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China Proposes Phasing-Out Manipulative Trading Algorithms
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China Proposes Phasing-Out Manipulative Trading Algorithms
Written by Jeff Nielson (Click For Original)
Over the past decade our markets have ceased to behave like “markets”, at all. We see obvious perversity, such as the simultaneous (and extreme) bubbles in U.S. stocks and bonds, something which is mathematically impossible in any legitimate marketplace.
More generally, we see what are supposed to be divergent stock markets (representing diverse, independent economies), diverse sectors and diverse companies being marched up-and-down, collectively, like some gigantic, synchronized yo-yo. This is more impossible behavior – in legitimate markets.
Such insanity, and such extreme/impossible market phenomena are not confined to Western markets. Two weeks ago blockbuster news emerged out of China, via Zero Hedge. China’s government is:
…seeking public opinion on limiting the use of automated trading programs in the stock market.
This initial news acquires even greater significance with the additional context provided by the China Securities Journal:
The stock market regulator said such automated systems could fuel market volatility and affect fairness.
It plans to tighten access and also review the mechanisms behind automated trading systems and would authorize stock exchanges to levy extra charges on such automated systems. [emphasis mine]
The first part of that excerpt is nothing more than stating the obvious. Computerized trading algorithms began (literally) “taking over” our markets roughly a decade ago. Today, these computer programs now account for roughly ¾ of all trading volume, dwarfing all human trading in what are (supposed to be)human markets.
Oceans of automated “stupid money”. Non-coincidentally, it is over precisely the same time-frame that we have seen “circuit-breakers” created in all of the world’s major markets. Then we’ve seen all those circuit-breakers tightened (again and again), as so-called “HFT trading” became more and more dominant. Liquidity run amok.
Or is it “amok”?
In fact, as regular readers already know, evidence has emerged to strongly suggest that all this automated stupid money is a brute-force means of herding and controlling all our markets. In a lawsuit against the Chicago Mercantile Exchange, evidence was introduced allegedly showing that 50% of all trades at the CME were merely phony and illegal “wash trades”, pseudo-trades between the same entity. This amounts to roughly 100 phony/illegal trades per second, market-rigging which could only be perpetrated via computerized trading.
Following this, some independent research has (finally) been done, looking at the obviously manipulative potential of these computerized trading algorithms for the first time. The research was based upon the U.S.’s fraud-ridden markets, and the results of that research were staggering.
a) 74% of all U.S. equities showed significant evidence of algorithm manipulation.
b) There was an “abnormal correlation in message flow” in this algorithm manipulation, implying that a single, Invisible Hand was responsible for most/all of this computerized manipulation.
It is with this context in mind that we can examine the latest news from China. This comes on the heels of China’s government banning one of the largest U.S. trading companies from China’s market (which specialized in algorithm trading), as well as suspending the accounts of dozens of U.S. based-traders – for their algorithm trading. Here what is most notable is the highlighted portion of the previous excerpt, the intention of China’s government to “review the mechanisms behind automated trading systems”.
All these investigations (and suspensions) occurred immediately after China’s stock market was marched (literally) straight up, and then crashed straight down. It doesn’t take much reading-between-the-lines to deduce that the “review” currently being undertaken is a search for this same, Invisible Hand – which regular readers know better as the One Bank.
There was no organic/economic catalyst for China’s stock market bubble, which erupted from trough-to-peak in an improbable span of little more than six months. It came “out of nowhere”, for no reason at all. Of course it did serve one purpose: it was a major distraction from the even-larger U.S. bubbles, which had been steadily pumped-up not over a span of a mere six months, but rather over six, consecutive years.
Note that these manipulative trading algorithms have been foisted upon us for the flimsiest of reasons: to make markets “more efficient”. Yes with structural unemployment across the Western world exceeding 100 million people (and growing), we need to look for ways to eliminate human labour, and replace it with a computer program.
Now refer back to the final portion of the previous excerpt, to “authorize stock exchanges to levy extra charges on such automated systems”. With such additional levies, it’s quite possible that such computerized trading would no longer be cost-effective, or only minimally so.
In that context, what then is the pretext for allowing the continued use of such automated stupid money? This computerized insanity already forces us to impose “circuit breakers” on what are supposed to be “free markets.” How much further do we pervert our markets to accommodate obviously manipulative (and thus obviously illegal) computer trading algorithms?
It should be further noted that the bankers used precisely the same excuse to introduce their equally manipulative (and equally illegal) “short-selling” into our markets. It would “make markets more efficient”, they told us, by supposedly promoting better “price discovery”.
Really?
There has been very little “price discovery” in the precious metals sector for decades, and absolutely zero since 2011. We see commodities with perennial supply-deficits, which regularly/continually trade below the average cost of production. It is price-discovery which is the mechanism which is supposed to promptly remedy such market disequilibrium. It is the only mechanism for restoring equilibrium to markets.
We got no “efficiency” from short-selling, just a lot more financial crime. The most-obvious of this crime is “naked shorting”, meaning naked fraud, criminal traders being allowed to literally counterfeit their own shares, and then dump those shares onto the market, in order to (illegally) depress prices.
The only thing more heinous than such market fraud is that it is an activity which is almost completely unpoliced in our corruption-ridden markets. Now we supposedly “need” computerized trading algorithms, in order to bring even more fraud and corruption to these pseudo-markets? Where does it end?
Many markets have already been forced to initiate bans on short-selling. We got none of the benefits promised by the banker con-men, but now we’re saddled with all the crime, and perversion of asset prices.
