By Pam Martens: August 2, 2012
You would never know it by the tame closing figures on the stock market’s leading indices, but there was another wild algorithm disrupting markets yesterday, leading to trading halts, finger pointing and one stock, Knight Capital Group, losing $330 million in market capitalization.
According to Eric Hunsader at Nanex, a creator and developer of a streaming datafeed that brings trading prices to workstations in real-time, as soon as the stock market opened at 9:30 a.m. “our monitoring software alarms went off on hundreds of symbols. Looking closer at the data, we found many stocks had extremely high trade rates: several stocks sustained more than 100 trades per second.”
Hunsader has become one of the leading authorities on aberrant algorithms that are becoming more and more prevalent in the stock market, causing suspicious trading patterns and stock halts. Coming on the heels of the so-called “flash crash” of May 6, 2010, where the market plunged 998 points in minutes and over a hundred stocks briefly lost as much as 60 percent of their value, the retail investor no longer views the market as a fit place for serious money. Since the flash crash, investors have withdrawn $305 billion from mutual funds and that doesn’t include the billions more in new money they have put outside the reach of high tech bandits.
Hunsader has amazing charts of yesterday’s trading on his web site. Two charts he describes as follows:
“The next 2 charts illustrate trades executions that ping-pong between hitting the ask and hitting the bid. As if someone is buying at the offer and then, almost immediately, selling at the bid, then buying at the offer, then selling at the bid and so forth. It turns out, the gray shading you see in charts above are the zig-zag lines connecting the alternating buy and sell executions. That’s right, almost all these trades alternate between buying at the offer and selling at the bid, which means losing the difference in price. In the case of EXC, that means losing about 15 cents on every pair of trades. Do that 40 times a second, 2400 times a minute, and you now have a system that’s very efficient at burning money.”
Unless you have an even smarter algorithm on a different trading desk. According to sources, some Wall Street trading desks realized profits out of the melee. As The Nation columnist, Alexander Cockburn, wrote just before his death last month, this looks like “a grimy hand all too visible.”
The New York Times today is covering yesterday’s event as a “Black Eye for Wall Street.” If this were one event, it might be a black eye. Two events, a bloodied nose. But it’s becoming a regular occurrence and it’s spelling the death knell for Wall Street. If you don’t have your customer’s confidence, all you have left is some kind of star wars game with competing algorithms fighting it out to the death.
After the May 6, 2010 flash crash, SEC Chair Mary Schapiro made the following remarks to the Economic Club of New York: “A staggering total of more than $2 billion in individual investor stop loss orders is estimated to have been triggered during the half hour between 2:30 and 3 p.m. on May 6. As a hypothetical illustration, if each of those orders were executed at a very conservative estimate of 10 per cent less than the closing price, then those individual investors suffered losses of more than $200 million compared to the closing price on that day.”
Add that $200 million to the still missing $1.6 billion in customer funds at MF Global, $200 million missing at Peregrine Financial, billions missing in the misfired Facebook IPO, $4 trillion lost in the Nasdaq tech bubble that was built on fraudulent Wall Street research, trillions in obscenely low interest rate loans by the Fed to bailout Wall Street, and untold billions ripped off in Libor rigging and we are not talking about glitches (as the Wall Street Journal characterized it today) nor are we talking about black eyes. We are talking about an unscrupulous, uncontrollable, insatiable wealth transfer system that is killing America as regulators shuffle paperwork, give lip service in Congressional testimony, and email messages to the Bank of England.
When the official report from the government on the flash crash was issued in September 2010, it stated: “Detailed analysis of trade and order data revealed that one large internalizer (as a seller) and one large market maker (as a buyer) were party to over 50 per cent of the share volume of broken trades, and for more than half of this volume they were counterparties to each other (i.e., 25 per cent of the broken trade share volume was between this particular seller and buyer).” But the report, amazingly, failed to tell the American public the names of these culprits.
On October 6, 2010, I filed a Freedom of Information Act (FOIA) request with the SEC for the names of these parties. Three weeks later the SEC told me that they would not release that information.
So I ask you, is there any reason for the little guy to have confidence in these markets?