was unclear whether that activity had added to market volatility.

One great advantage to online trading is that it costs less, and that too may have added to the volatility, said Itay Goldstein, associate professor of finance at the University of Pennsylvania's Wharton School and an expert on financial crises.

Goldstein said that one barrier to selling stocks during tumultuous market events of the past was the cost of executing a trade. But since online trading costs are substantially below those of going through a broker, that disincentive likely has become less powerful.

"Before, you had to pick up the telephone, but now you can do it in one minute and be done with it," Goldstein said.

Goldstein emphasized that the larger forces driving the current downturn were emotional, but he said that online trading could affect that trend on the margins.

"I don't think the underlying economics justified what we are seeing here," Goldstein said. "There was a bubble in the housing market and the bubble crashed and it had some spillover effect."

Yet people are emotional when it comes to money.

"We now have a society where people take courses in trading; it is so easy to open a trading account. It doesn't take a lot of expertise," said Rader of Temple. "It doesn't take a lot of expertise if you have the money."

And inexperienced traders tend to react emotionally, he said.