SEC Can’t Regulate The Super Rich Traders/Bankers Anymore

I got seriously sidetracked this month due to all sorts of personal reasons but finally, it is time to chime in on the SEC report about the big stock market plunge that happened over a year ago on May 6, 2010.  The Inevitable Black Swan Stock Market Failure | Culture of Life News is my original story the day the plunge happened.  It seems that this event was, as I figured, an accident waiting to happen.  The system has been keyed up to such a high speed, to operate via computers at the speed of light, when it tried to stop something, it can’t.  The brakes exist by are too slow compared to the speed of out of control trading.

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This is a technology problem that responds all too quickly to human errors. Ever since stock markets first opened in taverns where people got drunk, trading has had a very strong whiff of drunkenness which includes brawling and crying and getting lost under the table.  It has never, ever been a sober operation in nature.  Even if today’s traders don’t drink on the job (a quick look at all the bars near the exchanges and offices of traders tells us otherwise) they act drunk, call this, a not-so-dry drunk.

All betting games and gambling is regulated by governments if there are contracts to be honored.  Otherwise, it is ‘illegal’ in that there are no enforceable contracts, then it is ‘Mafia’ time where there is street enforcement through physical intimidation.  The stock market decided, long ago, to make itself legal so this means, it has to be regulated.

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The gamblers hate being regulated.  So they have this ‘pick and choose’ mentality about trade rules whereby they try to either evade or bribe politicians to change or remove regulations so they can do whatever drunken, wild things they desire. The #1 rule is, ‘Does this make me (and ONLY ME) richer?’  There is no heed for any consequences beyond one’s own accumulation of wealth.  Now, this is all and good up to a point: when stock trades destroy an economy, wreck everything in sight, it has to be stopped or controlled in some way.

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Now, the theology of trading is simple: the market sets prices correctly and is a great regulator all by itself.  This is utterly false.  As the US traders played their drunken games, they pretty much wrecked our entire economic system.  They destroyed our industrial base, they ruined our banking systems, they flooded the US with imports and refused to pay taxes.  So now we are going into debt, our country went from the #1 sovereign wealth nation in 1965 to dead last in the rankings behind every single third world country in 2011.

 

Here is the SEC report about the May 6th stock crash event:  http://www.sec.gov/news/studies/2010/marketevents-report.pdf

FINDINGS REGARDING THE MARKET EVENTS OF MAY 6, 2010

.REPORT OF THE STAFFS OF THE CFTC AND SEC TO THE JOINT ADVISORY COMMITTEE ON EMERGING REGULATORY ISSUESWHAT HAPPENED?

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May 6 started as an unusually turbulent day for the markets. As discussed in more detail in the Preliminary Report, trading in the U.S opened to unsettling political and economic news from overseas concerning the European debt crisis. As a result, premiums rose for buying protection against default by the Greek government on their sovereign debt. At about 1 p.m., the Euro began a sharp decline against both the U.S Dollar and Japanese Yen.

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Around 1:00 p.m., broadly negative market sentiment was already affecting an increase in the price volatility of some individual securities. At that time, the number of volatility pauses, also known as Liquidity Replenishment Points (“LRPs”), triggered on the New York Stock Exchange (“NYSE”) in individual equities listed and traded on that exchange began to substantially increase above average levels.

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By 2:30 p.m., the S&P 500 volatility index (“VIX”) was up 22.5 percent from the opening level, yields of ten-year Treasuries fell as investors engaged in a “flight to quality,” and selling pressure had pushed the Dow Jones Industrial Average (“DJIA”) down about 2.5%.

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Furthermore, buy-side liquidity in the E-Mini S&P 500 futures contracts (the “E-Mini”), as well as the S&P 500 SPDR exchange traded fund (“SPY”), the two most active stock index instruments traded in electronic futures and equity markets, had fallen from the early-morning level of nearly $6 billion dollars to $2.65 billion (representing a 55% decline) for the E-Miniand from the early-morning level of about $275 million to $220 million (a 20% decline) for SPY.

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At 2:32 p.m., against this backdrop of unusually high volatility and thinning liquidity, a large fundamental5 trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E- Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position.

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Generally, a customer has a number of alternatives as to how to execute a large trade. First, a customer may choose to engage an intermediary, who would, in turn, execute a block trade or manage the position. Second, a customer may choose to manually enter orders into the market. Third, a customer can execute a trade via an automated execution algorithm, which can meet the customer’s needs by taking price, time or volume into consideration. Effectively, a customer must make a choice as to how much human judgment is involved while executing a trade.

