The Paradox of Market Chaos?

Via Pension Pulse.

Zachary
Goldfarb of the Washington Post reports, SEC
launches inquiry into market's 'flash crash':

The
Securities and Exchange Commission is looking at whether key financial
firms broke securities laws when they stopped buying and selling
stocks during the "flash crash" on May 6, helping fuel the historic
plunge in prices.

SEC Chairman Mary Schapiro said at a
congressional hearing Thursday that these companies, known as market
makers, might have violated a legal duty to continue to buy and sell
during the rapid decline.

"We don't have evidence yet of market
makers who had affirmative obligations from withdrawing from the
market," Schapiro told the Senate banking committee. "It is absolutely
something that we're looking at and we've incorporated our enforcement
division into our ongoing investigation."

Schapiro's comments
are the first signal that the regulator might seek to sanction firms if
they contributed to the decline of nearly 1,000 points in the Dow
Jones Industrial Average. The agency previously had not suggested that
wrongdoing could have been behind the market chaos.

At the
hearing, the chairman of the Commodity Futures Trading Commission said
the regulator would look into reining in some of the high-speed,
mathematics-driven trading that aggravated the volatility.

"A lot of the algorithms are very . . .
dumb," said CFTC Chairman Gary Gensler. "We can't stop technology, but I
think that we have to update our regulations to stay abreast of this."

Regulators suspect that automated trading in a
speculative financial instrument linked to the performance of the
Standard & Poor's 500 stock index contributed to the market plunge.

But even if trading in that
instrument helped fuel the start of the decline May 6, regulators say
the failure of market makers to remain active buyers and sellers of
shares sent prices down even more.

Many long-time market
makers -- often a major bank or brokerage whose role is to facilitate
trades by others -- required to remain active in the market even during
times of market stress. But many other upstart firms, often using
high-speed electronic trading, face no such legal obligation to keep
buying and selling shares.

"I do believe one of the things we
absolutely have to look at is the fact that many affirmative
obligations of market makers have been eliminated by the markets over
the years," Schapiro said. "So one of the things we will be looking at
very carefully is the creation of affirmative obligations again."

The SEC has discounted the possibility
that an error at a financial firm caused the crisis, or that outright
criminal behavior such as hacking or terrorist activity was behind the
market chaos.

The agency has largely blamed outdated and
inconsistent rules governing trading across a wide array of market
venues, as well as speculation in electronic futures markets for
fueling the plunge.

One thing I try to explain to
people is that erratic market moves have much less to do with
fundamentals and more to do with banks' prop desks and hedge funds
flows. Big banks made a killing in the first quarter of 2010. In fact,
the FDIC reported that nationwide, U.S.
banks reported an aggregate profit of $18 billion during the first
quarter, up considerably from the $5.6 billion profit recorded in
the first three months of 2009.

Where are these profits coming
from? Certainly not from lending to small & medium sized
enterprises. The bulk of the profits at the big banks are coming from
trading revenues and most of these are driven by huge algorithmic
trading activities performed by an army of PhDs running ultra fast
supercomputers, looking for the slightest discrepancy in asset prices.

And
what about hedge fund flows? Earlier this week, Boyd Erman of the Globe
& Mail reported, Hedge
funds rebound, head for $2-trillion in assets:

Hedge funds are hitting some old high-water
marks, with assets in North American funds topping the $1-trillion
(U.S.) level for the first time since November of 2008, according to
tracking firm Eurekahedge.

Globally, hedge fund assets have passed the
$1.5-trillion level and are likely to surpass $1.75-trillion by
year-end at the current pace.

It's a big turnaround for a group
that had some of the biggest winners and losers of the crisis. On the
winning side, funds like Paulson & Co. took home huge returns from
bets against housing. Losers found themselves long equities or
mortgage-backed securities in 2008, then had their pain compounded by
margin calls on their leveraged portfolios.

For the moment, some of the hottest returns
are at distressed debt funds as default rates have proved nowhere near
what was priced in at the nadir of the crisis.