Now these markets are overrun with the bankers’ manipulative trading algorithms. Indeed, to “manage” (i.e. manipulate) markets in the collective manner which we observe every day requires a Master Trading Algorithm, a single, dominant program, which (in turn) herds all of the individual trading algorithms, like the Pied Piper herded rats.
Only someone with minimal understanding of mathematics, markets, and computer technology could possibly be oblivious to the grossly manipulative potential of computerized trading algorithms. The supposed (and extremely minimal) “gains in efficiency” could never, possibly have justified the introduction of these computer programs into our “free markets”, let alone allowing these algorithms to literally take over our markets.
It’s time to put an end to this systemic fraud. Those readers who still have a portion of their wealth invested in these fraud-markets need to ‘make some noise’. Write to your political representatives. Write to the pretend-regulators. Tell them you are aware of this systemic fraud, and that you demand an end to it.
Never forget that these people are cowards, and what they fear (more than anything else in the universe) is the prospect of losing their privileged positions. If you make enough noise, they will listen.
In the West, it may not cause these totally corrupted lackeys to “clean house” in our rigged markets. However, it will (at the least) restrain them from allowing even greater criminality, and (hopefully) cause them to rein-in the criminal bankers – even if only slightly.
Our markets did not become cesspools of corruption overnight. They won’t be cleansed of that corruption overnight. But we must start somewhere, and there cannot possibly be a better place to start than to begin the movement to (permanently) remove these market-rigging computer programs from our primary institutions of commerce.
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China Proposes Phasing-Out Manipulative Trading Algorithms
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http://pebblewriter.com/how-they-did-it/
Sure, you go first, China.
Glad to see that Nielson has recognized the essentially manipulative nature of short selling. Although this strategem has been around for a long time, that does not change the fact that it is an unethical threat to the proper functioning of a market. In short selling strategy, stock that would not otherwise be on offer in the market is borrowed from brokers and/or inactive investors and sold, thereby depressing the price. When the price has been suppressed to the satisfaction of the speculator, it is bought back by him at a lower price and returned to the original owner, who may not even be aware that it has been borrowed. "Naked" short selling is even dirtier - in this case the short seller does not even bother to borrow the stock being sold, but rather invents it out of whole cloth, temporarilly inflating the number of such shares outstanding. This happens often in the commodities markets, which is why there is often a big disparity between the prices of "paper" commodities, as quoted in the markets and that of the physical commodity itself.
God Almighty!! You know it's bad when the [Falun Gong] organ-harvesting Chinese are proposing sensible market reforms that the [embryonic] organ-harvesting Americans cannot.
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It's ironic the 'evil' Chinese are doing something about all this corruption as the west loves to wallow in it.
Look closely. What the Chinese government said was that they wanted to "limit" access to HFT algorithms. Any guesses on who this access is going to be limited to?
Oh yeah, I saw that. They are disparaging the algos and acknowledging the problem, even if they are keeping their control mechanism for themselves. It's a small step forward.
The rhetoric sounds great but I'm not certain that a system where certain tools are explicitly reserved for a selected class of investors as opposed to one where they are effectively reserved for a selected class of investors is really an improvement.
If they went to an outright ban, I'd congratulate them. But they won't and I don't even know how one could be enforced in today's all-electronic trading platforms. But it is indeed a shame that we are brought so low as to not even be on the side of rhetorical virtue in contrast to a corrupt dictatorship.
The only ways these things can be beaten is by either instituting a minimum hold period for any purchase or by returning to nothing but floor trading. Too much gravy for the current players in the current system so it will never happen barring some sort of epic societal collapse.
"... barring some sort of epic societal collapse."
But we know that's coming.
That leaves you free to consider the currently impossible.
The question is, is there any way to restart capitalism without ending up in this disastrous fix again 50, 100, 500 years from now?
I would also hope for some probabilistic distribution around the times.
With certainty, they will game it, even if they are forced to hold for a set time.
That would help.
How about a half-percent fee per trade?
The west promotes and even idolizes it!!!
"...and would authorize stock exchanges to levy extra charges on such automated systems."
The financial transaction taxes contained in the House "Humphrey Hawkins Full Employment and Training Act", HR 1000, and that Bernie is proposing in the Senate would have this effect. To a flesh-and-blood investor a 1/4 % or even 1/2 % tax on a stock sale, or a 1/10 % tax on a derivative sale, wouldn't be pprohibitive. To the HFT Algo traders it's a game-changer.
China proposes phasing out manipulation?!?!?
LMFAO!!!! People really are fucking stupid, this is what centrally-planned communism is built on!!!
I would much prefer that they kill the offenders rather than phasing out their crimes....
yes, consequences are considerably more effective at changing behaviors.
Centrally planned communism with billionaires and stock exchanges?
The idiocy (or original crime) was Chairman Deng's, declaring first China must build capitalism, then it can move on to socialism. Did he think through the logic that he was sowing the seeds of another revolution? Did he think this would be in some impossibly distant future"
China may still have a Communist Party apparatus, but billionaires are billionaires - greed driven, power-mad sociopaths who will use their money to buy the influence they need to get their way. And now China's Communist political system is almost certainly a hollow shell, approaching its day of reckoning.
The One Bank and all its agents are preparing for that day. Millions of angry ordinary Chinese who grew up listening to their parents' and grandparents' stories about their proud revolution are no doubt preparing for it as well.
China is descending into a huge and terrible convulsion, one that will throw global geopolitics into chaos. If I could get a good seat on Mars to watch this from I might even enjoy it.
so, life involves risk, so fucking what?
same as it ever was.
I see lots of opportunity in such "interesting times"...
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