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This large fundamental trader chose to execute this sell program via an automated execution algorithm (“Sell Algorithm”) that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time.

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The execution of this sell program resulted in the largest net change in daily position of any trader in the E-Mini since the beginning of the year (from January 1, 2010 through May 6, 2010). Only two single-day sell programs of equal or larger size – one of which was by the same large fundamental trader – were executed in the E-Mini in the 12 months prior to May 6. When executing the previous sell program, this large fundamental trader utilized a combination of manual trading entered over the course of a day and several automated execution algorithms which took into account price, time, and volume. On that occasion it took more than 5 hours for this large trader to execute the first 75,000 contracts of a large sell program.

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However, on May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes.

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Here is my next day report from May 7, 2010, discussing what possibly happened.  I surmised, correctly, that speed had everything to do with this crash and that it was generated by a big trader which the SEC doesn’t name (sheesh!):  Citigroup Trader Computer Command Caused Collapse | Culture of Life News

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Now we have a bit of an idea, what caused the sudden catastrophic plunge in the US stock market, one that proved very contagious across the entire planet: a Citigroup trader typed in a ‘b’ instead of an ‘m’ when writing an order so a billion trades briefly was shown instead of millions of trades in Procter and Gamble stocks. Now, this isn’t totally confirmed yet and of course, Citigroup and the Chicago Mercantile Exchange both deny this caused the crash.

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Alas, the SEC won’t confirm if it is this specific trader!  The nervousness in the markets was due to this being a very dangerous time what with bankers demanding all citizens pay for the banking crash while they continue sucking down giant bonuses and living high off the darn hog.  They were all quite nervous about the results of the Federal Reserve bailing out all of Europe as well as the US banking systems.  This nervousness passed quickly, though, and they resumed normal actions, later.  Now, they are in yet another panic due to the collapse of the European sovereign debt system.

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All of this is happening in a system that has a hair trigger setting and runs at an insane speed.  We see what happens when stupid people do dumb things in this week’s Indy smashup in Las Vegas, the land of the drunken, foolish gamblers:  Indycar Crash at Las Vegas Speedway 2011 ~ R.I.P. Dan Wheldon – YouTube

Evidently, they let too many cars race on this track.  They were all jammed together, of course.  Moving at a very high speed, they jostled for positions, each greedy for the ‘inside track’ which is a term traders use for exclusive information coupled with access to the highest speed equipment for trading.  Mere outsiders have no chance of staying ahead of the professional card sharks!

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The racers, jammed hopelessly together had only ONE SOLUTION: all drive at the same speed and collectively slow down.  Instead, they DROVE FASTER and jostled each other to obtain the ‘inside track’.  One driver slowed down.  Suddenly, everyone was crashing into each other.  Even if they were well behind and could see the catastrophe unfolding, they were helpless for they couldn’t swerve or stop fast enough and if they swerved, they would then crash, anyway.

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Race car drivers die with depressing frequency.  They have to be reckless to win.  But this makes it more and more likely, they will die.  They still do this because it is fun and makes them all feel quite macho.  The audience comes, hoping for a crash.  You can bet, the people watching this chariot race were very excited and told everyone they knew, they saw the crashes.  Stock markets crash.  The same language for races and the stock markets, all the betting lingo, all the rituals of gambling games is the basis for the stock market’s theology, technical actions and philosophy.

One thing is certain: they will drive stocks faster and faster until the entire thing crashes.  They hate static or slow systems.  They want the highs, the rushes, the feelings of excitement.  The sexual energy.   Here is the sober SEC discussing all of this:  www.sec.gov/news/studies/2010/marketevents-report.pdf

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This large Fundamental Seller chose to execute this sell program via an automated execution algorithm (“Sell Algorithm”) that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time.

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The execution of this sell program resulted in the largest net change in daily position of any trader in the E-Mini since the beginning of the year (from January 1, 2010 through May 6, 2010). Only two single-day sell programs of equal or larger size – one of which was by the same large Fundamental Seller – were executed in the E-Mini in the 12 months prior to May 6. When executing the previous sell program, this large Fundamental Seller utilized a combination of manual trading entered over the course of a day and several automated execution algorithms which took into account price, time, and volume. On that occasion it took more than 5 hours for this large trader to execute the first 75,000 contracts of a large sell program. 

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However, on May 6, when markets were already under stress, the Sell Algorithm chosen by the large Fundamental Seller to only target trading volume, and not price nor time, executed the sell program extremely rapidly in just 20 minutes. 