Eurekahedge said distressed debt funds have posted 13 months straight of
positive returns, giving them a 50 per cent gain since March of last
year.

Two trillion in hedge fund assets may not
sound like a lot, but when you add leverage, it's huge. Many of the
larger hedge funds also engage in algorithmic trading and OTC derivative
trading, adding more volatility in market moves.

I bring this
up because it baffles me when "experts" compare today's markets to
those of the 1990s, 1980s or 1930s! The structural changes in the
markets are huge, bringing more volatility in periods of uncertainty,
and less in periods of stability.

And what really concerns me
is what effects this will have on defined-benefit plans and individual
retirement plans. Moreover, the Prime Minister of Greece, George
Papandreou, raised an important point last week in his
interview with CNN's Fareed Zakaria. Mr. Papandreou addressed the
"paradox" of bailing out banks that turned around and funded hedge funds
that speculated on sovereign debt:

MR.
F. ZAKARIA: You know, you are in some ways the bellwether for
the Western world. You are the first Western country that is going to
try in a comprehensive way to pare back some of the excessive
guarantees, commitments and expenditures of the welfare state.

Do
you think you can do this and survive politically? I know that you
made a reference to taking a voyage like Odysseus, and a Greek
columnist said yeah, but it took Odysseus ten years. All his comrades
died, and he ended up naked and washed ashore in Ithaca. Do you think
you’ll have a few more people than Odysseus did, when this journey is
over?

MR. G. PAPANDREOU: Well, we know that
these journeys are not easy and there are casualties. But we also know
we can reach this goal.

What we lived through in the last few
months was also somewhat of a paradox, because – and again I am not
trying in any way to get away from our responsibilities; we are fully
aware of our responsibilities and what we must do – but there are also
the financial markets.

In 2008 we had actually the governments
coming in to bail out the financial markets and the banks. They had to
accrue a huge debt very often, for stimulating the economies, so that
we don’t go into not only a recession but a deep depression.

Now you have banks
funding hedge funds. They are actually then betting against governments
that had actually helped the banks.

So this is a paradox, and I think this is where we
need to also regulate markets.

MR. F. ZAKARIA:
Do you think that Greece was a victim of the American investment banks?

MR.
G. PAPANDREOU: We right now have a parliamentary
investigation in Greece, which will look into the past and see how
things went the wrong direction and what kinds of practices were
negative practices. There are similar investigations going on in other
countries, and in the United States.

This is why I think yes, the
financial sector – I hear the words ‘fraud’ and ‘lack of
transparency.’ So yes, there is great responsibility here.

MR.
F. ZAKARIA: Could you imagine going after any of these banks
legally? Do you see that you have some legal recourse?

MR.
G. PAPANDREOU: I wouldn’t rule out that this may be a
recourse also, to go into this legally. But we need to let the due
process proceed, and then make our judgements once we get the results
from the investigations.

MR. F. ZAKARIA: And do
you think you will make it, like Odysseus, in the end, personally,
politically?

MR. G. PAPANDREOU: I am doing what
is best for my country, and I think that’s the best way to make sure
that this country does get to its destination, which is Ithaca.

What
happens to me is of less importance, as long as I feel that I am doing
what is best for my country and I can sleep well at night, with my
conscience clear, that maybe taking very tough decisions and decisions
that very often hurt, not only me but also many of the Greek people,
but in the end knowing that this is the best.

On
Friday, I had lunch with a buddy of mine that came in from Greece. He
told me that he was surprised with the speed that Papandreou's
government is moving to implement reforms. He also told me that many of
these reforms are hurting individuals like his aunt who was a
schoolteacher for many years and is now seeing her pension decline from
1,200 euros a month to 900 euros a month.

As far as speculators
are concerned, my friend told me: "I told you a long time ago that major
financial regulations are coming". Indeed, politicians are not going to
let hedge funds and banks run amok, threatening the integrity of the
capital markets and the global economy.

Let me be clear on something: I'm not against
hedge funds or banks with huge prop desks. They provide liquidity to
markets and hedge funds that deliver true alpha (not levered beta) are
worth paying fees for.

