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One has to wonder.

I haven’t railed against Wall Street's program trading, dark pools, and high-frequency black box trading (without human intervention) in a while, though they certainly deserve it -- and suffer from exposure to the light. I haven’t even reminded myself and my readers that such shenanigans are perpetrated mostly because our government was bamboozled by Wall Street into dropping the short sale uptick rule, allowing banks to become both day traders and "too big to fail" (not), and moving the "circuit breakers" (trading halts if a severe decline reaches levels that "may exhaust market liquidity") so far out as to be worthless to investors.

The first circuit breaker kicks in only if the Dow Jones Industrial Average falls 1200 points in a single day! Otherwise, it’s business as usual for the 25-year-old quants and their black box experiments on the American people. What happens if the Dow does fall 1200 points in a day? Do we shut down overnight to let emotions and orders cool? No. There is a one hour halt in trading if the DJIA falls 1200 points prior to 2 p.m., 30 minutes if it occurs between 2:00 and 2:30. After 2:30? There’s no action taken. After all, Wall Street needs that final hour or so to re-adjust their overnight positions.

How did this regimen come into place? The SEC asked the fox (in this case, the exchanges and FINRA) to figure out how best to preserve the contents of the henhouse. If you don’t recognize it, by the way, FINRA is the Financial Industry Regulatory Authority. It bills itself as” the largest independent regulator for all securities firms doing business in the United States.” I call it something different: MEOWS – the Mouthpiece Extraordinaire Of Wall Street. To finish this sad tale, the current circuit brealers are due to expire on January 31, 2012 “unless” [as the SEC freely admits on its website] “exchanges and FINRA propose to extend the trial period...”

The result of all this is days where the market plunges 635 points on a Thursday, pops up a smidgen on Friday, falls more than 400 on Monday, falls another 190 all day Tuesday, until, at 3:04, on cue, it roars ahead from 10,720 to 11,201, before sliding into Wednesday, when it falls 520 – all this with nary a circuit-breaker or a regulator in sight.

For those who vaguely recollect more stringent trading curbs, good for you. The NYSE originally implemented a curb on program trading to deal with “baskets” of 15 or more stocks or where the value of the basket was $1 million or more. (99% of the time, these are automated trades; unlike trades that require human beings to enter them one by one, thus stretching out the order entry process, providing transparency for all investors to see the trend, and reducing volatility.)

But Wall Street chafed at such restrictions. It might have “tipped their hand” they said. (So?) Their attitude was and is that the “little people” whose money they are always vying to get via 401k’s IRAs, et al, shouldn’t really clutter their playing field, anyway. So they petitioned the SEC to remove the “onerous” restriction that used to prevent computerized / black box program trading whenever the DJIA moved 2% from its previous close. The rule was scrapped November 7, 2007. Welcome to the delights of 2008. And now 2011.

Wall Street, always ready with a pat answer, invites financial journalists to quote them when such things as a market plunge happen. They always point the finger at thee and me. “Well, you know, "people" were excited because Bernanke gave an actual timeline that he had only hinted at before,” or “Well, today "investors" were fearful that France might be the next to be downgraded by S&P.”

Balderdash and piffle! It has nothing to do with we individual investors. Think about it – most of us are too busy during the day building automobiles or running a restaurant or helping a client or sitting in meetings to even know what Bernanke said or that France is in trouble. Some investors might sneak a look at the market on their little electronic gee-gaws, a few may even panic and call their broker. So – with 76% of the trades on the NYSE coming from Wall Street institutions, if you figure that 10% of the remaining 24% do just that, it’s still a drop in the bucket.

What’s an Individual Investor to do?

1. Don’t try to play their game. When I see two prickly dinosaurs thumping against each other, I don’t try to insert myself between them. I repair to a meadow and watch the unfolding drama. To do that requires that you be willing to back off a little on the greed factor and remove yourself from the fray when it looks like things are going to get dicey, not when the battle is in full force. That’s what we did, and recommend others do, via our article The Myth of the Summer Rally at the end of June. You would of course, have missed a good week or two in July, but better to have missed a couple weeks than suffer for staying too long at the fair. In that article I suggested selling some long positions and buying ETFs:

... like ProShares Short Russell 2000 (NYSEARCA:RWM), ProShares Short Small Cap 600 (NYSEARCA:SBB), ProShares Short Financials (NYSEARCA:SEF), and PowerShares DB USD Bull (NYSEARCA:UUP) -- and perhaps some iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT) for good measure -- to benefit from, in the case of the first three, a declining market in what I consider three of the most overbought and shaky sectors, and in the case of the latter two, a flight to safety over the summer.

2. Play instead to the real strength of the individual investor. You and I don’t have to close our positions every night. We don’t have to be flat over the weekend. We don’t – or shouldn’t – give two hoots about whether a company we favor exceeds or misses some analyst’s estimate by a penny. We have the ability to compete in an entirely different arena. We individual investors haven’t lost sight of Ben Graham’s dictum that in the short run stocks are merely a voting machine, but in the long run they are a weighing machine. “The markets” are primarily comprised of stocks of companies. If we select those firms which we believe will grow their revenues, grow their earnings, expand their market share and increase their dividends, we will do very well for ourselves.

At every inflection point, people say “It's different this time! We've never been in such dire straits before!” They're wrong. The market, as measured by the popular Dow, was at 608 during the bleak economic travails of 1974 and only reached 822 seven years later (as mortgage rates hit 15.8%, speaking of dire economic times.) And yet the Dow has risen more than 1000% since. In the 2 weeks from October 5,1987 to Oct 19, the Dow lost 34%. Yet we're 600% higher today. During the dot-com crash in '02, the Dow dropped 34%. And as even the youngest market participant remembers, it fell 38.5% in 2008. Sanity does return if you don’t panic and sell at the bottom.

I advised our firm’s clients in a special update yesterday to take a walk. Kayak. Play with the kids. Do things that give you pleasure. Most importantly, don’t panic now. Think things through and look beyond this current volatility.

I am already compiling my list of great value companies that I liked at higher prices and can’t wait to buy them lower. I’m not reaching for any of them just yet because I believe this market is likely to drift through the Dog Days of summer, probably with a downward bias, taking time to repair the damage. But I have already begun selling puts to open on some favored companies, inviting the put buyers to put Exxon Mobil (NYSE:XOM) and Deere (NYSE:DE) to me at 60, Peabody Energy (NYSE:BTU) and Total (NYSE:TOT) at 40, Plum Creek Timber (NYSE:PCL) at 30, Natural Resource Partners (NYSE:NRP) at 25, EnCana (NYSE:ECA) and Penn Virginia (NYSE:PVR) at 20, Weyerhaueser (NYSE:WY) at 15, and Corning (NYSE:GLW) at 10. If our limit prices are reached we’ll be owning some of these companies. If I’m wrong and the market roars ahead tomorrow unto perpetuity we’ll pocket some fine premiums that Wall Street’s volatility has created. The options market, like many foreign shares and those traded as ADRs in the US, are just too small to attract Wall Street’s attention. Until we can rein Wall Street in, these are two of the fields in which I choose to play.

Disclosure: We, and/or those clients for whom it is appropriate, are long SBB, RWM, SEF, TLT and UUP. We are in the process of placing limit orders to sell puts on XOM, DE, BTU, TOT, PCL, NRP, ECA, PVR, WY and GLW, among others.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we "eat our own cooking," but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Source: Is Wall Street Trying to Force Us Out of the Markets? Here's How to Protect Yourself