The Ponzi Market Explains the Flash Crash
Although he doesn't specifically address the flash crash, Dan Norcini's insightful commentary on the unsavory structure of today's equity markets speaks volumes on the source of such an event and further events to follow.
Here is a perfect example of what has gone wrong with our financial markets and why they are becoming irreparably destroyed as an indicator of true value. As I have said repeatedly, the influx of hedge fund money under the control of black box algorithms instead of providing liquidity as they falsely claim is actually working to undermine the integrity of our financial markets.
We no longer have a venue where buyers and sellers meet to determine “value” but rather where computers push prices in attempts to generate price movement so that they can create profits out of that movement based on their ability to fire off a series of rapid fire Buy or Sell orders. This has absolutely nothing to do with balancing the forces of supply and demand and everything to do with separating the investing or trading public from their capital who are the minnows swimming in this sea of unethical and unprincipled sharks.
High-Speed Washing Under Scrutiny In Futures Mkt
Wed Jul 14 14:54:43 2010 EDT
1854 GMT [Dow Jones] Regulators are trying to get a handle on how to make sure electronic trading firms aren’t trading with themselves. At CFTC roundtable on market technology issues, FIA officials warn that trading firms running multiple algorithms sometimes end up unintentionally hitting their own orders, and while exchanges like CME Group (CME) and IntercontinentalExchange (ICE) have made efforts to identify such issues, it’s an ongoing process. Rules around wash trades — riskless transactions that are prohibited in US mkts — may have to be clarified, according to FIA.
Also, see my July 2009 post on the inherent inequality of the equity marketplace since the introduction of sophisticated, high-speed computerized trading platforms.
And my May 2010 post on the flash crash:
You want to talk financial reform? It doesn't even begin until algorithm-led supercomputers are systematically extracted from trading activity. How about ensuring that our equity markets actually function as a pricing mechanism? Wouldn't THAT be nice!?!
Not to mention the massive overhaul of accounting standards required to place the interests of shareholders ahead of those of the corporation:
The gold price action this morning and yesterday morning are a pair of identical twins. Strong movement into the market open above $1,215, followed by a telltale abrupt sell-off dropping prices back beneath $1,210. Theses are not huge moves, but honest regulators will be the first to tell you that identical intraday trading patterns are the surest signs of a manipulated market. Those who follow gold and silver's price moves on a daily basis as I have for the past 5+ years will no doubt be well versed in these recognizeable intraday patterns that are the unmistakable signatures of the unscrupulous, price-suppressing bullion banks.
Lies, obfuscation, fraud, manipulation, malfeasance, and opacity are present in every corner of this investment landscape: Governments, financial behemoths, corporations, hedge funds, media, etc. Under the circumstances, the odds of success are stacked against the retail investor to a completely unacceptable degree ... and incredibly I encounter very little outrage among investors ... or perhaps it's merely a viral apathy.
The whole situation leaves a nasty taste in my mouth. I hope wisdom and fairness will once again prevail in this country/world ... they each appear to be in limited supply at the moment.