Let me state this another way: two trading firms were predominantly involved in handing investors’ losses of 60 per cent or more in their stocks on May 6 but a staid old mutual fund company trading an S&P futures contract in Chicago has been fingered as the culprit of the Flash Crash.
To get a more complete understanding of our current crisis, we need to look at the history of events that led up to it. We need to peer deeply into the inner workings of the Global Banking Intelligence Complex. Without acknowledging and exposing the covert forces that are aligned against us, we will not be able to effectively overcome them.
The recent merger between United and Continental confirms merely the inevitable: ever since the deregulation of airlines some 30 years ago, the path in corporate development in the carrier business has been one toward constant consolidation, interspersed with the occasional bankruptcy, as companies are massively and pro-cyclically leveraged to the same economic growth model that caused Moody's computers to #REF out whenever a decline in home prices was assumed. Oddly enough the evolution in the airline carrier space will soon be mimicked by what is happening in market structure, as more and more exchange, ATS, dark pools and what not realize that the only way to survive is by growing horizontally instead of relying on organic growth in a market which is seeing less and less participation. And while a detailed chart showing the development in market structure is still missing at the corporate level, the New York Times has put together the following very informative infographic which shows how little by little America will soon be served by just one airline, in which first class is reserved only for those working south of 58th street in Manhattan, while everyone else will be shoved in the cattle car back in coach. Because only a fool thinks that a two-tiered market exists solely in stock trading...
One of the theories proposed by Zero Hedge and Nanex is that some of those who may have clogged the market with "quote stuffing" did so in order to benefit from arbing the immediately effectuated latencies in the NBBO and proprietary quote streams. We were immediately ridiculed by "experts" who claim such an arb is impossible. Luckily, the SEC confirms that not only is it possible, but here is how it very well may have happened, utilizing, what else, dark pools. But, as the SEC says, it didn't happen, because for it to be profitable only a select few must have been utilizing this strategy, when as the SEC so thoughtfully assumes, everyone was in on this criminal trade, thus removing all arbitrage opportunities. So all is well, because if there is one criminal in the market they all are. Brilliant.
One of the last true defenders of a long lost honest and efficient market is riding away into the sunset. Today, at 2:15 PM Delaware Senator Ted Kaufman will deliver his farewell address on the Senate Floor. The full speech will be broadcast here. He will be sorely missed by everyone who laments the days when good news meant to buy stuff, while bad news did not mean to buy ten times more stuff. Alas, in the great race for technological supriority, the market broke some time ago, and the retail investing class, which accounts for a vast majority of the stock market's capitalization via its trillions in ever diminishing investments, has now lost all faith that stocks reflect anything but the Fed's desire to reflate the troubles of a few massively underwater bankers away. It is sad, but it is a fact. There is no more fair and efficient market. Which is why we know that those corrupt and captured cronies of the status quo at the SEC will be applauding Kaufman's departure - after all he was the last voice in Washington who dared to put up a fight for the little investor. Soon, everything will be back to normal, where the only guaranteed outcome of any stock trade is a loss. In the meantime, we present to you Senator Kaufman's last speech (of seven) on market structure issues and the unending scourge that is high frequency trading. We also present Carl "Shitty Deal" Levin's follow up comments to Kaufman's speech.
The following is Part I to David DeGraw’s new book, “The Road Through 2012: Revolution or World War III.” This is the second installment to a new seven-part series that we will be posting throughout the next few weeks. You can read the introduction to the book here. To be notified via email of new postings from this series, subscribe here.
Sheer poetic brilliance from the world's greatest realist: "The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious." Albert Edwards, Soc Gen
Mary Schapiro is making some waves at the Economic Club of New York, where for the first time ever, she has given some indication she is only two decades behind the curve when it comes to a market that now has a 5 to 1 ratio of HFT to retail participation (yes, you are all not only frontrun daily, but also surrounded by Sky Net). Here is a summary of her key points from the Economic Club speech earlier, courtesy of Themis Trading.