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HFTs (High Frequency Traders at Goldman Sachs, etc.) and Intermediaries were the likely buyers of the initial batch of orders submitted by the Sell Algorithm, and, as a result, these buyers built up temporary long positions. Specifically, HFTs accumulated a net long position of about 3,300 contracts. HFTs, therefore, initially provided liquidity to the market.

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However, between 2:41 p.m. and 2:44 p.m., HFTs aggressively sold about 2,000 E-Mini contracts in order to reduce their temporary long positions. Thus, at this time, HFTs stopped providing liquidity and instead began to take liquidity. At this time, HFTs were competing with the large Fundamental Seller for the liquidity expected to be provided by Fundamental Buyers who would hold their positions, or by Opportunistic Buyers who would trade based on their ability to hedge their positions in the equity markets.

.At the same time, HFTs traded nearly 140,000 E-Mini contracts or over 33% of the total trading volume. This is consistent with the HFTs’ typical practice of trading a very large number of contracts, but not accumulating an aggregate inventory beyond three to four thousand contracts in either direction.

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The Sell Algorithm used by the large Fundamental Seller responded to the increased volume by increasing the rate at which it was feeding the orders into the market, even though orders that it already sent to the market were arguably not yet fully absorbed by fundamental buyers or cross-market arbitrageurs. In fact, especially in times of significant volatility high trading volume is not a reliable indicator of market liquidity.

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In a day of very negative market sentiment and high volatility, the combined selling pressure from the Sell Algorithm, HFTs and other traders drove the price of the E-Mini down approximately 3% in just four minutes from the beginning of 2:41 p.m. through the end of 2:44 p.m.

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The big question here for me is, why do these human-created trading systems that are gambling operations, so beholden to Laws of Nature?  This is fundamental to all understanding of systems and how one can analyze these systems.  That is, much of what passes for intellectual activities about the stock market systems is actually attempts at suspending the Laws of Nature or speeding up events so they flash by so fast, only the people with the most employees, the fastest computers and the biggest operations can cope with it and be ahead of it.

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But the basic Law of Nature are the rock which destroys these speedy systems.  That is, there is always ‘gravity’ and ’cause and effect’ and ‘evolution’ as well as the ‘speed of light’ and the dynamics of ‘liquids’.  Not to mention good old Lady Luck.

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 Moreover, if there are latencies in transmitting exchange data to the consolidated data processors, investors who make real-time decisions to buy or sell based on observed prices in the consolidated feeds (as do most individual investors) are likely to find that their orders are not filled in the manner expected, and these investors will be at a disadvantage compared to those making decisions based on proprietary feeds. This is one of the reasons data delays on the consolidated feed should be kept to an absolute minimum.

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Some market participants and firms in the market data business have analyzed the CTS and CQS data delays of May 6, as well as the quoting patterns observed on a variety of other days. It has been hypothesized that these delays are due to a manipulative practice called “quote- stuffing” in which high volumes of quotes are purposely sent to exchanges in order to create data delays that would afford the firm sending these quotes a trading advantage.

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Nevertheless, as discussed in the Executive Summary, the events of May 6 clearly demonstrate the importance of data in today’s world of fully-automated trading strategies and systems. The SEC staff will therefore be working closely with the market centers to help ensure the integrity and reliability of their data processes, especially those that involve the publication of trades and quotes to the consolidated tape. In addition, the SEC staff will be working with the market centers in exploring their members’ trading practices to identify any unintentional or potentially abusive or manipulative conduct that may cause such system delays that inhibit the ability of market participants to engage in a fair and orderly process of price discovery.

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The SEC sounds so secure here!  They will regulate the very same people who control our Federal Reserve, our banking system, Congress, any President no matter which party.  Yup.  They will do what?  Anything?  Obviously, the Big Banking Gnomes of JP Morgan and Goldman Sachs and the others control the value of markets, the speed of trade and the systems doing all of this. They control the controllers.  They have absolute power.  They didn’t like the May 6th crash because they didn’t want it to happen.

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But at the same time, they want to change nothing. They want things to be faster and faster.  They want it to be wilder, not tamer.  The love the fact that they can control ‘liquidity’ and exploit ‘shorts’ so they can ‘float’ their deals without putting up any capital at all or having any regulations or hinderances to fast shorts.  They NEED these ‘fast shorts’ that created ‘their own liquidity’!  They love this system!

