If phrases such as "free markets" and "level playing field" resonate with you, you might want to dig a little into deeper into the hows, whys, and what-fors of the big stock exchanges. It seems that while a whole generation of offspring of "The Greatest Generation" were growing up, a few were intent on turning those exchanges into the equivalent of Las Vegas slots or roulette, a guaranteed losing proposition for most "investors" (chumps).
In the early days of the Wall Street trend to involve Main Street in investing in stocks (playing the market), access to the market was not the simple matter it is today. The easy money was made by brokers (salesmen) of all stripes for facilitating individual stock trade transactions. Over time, brokers morphed into "advisors" (salesmen) whose advice was designed to channel investors (chumps) money into products with the highest sales commissions. While the advent of computerized trading did lower transaction costs, flash trading and front running allowed the firms with the best computers and programmers to skim a steady percentage of all transactions without a visible charge on the customer's bill.
Flashing trading and front running are not the same, but they both have essentially the same effect. They give the big financial players the edge of being able to look at your cards before they place their bets. Even more alarming, according to some who know the capabilities of these high speed trading programs programs, they are capable of doing more than skimming a few pennies from each of millions of transactions. Supposedly, the big players can manipulate individual stocks and whole markets up and down or engineer sharp crashes and reversals.
That last point is worth elaborating upon. Suppose you are the type who is naturally skeptical of claims that Wall Street is capable of using its high speed trading programs to manipulate the broad stock market averages, and you begin to tune out at the mere mention of the "Plunge Prevention Team". Consider this, by various accounts high speed trading makes up 50-75% of ALL trading on the major exchanges. Does that suggest it is at least, possible?
Now, let's examine a number of possible explanations for the recent minutes-long 1,000 point plunge in the DOW. Mainstream media immediately seized upon the notion that a "fat fingered" trade was responsible, meaning that at least in concept if not in exact detail, someone might have erroneously entered a sell order of a billion of something instead of a million. That idea has been discounted lately, no such fat fingered trade being found. A few large stock sell orders, a large E-mini futures trade, and an anomaly in the Japanese currency market have been identified, but apparently all of these were parts of legitimate trading or hedging activities.
So, a fat fingered trade did not trigger the plunge. Other explanations offered are that current high speed computer trading algorithms are so prevalent and so twitchy that a few large legitimate trades can crash the market in minutes, or a few large high speed computer traders are so influential that they can plan and execute a market take-down whenever they want. Right now, the buzz seems to be all about the first explanation, and discussion revolves around ways to implement additional market "safeguards" to prevent this from happening again, as if the plunge was similar to a car accident, and what the stock market exchanges really need are more "seat belts" and "air bags".
Here's where this gets good, or at least I think so. What's the difference between a few well placed trades crashing the market because high speed trading makes the market twitchy and a few large high speed traders being able to crash the market? Isn't the glaringly obvious plain fact really this, that Mr. Market has just demonstrated beyond a shadow of a doubt that high speed computer trading is responsible for an unprecedented high speed plunge and recovery? If high speed trading CAN do this, even if this incident occurred by accident, hasn't the capability to do this by design just been proven? And, if it CAN be done, do you really think no large high speed trader, such as Goldman would dare do it? Haven't the Goldman leadership already proven they have balls the size of planets?
OK, OK, you just cannot bring yourself to believe the broad market averages are being manipulated. The 1,000 point plunge is and always will be simply an "accident" or an "anomaly" in your mind, an "accident" of some kind. What would be the cause of the worst possible stock market accident you can imagine? Suppose the $700 trillion derivatives market "blows-up" suddenly, whatever that means. I think it means a large move in currency or bond markets causes a number of BIG derivative contract defaults, and because there isn't enough money in the world for counter-parties to pay off in such an event, a series of cascading defaults would occur.
Do you really think you can trade more intelligently and nimbly than Goldman Sachs high speed trading programs and get out of the way of such a disaster before Goldman does? That idea triggered a memory in my engineer's mind, that instead of trying to calibrate a model of a dynamic system by direct calculation, it can be far easier and more accurate to simply shock it and record how it reacts. Did Goldman or some other big trader simply ping the system by pulling or delaying thousands of buy orders across the board and initiating that 1,000 point drop in order to calibrate their trading programs? If so, could the timing have possibly been any better, when Congress was meeting concerning the Goldman Sachs investigation and Fed audit bill? Could this have been both a test of the market and a threat to Congress?
Read the claims and judge for yourself whether they are credible or not. If they are, do you really wish to play poker with players who can peek at your cards or determine in advance the cards you will be dealt? If so, you might do well to go to Las Vegas instead. At least there you will score free drinks while throwing away your money.
Wall Street and the World of Flash Stock Trades, by Ned Potter, July 29, 2009
Front Running, Wikipedia
Computerized Front Running: Another Goldman-Dominated Fraud, by Ellen Brown, April 21, 2010
Computers, Not Human Error, Likely Caused Market Meltdown, CNBC, May 07, 2010
Surge of Computer Selling After Apparent Glitch Sends Stocks Plunging, by Nelson Schwartz and Louise Story, May 6, 2010
Stock Market Time Bomb?, by Arnaud deBorchgrave, May 10, 2010
High Frequency Terrorism: How the Big Banks and Federal Reserve Maintained Their Death Grip Over the United States, by David DeGraw & Max Keiser, May 11, 2010
The May 6 Stock Market Crash Revisited, by Pam Martens, May 12, 2010
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