Markets in the US and no doubt elsewhere are being rigged. There will be a cost to this undermining of a core feature of our economic system. The longer it is allowed to continue, the greater the cost will be.
Most recent possible example courtesy of the The Daily Reckoning :
“You may not have heard about it, but there was another flash crash. Apparently a software glitch caused the S&P 500 ETF to trade 10% cheaper for a couple of seconds. US$ 7.9 billion in value disappeared and then reappeared when the trades were cancelled.
Yes, automated trading systems are only allowed to make a profit. When they make a loss, the trades are cancelled. Check with your broker for similar arrangements.”
I guess that’s why this is so profitable:
“70% of trading volume on the major exchanges is conducted by high-frequency traders who hold a stock for an average of 11 seconds.”
There were some great comments about such a short duration for holding stocks:
Bobh says: “These guys are just efficiently allocating investment capital. They just change their minds very quickly about which companies are well-managed and are likely to produce increased future earnings.
Seriously, is there any way that this practice and the relentless extraction of wealth from the system, from real investors and from companies that might use investment capital to create additional wealth and jobs is not a bad thing? Can anyone point to any economic service that these people perform in terms of adding value? It would be so easy to regulate this practice out of existence, that its continuation seems only attributable to political corruption.”
Hugh says: “The predominance of HFT is the clearest evidence that the markets are rigged. Only a fool wanting to be parted from their money would enter into such a stacked arrangement. Such trading also cuts any connection to traditional market signals. This is why a bad jobs report or trouble in China or Europe or foreclosuregate has little or no effect on markets and that markets can rise despite them.
It is still a casino but it is one where the dice have been shaved, the cards marked, and the wheels weighted. It is a place where there are only fleecers and the fleeced.”
To which Doug Terpstra adds:
” …and the casino has a giant counterfeiting press in the basement with printer named Ben feeding the primary dealers at the tables. Heads the house wins; tails the players lose.”
Even were this instance to prove warranted, there appears to be something is rotten in the state of Denmark. Karl Denninger’s has been all over the perversion of the stock market with comments such as this one , in which he explains why the cancel to execute rate for orders has gone from 10:1 to 30:1 over the last ten years.
Apparently high frequency traders place tens of orders that they are not sure they want to have execute or not. If the price moves in a way they deem “disadvantageous” suddenly most of the shares in line for sale will disappear. Small retail investor such as you and I cannot react fast enough to do this. But computer can and do. Karl points out the obvious implications of this:
“The stock market does not exist in its primary purpose to be a gambling casino. Its social purpose is to provide for capital formation and price discovery. When the vast majority of all transactions are in fact computers trying to game one another for a split-second that fundamental purpose has been lost and the field of play has turned into nothing other than an arena for a vast technological arms race.
Both corporations and investors have been sc***ed blind by the transition of the market from a place to raise capital and discover price into one that focuses instead of the skimming of fractions of a cent from the other players – that is, the essential functionality of the “House” in a gambling casino!” (My editing of the expletive)
The complete post provides a simple solution to the problem. For other examples of market rigging, read this, this and this. Unfortunately Karl has a “potty pen” and his histrionics can be a bit much. But over the last few years he has been well ahead of the game in revealing the truth of what is happening in the USA.
Taleb tells a marvelous analogy of a street smart person and an academic being asked what the probability of the next toss giving a head if a fair coin has been tossed 100 times and came up heads on each. The academic replies around 50% and the other person says around 99%. He does not believe the coin is fair and the toss not rigged. With that in mind, read this.
Let’s add the stock market to the list of cultural intangibles being undermined – accounting standards, the rule of law, property. Talk about wrecking your cultural inheritance. Like the justice system, free market exchange does not just have to be fair. It has to be seen to be fair. With bailouts followed by bonuses and government endorsing or actively participating in the rigging of markets there will be a crisis of legitimacy.
President Hoover put it succinctly in his memoirs:
“It was difficult for the public to believe that such griefs and tragedies lay hidden in so obscure a process as credit inflation when forced on an already optimistic people. It set the stage for wicked manipulations and promotions of stocks. Its collapse brought hunger and despair to millions of homes. It destroyed the savings of millions of families. It also furnished ammunition to radicals for attacks on the whole American system. The exhibition of waste, fraud, and greed which flowed from this artificial credit inflation appears in their literature as a typical phenomenon of our free civilization; whereas it was the exception.
There are crimes far worse than murder for which men should be reviled and punished”
The “70% of trading volume on the major exchanges is conducted by high-frequency traders who hold a stock for an average of 11 seconds.” is almost certainly incorrect:
Conclusion: The 11 second number is wrong. There is no data supporting that. Estimates of HFT of 70% of trade volume are just that — estimates — and we have no evidenciary proof or data that HFT trade volumes are 70% . . .
Update: O’Shaughnessy writes back “That’s an estimate I put together by speaking with various industry”
He adds: “HFTs are the new market makers, which puts them on essentially one side of all exchange trading. Exchange trading is around 70% of all trading activity, so that gets them to 35% share. Then you have a lot of exchange trades where the hft algos trade against each other, plus hfts do a lot of dark pool trading too. 70% may be a bit high but I would wager it is easily 50%.”
The exact figure is largely irrelevant as long as it is significant. From this flows the artificiality of stock market prices and the skewering of the market against retail investors. The destruction of the rule of law is being evidenced in the foreclosure crisis. The crisis is also undermining certainty of title.
Our culture is incompatible with the practices manifesting themselves in the USA. Either it returns to something truer to its history or becomes something quite different. If not a banana Republic, then perhaps an oil or finance one. Whatever vested interest pulls the strings, the destruction of the middle class will continue apace. Society as a whole will continue to be looted for the benefit of the politically connected.