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They do not want it to stop at all. They want it to not slosh around so badly as when a trader, who they all know exactly who this is and it is very fey of the SEC to not reveal who this drunk clown really is by name, sheesh.  He is still at large!  We arrest drunk drivers, after all, we even take away the licenses of reckless drivers, too!  And this guy is still in the driver’s seat?

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The SEC noticed a new thing whereby JP Morgan and Goldman Sachs traders and their buddies deliberately flood the market with orders so as to disguise actions or slow it down so they can play shorts even more than usual.  This is abusive and manipulative.  But then, the entire market is now abusive and manipulative, most of the ‘trades’ are merely playing a game of ping-pong bouncing the same deal back and forth at a very high speed in a meaningless way, shaving off profits from high speed temporary liquidity in these ‘micro-shorts’ and this is very profitable and totally useless.

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Naturally, none of the ping pong players want to lose the ball like on May 6th!  No, they want to keep the ball bouncing merrily along, on full auto.  They want it to go on forever, mindlessly, quietly, not noticed by the masses who are only affected by the overall deterioration in their own estates as money magically travels from working systems into this utterly useless gambling operation we call ‘Wall Street.’

sunset borger

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8 Comments

Filed under .money matters

8 responses to “SEC Can’t Regulate The Super Rich Traders/Bankers Anymore

  1. I have a new neighbour, an Icelander fleeing the economic destruction wrought by players like Goldman Sachs.

    There is no doubt that the people will not have their lives wrecked by greedy gnomes playing games to enrich themselves and play power games (like the buying of politicians etc etc etc)

    There is a “happy face” on the protests (OCW) so far, a kind of – let’s do this the civilized way approach – but that approach will not lead anywhere. It is the next phase where people will have hard choices to make.

  2. payAttention

    I don’t want to get into it, to be honest. Mary Schapiro pinned this on Waddel and Reed, which was already a joke an punchline all in one. Like the Reverend Jim Ignatowski from the show Cab, all you had to do was say his hame and it was funny. Then people with a huge tolerance of boring minutae found out that Barclays executed the trade through their proprietary algorhythm, which does not sell at market, meaning that it does not sell at the bid price. This is exacvtly done to avoid from getting burned by another algo that is sniffing for large orders, aka iceberg orders, and chiseling them half to death by flooding the order with fake bid/ask quotes. Of course this is not supposed to happen, but it’s just business. This was a preagganged raid to run at preset limit orders to force the hapless out of their positions, create a fake panic, buy the firesale and then sell back, probably to the same hapless buyers who were sellers the day before. Does this make you want to be an inwestor?

  3. Sharkbabe

    Nice to see some good ol’ EMS cartoons – i especially enjoyed the gnome wearing an “I love me” t-shirt, lol!

  4. Alex Yam

    @Sharkbabe

    Yeah I found this cartoon particularly funny:

  5. emsnews

    I have had to take care of so many medical emergencies, it has been quite hard to do cartoons lately. Had to take my exhusband to the hospital last night and got home at 1:30am, for example.

  6. JimmyJ

    Sad to hear your Hubby was back in hospital, Elaine. Is he ok now?

    ***

    As for why human activities are beholden to nature:

    According to authors such as Julian Barbour and his Platonia, or Max Tegmark and his Mathematical Multiverse, physicists posit a highly structured, complex consortium of realities, most of which we are intuitively unaware (and most of which are currently unobservable).

    Wherever we observe, and often where we predict, whether through advanced physics or simply through our senses, there is a structure to spatial reality. If time and space have structure, then human activities that occur within them must have structure as well. As Tegmark suggests:

    “…we all live in a gigantic mathematical object — one that is more elaborate than a dodecahedron, and probably also more complex than objects with intimidating names like Calabi-Yau manifolds, tensor bundles and Hilbert spaces, which appear in today’s most advanced theories. Everything in our world is purely mathematical — including you. If that is true, then the theory of everything must be purely abstract and mathematical.”

    http://goo.gl/e4rqX

    http://goo.gl/YV0so

    http://goo.gl/OlYsr

  7. JimmyJ

    I guess I need a new glass prescription. I see it was your ex-husband, an ongoing problem if I recall. Sorry.

  8. excellent info. Sickening that we will hear more lies next time another bailout happens…”SEC was asleep at the switch” How stupid and brain dead do politicians think all Americans are…it is enraging.

    Was in a local Barnes and Noble and the empty bookshelves (because the store is practically on verge of bankruptcy ) had a lone copy of the book written by Satan himself. Hank Paulson.

    Very apropos. And yet the media refuses to cover this, ah yes CNN is sponsored by JPMorgan of course.

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