But the paradox remains. Banks that got
bailed out are funding hedge funds and so are public pension funds
looking to increase their leverage to meet their required actuarial
rate of return. What worries me is that by doing this, they're
increasing systemic risk. Without taking into account their collective
actions, they're sowing seeds of more market chaos.

This is
something which needs to be addressed on a global level. Individual
countries are powerless to deal with these structural changes and their
implications for global systemic risk.

Finally, as you listen to Mike
Ryan, head of wealth management research for the Americas at UBS
Financial Services Inc., talking with Bloomberg's Matt Miller and Carol
Massar about the outlook for U.S. equity markets and prospects for a
continued U.S. economic recovery, keep in mind the structural
changes I discussed above. Nothing shocks me anymore. Erratic moves
have become the norm, not the exception.

Comments

[qrs521]

Women in summer would like to become beautiful. Everything can grab other's eyes is their best friends.Products make them beauty and confident is their favourite. Look in the street,you can see many different types of make up to show women's personality.

Welcome to the shop, the following is our products, free shipping.

Soccer Shoes Cheap Soccer Shoes Nike Soccer Shoes Adidas Soccer Shoes Nike Soccer Shoes sale Adidas Soccer Shoes sale UGG UGGs UGG Boot UGG Boots UGG Boots Sale Cheap UGG Boots UGG Boots Cheap Women UGG boots ugg boots cardy ugg cardy boots Timberland Timberland sale Timberland boots Timberland boots online Timberland on sale New timberland boots UGG UGG boots UGG boots sale UGG boots short Short ugg Short ugg boots Ugg boots tall Nike Air Nike Air Max Nike Air Max Shoes Nike SB Nike Dunk Nike Dunk SB Nike Dunk SB Shoes Nike Shox Nike Shox Shoes Women Bags Women Bags Sale Women Handbags Women Handbags Sale Women New Bags Cheap Bags Cheap Bags On Sale New women bags New women bags sale New women bags sale online Louis Vuitton Handbags Gucci bags Nike Nike Shoes Nike Shoes Sale Nike running Nike running shoes Nike trainers Nike trainers shoes Timberland Timberland boots Timberland boots sale Timberland boot Timberland boot sale Timberland boots cheap Men timberlands MBT MBT Shoes MBT Chapa GTX MBT Men Shoes MBT Women Shoes Discount MBT Shoes LV Handbags Gucci Handbags Chanel Handbags Chloe Handbags D&G Handbags Dior Handbags Fendi Handbags Hermes Handbags Jimmy Choo Bags Marc Jacobs Bags Miu Miu Handbags Mulberry Bags Prada Handbags Versace Handbags Yves Saint Laurent Balenciaga Bags Burberry Handbags LV Handbags Gucci Handbags Chanel Handbags Chloe Handbags D&G Handbags Dior Handbags Fendi Handbags Hermes Handbags Jimmy Choo Bags Marc Jacobs Bags Miu Miu Handbags Mulberry Bags Prada Handbags Versace Handbags Yves Saint Laurent Balenciaga Bags Burberry Handbags

Those who want to become most beautiful in the world should try them. Just ones can make you different. Girls who want to grab your boyfriends's heart is necessary to use them.

[Moneygrove]

The bush tax cuts are just kicking in !!!!!!!!! GDP to the moon !!!!!!!!!!!!lol !!!!!!!!!!!!!!!!!!!!!!

[Apostate]

It's more than just PPT. Remember, the NYSE tripped individual circuit breakers for stocks.

The NYSE sees it as their prerogative to keep people interested in the listed equities. They want to avoid the fate of the NASDAQ as much as possible.

I mean, it's easy to forget, but the NASDAQ used to be a tremendously proud (and innovative) exchange.

This is what happens when exchanges are protected from competition. Perversely, by using circuit breakers to keep their current customers, the NYSE is corroding its long term credibility.

Let the sucker burn, goddamnit! We'll rebuild the damn thing.