Monday, August 23, 2010

24 Seconds to Financial Incineration

Another Monday of not trading (for many) has come and gone, and with it the hopes for a US economic recovery any time soon. Even though the words - like upturn, rebound, recovery - are spoken on CNBC, evidence of them is falling in frequency as the evaporation of trading continues to take hold.

There's a real problem with the US markets and it has as much to do with technology and greed as it does with fear, uncertainty and skepticism, all of which have been on the rise not just in the past few weeks or months, but for years.

The average American (if there is anything such as "average") is invested, like it or not, in stocks to varying degrees. Some have their own online accounts, some are in mutual funds, others in 401k funds, others have their money forcibly taken from them by union fiat and pushed into a pension fund. Anyone who pays taxes is invested via society because the money they pay in taxes is inextricably wound up into public employee pension funds, most of which are glorified Ponzi schemes which need to be radially overhauled. So, for the sake of argument, we all have an interest in the smooth functioning and prosperity of our capital markets.

What amounts to the real problem, at its very core, is a rising lack of confidence that the system is fair and not manipulated. And that's because many have come to the sad realization that it is not, that it favors those with bigger bank accounts, better access and faster computers. Nothing could have put that issue more in focus than the "flash crash" of May 6, 2010, when stocks tumbled more than 600 points on the Dow Jones Industrial Index in a matter of minutes before recovering most of those losses in mere minutes afterward.

Why the "flash crash" of concern right now carries any number of rationales, but it is probably the one event - still unexplained by government regulators who vowed to "look into" the matter - that has, more than any other single event, exacerbated the flight of small investors away from stocks and stock markets.

Foremost, the regulators looking into the cause of the event are lying through their collective teeth when they say they have not figured out why it occurred. It happened because of a time lag in different trade reporting venues, between the NYSE, the specialists and other exchanges and exploitation of them by hedge fund traders. Which exchanges or traders are not readily known, though the SEC could pin those down if they so desired.

More than likely culprits include high-frequency traders (HFT) whose desks belong to some of the more well-known institutions on Wall Street, which is another reason why the government can't seem to find numerous needles in the stock market haystack. The clues are all there, all recorded, but the regulators simply do not want to expose the truth, their reasons being that even more faith in the markets would be squandered, while, in reality, their resolute desire to "keep the lid on" is only making matters worse as more and more honest investors are too afraid, been burned too many times and now have lost their last remaining sliver of faith in the markets.

An interesting article by Tyler Durden of, published today, adds more credence to the machinations of the conspiracy crowd. Durden cites a report which demonstrates two very salient pieces of data. One is that the NBBO (National Best Bid and Offer) - the best price quoted - is not actually that at all, that it often defaults to the NYSE price. The second piece of information is even more critical: the time lag between the quoted NYSE price and the actual trading price can be as much as 24 seconds or longer in the CQS (Consolidated Quotation System).

This may sound like a lot of mumbo-jumbo to most people, but in a world dominated by enormous companies using vast amounts of money and the world's fastest computers, 24 seconds in which a quote may be off by a quarter point, a half point or more, can result in huge profits, and that's what happened during the aforementioned "flash crash" and continues as an illegal arbitrage tool of the rich and powerful to this day.

Rather than belabor the point by trying to explain it all in layman's terms, attention should be focused on the one company which has done a detailed analysis of the event and continues to provide cogent explanations of what's really going on behind the scenes in our swift and untidy, unbalanced, unfair markets.

The question arises that if Nanex could figure this out, why hasn't the SEC? And why hasn't this been headline news on the financial and news networks? Being that I am prone to believing the worst about corporations and our government, I urge readers to examine the facts and draw their own conclusions. I believe the work by Nanex is top-rate and unbiased, and I'll leave it at that.

All of this matters so much today because the markets are rather rapidly grinding to a halt. We've been detailing the low volume regime that's persisted for the past two weeks, and today it got even worse. Not only that, but the trading pattern of the major indices are indicating massive manipulation and arrogance by insiders and patterns suggestive of an imminent crash.

I've borrowed the chart of today's Dow for emphasis.

Note that stocks were up initially, and then fell abruptly, vacillated through most of the day and then slid lower into the close. The other indices followed roughly the same pattern all day. This is a classic bear market trading session, a sucker's market, if you will, in which stocks fly at the open suckering in the slower traders, pounded lower throughout the day, and then hammered down again into the close. As usual, some people made money off this trade, others lost. You can only guess who were the winners (HTFs, Goldman Sachs, JP Morgan, et. al.) and who were the losers (individual investors, some small hedge funds, pension and mutual funds).

This is a no-win situation for everybody as pointed out by Kristina Peterson in "Not Wolf, Not Bear, Meet the Wolf Market," published in the Wall Street Journal, which describes the current condition of the market as analogous to a pack of wolves, which, after devouring all of the prey then turn on each other. Ergo, low volume of trading, because, in the wolf market, there aren't many other animals on which to gnaw.

So, thanks for indulging me, and allowing me to explain how 24 seconds can turn into the equivalent of an eternity in financial hell.

Dow 10,174.41, -39.21 (0.38%)
NASDAQ 2,159.63, -20.13 (0.92%)
S&P 500 1,067.36, -4.33 (0.40%)
NYSE Composite 6,784.97, -28.18 (0.41%)

On the day, decliners took advantage over advancing issues, 3902-1826, though new highs exceeded new lows, 263-216.

NASDAQ Volume 1,722,462,250
NYSE Volume 3,477,778,250

Commodities continued to trend lower, especially in the energy space, where crude oil for September delivery slipped another 72 cents, to $73.10. The metals were little changed. Gold fell 40 cents, to $1,226.90, and silver was unchanged at $17.98.

Things are grinding to a halt almost everywhere, but we'll find out just how quickly with some economic data this week. Existing home sales figures for July will be released tomorrow, new home sales and durable goods on Wednesday, initial claims on Thursday and finally, the government's second estimate on GDP for the second quarter on Friday, along with the University of Michigan's Consumer Sentiment Index. It ought to be a fascinating, though slow-trading volume week.

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