Not only is consolidated stock activity plunging, with Rosenblatt Securities confirming a 50% drop in August action YoY, but ever more are shifting their trading patterns to dark venues. This is yet another checkmark confirming that "stock markets" are nothing more than a venue for institutions to play hot potato with each other, as retail wants nothing to do with this joke of a manipulated market. From Rosenblatt securities:"The bad news is that non-displayed venues are taking a bigger slice of a shrinking pie. August consolidated activity is on pace to fall even more dramatically (~35% sequentially and ~50% YOY), suggesting something beyond just the typical summer doldrums." In other news, the final draft of the obituary for capital markets is now running through the spell-check.
Zero Hedge fully supports this petition for the return of some semblance of normalcy to America's runaway and chaotic market structure.
When TrimTabs Charles Biderman questioned the source of the money that propelled stocks 65% from the March 2009 lows, he got beaten with the idiot stick so badly that he actually turned bullish in April 2010. Lost in the ensuing choke-out was the fact that no one ever actually answered his question, unless scoffing and muttering “dark pools and stuff,” under your breath counts (and he’s the one who should be wearing the tin-foil hat?). Here we go again.
Scientific Proof That High Frequency Trading Induces Adverse Changes In Market Microstructure And Dynamics, And Puts Market Fairness Under QuestionSubmitted by Tyler Durden on 07/13/2010 00:46 -0400
Up until recently, any debate between proponents and opponents of High Frequency Trading would typically be represented by heated debates of high conviction on either side, with discussions rapidly deteriorating into ad hominem attacks and the producer screaming 'cut to commercial' to prevent fistfights. Luckily, all this is about to change. In a research paper by Reginald Smith of the Bouchet Franklin Institute in Rochester titled "Is high-frequency trading inducing changes in market microstructure and dynamics?" the author finds that he "can clearly demonstrate that HFT is having an increasingly large impact on the microstructure of equity trading dynamics. Traded value, and by extension trading volume, fluctuations are starting to show self-similarity at increasingly shorter timescales. Values which were once only present on the orders of several hours or days are now commonplace in the timescale of seconds or minutes. It is important that the trading algorithms of HFT traders, as well as those who seek to understand, improve, or regulate HFT realize that the overall structure of trading is influenced in a measurable manner by HFT and that Gaussian noise models of short term trading volume fluctuations likely are increasingly inapplicable." In other words, the author finds ample evidence that during the past decade (on the NASDAQ) and especially since the 2005 revision of Reg NMS (on the NYSE), stock trading increasingly demonstrates "self similar" fractal patterns, resulting in volatility surges, recursive feedback loops, and a market structure which is increasingly becoming a product of the actual trading mechanism. In the process, as demonstrated by a Hurst Exponent gravitating increasingly further away from 0.5 (i.e., Brown Noise territory), the Markov Process nature of stock trading is put under question, and thus the whole premise of an efficient market has to be reevaluated. Simply said: HFT has been shown to affect the fairness of trading.
Speaking of circuitbreakers, in a speech on the Senate floor Wednesday, Senator Ted Kaufman pointed to evidence that the May 6 flash crash may not have been an isolated event. On June 2, stock in Diebold, a technological services company, experienced a “mini-flash crash” of its own, plunging 35% and recovering fully in only minutes. The sudden decline and rebound appeared to be the result of an “electronic overreaction” to news reports of Diebold’s long-expected settlement with the Securities and Exchange Commission (SEC) over fraudulent accounting practices. “Regardless of what caused Diebold’s ‘bungee jump’ or the May 6 market meltdown, we should all agree that such unusual market activity strikes at the very heart of our market’s credibility. Regulators should add to their list the need to examine whether the precipitous drop in Diebold stock was the result of high frequency traders who can subscribe directly to market data and news feeds and perhaps had programmed faulty correlations into their algorithms to react to breaking news events. With so much of the marketplace dominated by high frequency traders employing similar strategies, an overreaction by a few algorithms looking to trade instantaneously on the basis of imprecise correlations could trigger a dramatic plunge.”
