(10 am. – promoted by ek hornbeck)
In case you missed it the stock market lost about a 1000 points a few days ago — all in a matter of minutes.
It was in “free fall” — market traders were bailing left and right.
With the Greek Euro Debt crisis, serving as a back-drop — Stock Prices in rapid decline, was the last thing Institutional Fund managers wanted to see. Kind of makes you want to sell ‘before it’s too late’ too.
Many of them did.
But then almost magically, the stock market fall slowed, paused, and then begun a similarly rapid return. The bungee chord dynamic, reached its limit — and thankful — rebounded. If someone were to catch this bungee chord fall and rise while trading on with a broker like IronFX or others they could have potentially made a lot of money.
But what if next time, the Market gets spooked like that, and goes into a cascade of frenzied selling … what if the next time …
It just keeps falling ? say goodbye to those 401k and Pension funds [if you haven’t already, that is].
So what was really behind the the Market Thrill seeking dynamic? I seems to be a lot of combined things, but the one common factor to them all was something call “automated programmed trading”.
The majority of those free falling trades were being placed by computer programs, on auto-pilot. Extremely fast, and semi-intelligent computer programs.
Hello ‘Skynet’, your day, of ruling the electronic world, may have finally arrived.
Feds trace flash crash to Chicago
By EAMON JAVERS – 5/7/10
Federal investigators probing the “flash crash” that briefly sliced nearly 1,000 points off the Dow Thursday are zeroing in on a series of “unusually high-volume” trades in S&P futures that originated in Chicago, a government official told POLITICO
According to the government official, investigators have traced the calamity back to the trades in Chicago, which were picked up by automated trading computers in New York. The New York computers in turn issued a series of sell orders, which had a cascading effect on the Dow as even more programs picked up on the trading and issued their own sell orders.
When the New York Stock Exchange slowed down its computerized trading in response to the sell-off, sellers turned to other exchanges. That increased volatility in the markets was in turn picked up by computerized algorithms, which executed even more sell orders.
The decision by the NYSE to slow down trading Thursday has set off a furious debate between the exchanges over what would have been the right course of action in response to the market drop.
And the breathtaking 1,000-point drop has also heightened calls to regulate so-called high frequency trading, in which buyers and sellers use ultrafast computers to trade in and out of stocks in fractions of a second. Critics say such lightning-quick trading increases volatility in the market and can make a sell-off much worse in a crisis.
High frequency trading (HFT) places a buy or sell order, for 10,000’s of shares, in the span of a few Micro-seconds.
And then they do it again , in the next few Micro-seconds. … and again and again.
Now multiply that by the 1000’s of Hedge Funds, and the Wall Street brokers, all with their multiple computers, all furiously trading — all trying to ‘out game’ each other, for those tiny slivers of a cent, in profits.
It’s a wonder all those semi-intelligent trading programs DID NOT trade the Stock Market into oblivion. Thankfully, some fail-safe worked, somewhere. Machine or Human? No one knows.
Thankfully that tread-bare Bungee Chord, held. This time.
SO Why do they allow these micro-second trading wars between computers to continue (much of it with Other People’s Money) ?
Two words: Easy Profits.
Computerized Front Running and Financial Fraud
Ellen Brown, Web of Debt — 22 Apr 2010
While the SEC is busy investigating Goldman Sachs, it might want to look into another Goldman-dominated fraud: computerized front running using high-frequency trading programs.
[Max Keiser’s] patented program was designed to take the manipulation out of markets. It would do this by matching buyers with sellers automatically, eliminating “front running” – brokers buying or selling ahead of large orders coming in from their clients. The computer program was intended to remove the conflict of interest that exists when brokers who match buyers with sellers are also selling from their own accounts. But the program fell into the wrong hands and became the prototype for automated trading programs that actually facilitate front running.
Also called High Frequency Trading (HFT) or “black box trading,” automated program trading uses high-speed computers governed by complex algorithms (instructions to the computer) to analyze data and transact orders in massive quantities at very high speeds. Like the poker player peeking in a mirror to see his opponent’s cards, HFT allows the program trader to peek at major incoming orders and jump in front of them to skim profits off the top. And these large institutional orders are our money — our pension funds, mutual funds, and 401Ks.
When “market making” (matching buyers with sellers) was done strictly by human brokers on the floor of the stock exchange, manipulations and front running were considered an acceptable (if morally dubious) price to pay for continuously “liquid” markets. But front running by computer, using complex trading programs, is an entirely different species of fraud. A minor flaw in the system has morphed into a monster.
Flash Trades: How the Game Is Rigged
An integral component of computerized front running is a dubious practice called “flash trades.” Flash orders are permitted by a regulatory loophole that allows exchanges to show orders to some traders ahead of others for a fee.
So some Wall Street Players can “see their opponent’s Cards” ahead of time, just by paying a fee? Watch out on that day your Pension Fund manager, decides to “diversify” your retirement fund.
Talk about ‘broadcasting’ your intentions … talk about tipping your hand.
Watch out the next time you try to cash in your meager stock holdings (if you are so lucky). You will be trading in “regular human time”. While the Wall Street insiders, paying a fee, will be “trading in super human time” with a full view of your intentions, (or the intentions of your Mutual Fund Manager, Municipal Fund Manager, etc.).
How DO they get away with this?
Two words: No Disincentives.
Financial Markets Computerized Front Running Using High Frequency Trading Programs and Fraud
Politics / Market Manipulation
By: Ellen_Brown — Apr 24, 2010
So what can be done to restore free and fair markets? A step in the right direction would be to prohibit flash trades. The SEC is proposing such rules, but they haven’t been effected yet.
Another proposed check on HFT is a Tobin tax – a very small tax on every financial trade. Proposals for the tax range from .005% to 1%, so small that it would hardly be felt by legitimate “buy and hold” investors, but high enough to kill HFT, which skims a very tiny profit from a huge number of trades.
That is what proponents contend, but a tiny tax might not actually be enough to kill HFT.
Sounds reasonable — A Micro Tax for each Micro Trade.
A little sticky tape, wound tight, to get rid of some of that Bungee Chord, elasticity. What could go wrong with that little “braking system”?
Two words: Paid Lobbyists.
Hold on tight, to those 401k statements, American workers.
It’s going to be a Hair-raising ride, before WE ever get a chance to cash them in —
and that is, IF some computerized trading glitch, by those lightning-reflexes, Skynet Computers, DOESN’T manage to FIRST plunge the stock market, all the way to DOWN TO ZERO —
Afterall, there exists Multitudes of Computer-time EONS, between Now and that fabled Retirement, on Golden Pond, many years from now.
Good Luck — we’re gonna need it!