Posted by Karl Denninger
Shall we talk about RISK the markets and in particular high-frequency trading and direct-exchange connected computers?
What started this? Right here:
That trade appears to be what set it off.
Here’s the problem: As soon as that hit the DOW it dropped the index hard. The response in the computers connected directly to the exchanges was instantaneous and produced this:
Computer-triggered and the result was a more than 1,000 point selloff, about half it organic and the rest on a bid-collapse driven entirely by the HFT computers that took less than a minute.
No, that’s not the ONLY oddity. There were plenty of wild moves in both option premia and the FX just before it all went down the toilet – but the computer trading systems, with no humans actually feeding them orders – that is, autonomous robots – did exactly what they were programmed to do.
There is absolutely no protection against this sort of thing in the market for the average investor, or anyone other than the HFT boys. Stops don’t work as there’s “no bid” during these events – there was LITERALLY no bid in the futures for about 30 seconds, then no offer on the way back up.
This sort of thing has to be stopped.
This was not humans – it was pure computer algorithm trading. If you had stops set, you got blown out way below any reasonable trading range with no recourse. Margin requirements were raised instantly on futures which sure didn’t help.
This was basically the 1987 program-trading crash powered by the fastest CPUs money can buy, and points out that these systems do not have social utility and at times like this they are unbelievably destructive.
The banks and others who have argued for innovation have just proved once again that their brand of “innovation” means that the average investor gets bent over the table. You cannot, as an investor, be in the market until these outrageous practices are permanently barred from the exchanges.
I was on the right side of the destruction today, but I could have very easily been on the wrong side and gotten badly hurt. As it stands I’m quite certain there were tens of thousands of individual traders who went so far into negative equity in the futures market and got immediately liquidated that we will be hearing of blown up accounts and bankrupted traders for weeks if not months.
To those who say that we have “restored confidence” in the markets and “the worst is beyond us”, I want everyone to remember very carefully the early 2007 market collapse that originated in Asia and came over here – the event that began my writing of The Ticker.
When governments tamper with markets as has been done over the last year and change to the point that true liquidity leaves and is replaced by computer-driven volume, this is what happens as there is NO UNDERLYING BID.
VOLUME IS NOT LIQUIDITY. Liquidity creates volume but not the other way around. We have deluded ourselves into believing that a handful of major banks passing shares between each other funded with zero percent loans equals “liquidity.”
IT DOES NOT.
This is the harbringer of more trouble to come, it is not over, and I have been warning people all through the so-called “new bull market” that this sort of event – and likely more than one – was coming as a direct consequence of the destruction of true liquidity and it’s replacement with BS and games.
It was simply a matter of when.
Bernanke, Geithner and Obama have failed to restore confidence – in fact all they’ve done is put in front of the big banks a near-unlimited amount of money to game the system with and game it they have – right up until you had your stops run today and got screwed once again.
Say thanks to your elected and appointed officials who have taken their bows for something that, just as with “Mission Accomplished”, has turned out to be one gigantic lie.
PS: Tickerforum remained up during the entire event, although it recorded the highest load-average and page-count spike ever seen, including during the depths of the 2008/2009 hell.