$34 Billion Asset Manager Says Market Prices Are Manipulated, Accuses NYSE Of Intellectual Property Theft, Debunks HFT "Liquidity Provider" LiesSubmitted by Tyler Durden on 06/11/2010 17:12 -0400
As part of the SEC's process to fix the broken market, it is currently soliciting public feedback on a variety of issues. Why it is doing so, we don't know - after all anything that does not conform to the SEC's preconception of what the most lucrative market to the SEC's recent batch of clients (see earlier news about an SEC director going to HFT specialist Getco) is, just ends up in the shredder anyway. At this point to believe that the SEC will do anything remotely in the interest of investors instead of millisecond speculators, is naive beyond compare. Nonetheless, while combing through some of the recent public responses on the topic of market structure, we came across the following presentation by $34 billion Southeastern Asset Management (SAM), titled "Comment & Analysis on Equity Market Structure" which must be brought to the attention of all those who have the temerity to defend HFT as an altruistic source of liquidity provisioning. SAM's 4 points are simple, and laid out very easily so that even the mildly retarded public, pardon, GETCO servants at the SEC can understand it: "1) The intent of the Securities Exchange Act of 1934 as provided for in its preamble is being twisted and abused for the benefit of gamblers and to the detriment of investors. 2) The markets are not "fair and honest", 3) Securities prices are presently "susceptible to manipulation and control, and the dissemination of such prices gives rise to excessive speculation, resulting in sudden and unreasonable fluctuations in the prices of securities. 4) The preceding three issues are fixable by the SEC." Let's dig in.
Dark Pool Warfare Is Now Official As Investment Bank Dark Venues Begin To Report Trading Data, Even As Third Parties Clamp Down On DisclosureSubmitted by Tyler Durden on 05/24/2010 16:50 -0400
Following an ongoing outcry over opacity in the dark pool markets, a topic discussed to death on Zero Hedge, six investment banks have finally started providing some modicum of transparency into how much trading actually occurs in their dark pool venues. Today, MarkIt will start disclosing European trades matched in the internal crossing engines of Citigroup, Morgan Stanley, Credit Suisse, JPMorgan, UBS and Deutsche Bank. The first ever report of this kind can be read on the following MarkIt site. The data will be published on a T+1 basis. As MarkIt notes, "The aim of the Markit BCS (Broker Crossing System) product is to provide the market with greater visibility of the total volume crossed within their systems by the reporting brokers." Europe is a good place to start with such disclosure, as estimates on European dark pool trading are extremely wide: as Bloomberg notes, "The U.K.’s Financial Services Authority says the pools account for 1.25 percent of trades, whereas the Federation of European Securities Exchanges, which represents exchanges, estimates the figure is closer to 40 percent. The lack of reliable information on volumes and pricing of securities in dark pools has posed a problem for regulators trying to keep pace with market innovation." Curiously, this major development in dark pool opacity comes on the heels of the announcement that non-investment bank dark pools, those of Chi-X and BATS, will curb market data disclosure. Again Bloomberg: "Chi-X Europe Ltd., the region’s biggest alternative stock-trading system, began suppressing some market data from its dark pool after customer concern about information leaks led to a decline in business. Starting today, London-based Chi-X Europe will no longer disclose customer identification or order numbers in Chi-Delta, its dark pool. Bats Europe, the second-largest multilateral trading facility, will impose similar controls on May 24." We believe this is a byproduct of accelerating cannibalization between investment bank and 3rd party ATS venues (not to mention dinosaurs such as NYSE-ARCA), as margins continue to dwindle in the rapid evolution to a zero margin trading business, be it exchange or dark pool based. In their pursuit of the fastest, biggest, newest, market participants are destroying each other in the process, and further destabilizing market structure in the process.