One Defining Moment of 2010 - May 6, 2010

It was the day of the Flash Crash. I was sitting in front of the computer, trading. Dow was down something like 400, slowly grinding downward all day. And all of a sudden the floor dropped. I thought a nuclear war must have broken out somewhere. Thank you algo bots for the scare much bigger than when Lehman Brothers went down. Back then, we knew what had happened (Lehman went bankrupt). But in May 6, there was absolutely no news that could have triggered the drop. I didn't feel any sense of someone, something, buying to support the market. None.

That particular date and time, the Senate was debating Bernie Sanders' bill on auditing the Federal Reserve. The Flash Crash clearly scared the s--t out of the Senators including Mr. Sanders, who opted for a much weakened version of the bill. That was convenient for the banksters, wasn't it? In addition, it was particularly good for the High Frequency traders who had gone short the week before and were doubling down on shorts that week.

Then, just as fast a Flash Dash happened, taking the indices back up very rapidly. No rhyme nor reason, both ways, that the carbon-based life-forms could comprehend. Many small retail investors couldn't access their accounts. I couldn't, though I wanted to buy. That's when I finally thought enough was enough, screw this. This ain't no market any more, where information is exchanged to assess the value of a company and allocate capital accordingly. The market is totally controlled by the algo bots, and they are used to bring about the desired outcome for the powers that be.

The Flash Crash of May 6, 2010 showed all who cared to see what a sham the whole edifice of capital markets had become.

For the record, this is a recording of the S&P500 pits that day, that moment. It was linked at Zero Hedge.

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Huge Inflow into SPY on May 6 'Flash Crash' and the Day After

So reports Zero Hedge, citing Bank of America comment.

Presenting What Could Be The Oddest Capital Flow Observation In History (Tyler Durden, 5/23/2010 Zero Hedge)

It is no secret that the last few weeks saw massive liquidations along all asset classes. The result was a huge outflow across almost all products: Loans, HY Bonds, Municipals, Commodities... all a typical reaction to broad based liquidations. However, note we said "almost" - one class that actually posted a $6.2 billion inflow was equities. Yet not is all as it seems: peeking underneath the hood indicates that the bulk of this inflow, or $10.3 billion, had to do with inflow into ETFs... or rather, just one ETF - the SPY, accounting for $10.1 billion. Did someone prop up the entire equity market last week by massively pushing capital into the most liquid equity proxy available?

The plot thickens: as Bank of America points out: "The number of SPY's shares outstanding rose by 5.3% on Thursday and Friday of last week (May 6-7th), at the time when S&P 500 was trading lower on both days." BofA asks: "The question then becomes if this large intake into SPY was a part of the rogue trade that took place on Thursday, May 6th, or was it part of bona-fide rush by investors to buy equities at their lows...This suggests to us that the inflow into SPY, and by extent the overall equity category, was at least partially attributable to that trade dislocation. Potentially, some form of market-making activity closing on divergences between shares, ETFs, and derivative instruments may have been responsible for positive net interest in SPY." That, or is this the biggest faux pas ever conducted by the "invisible hand" which openly flooded the market with $10 billion in the form of ultra liquid SPY, at a time when massive derisking was taking all single names lower. A much more relevant question according to Zero Hedge, is whether there is any sense trading single names anymore - all the action is now in the form of index equity proxies now that liquidity in single names is virtually non-existent: this means trading only SPY and ES. Was last week's freak occurrence a huge ETF rebalancing, an implosion in one or more market neutral funds, which were forced to cover billions in SPY shorts as single names were being sold off en masse, or was this merely a direct intervention into equities by the Federal Reserve? We are confident that the SEC will immediately rush to answer all these questions and will have a definitive conclusion within a week. [Emphasis is original.]

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CNBC Is Assuring Us Everything Is Back to Normal

It is hilarious, really, to check the headlines of the mainstream financial news media like CNBC. Right now, these headlines inhabit the front page (of no specific order):

Cramer: 5 Stocks Powering This Market Higher

Mr. Cramer was reportedly saying just last Friday after the "flash crash" that he would put his money in CD... He has proved himself to be a total contrarian indicator, yet again. So what is he peddling now? Apple, Deckers Outdoor, Salesforce.com, Intuitive Surgical, Chipotle. As if nothing happened. Move along, nothing to see here.

Fast Money: Gold Making Double Tops?

According to Fast Money, technical analysts are huffing and puffing about "double top" in gold chart which is bearish. Uh huh.

Technical analysis? We now know what happens when algo bots disappear. Good luck with TA.

Gold Price May Still Have a Way to Go: Analysts

So, which is it? The article is rather devoid of solid analysis. What's more interesting is this Zero Hedge's article that Europe is running out of gold and silver due to exploding demand from the concerned citizens over there.

Dont Fight the Fed - Power of Central Bank Preserved

The Senate voted to keep the Fed in charge of smaller banks. Combine that with the very narrow audit, and you should join CNBC in congratulating the Fed for the successful lobbying - the Fed got all it wanted. So much for "reform".

My moment of insight about the US market a while back - that it will just keep going up because all these large companies listed on the stock exchanges are safe, backstopped by the taxpayers - can now extend to the global markets. The entire world is on hook to save the EU governments and large multinational bankers who lend them money.

After last Thursday's mistake of revealing what's underneath the veneer floor that we stand on - it was like staring into a dark, bottomless elevator shaft - algo bots have been scolded by the financial authority (the Fed comes to mind) never to do that again. Bad bots, you're bad bots!

With the likes of Cramer, they are inviting you, retail investors, to put your money in the stock market. Trust us, your money is in good hands.

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Hedge Fund Advised by Nassim Taleb May Have Triggered a "Black Swan" Moment

with its $7 million bet using S&P500 June put options

Now that's ironic, if it is true. Or was it an experiment?

Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?
(SCOTT PATTERSON And TOM LAURICELLA, 5/10/2010 Wall Street Journal)

"Shortly after 2:15 p.m. Eastern time on Thursday, hedge fund Universa Investments LP placed a big bet in the Chicago options trading pits that stocks would continue their sharp declines.

"On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later.

"The trade by Universa, a hedge fund advised by Nassim Taleb, author of "Black Swan: The Impact of the Highly Improbable," led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank Barclays PLC—to do their own selling to offset some of the risk, according to traders in Chicago.

"Then, as the market fell, those declines are likely to have forced even more "hedging" sales, creating a tsunami of pressure that spread to nearly all parts of the market.

"The tidal wave of selling fed into a market already on edge about the economy in Europe. As the selling spread, a blast of orders appears to have jarred the flow of data going into brokerage firms, such as Barclays Capital, according to people familiar with the matter.

"Exchanges, in turn, were clogged by huge volumes of offers to buy and sell stocks, say traders and exchange executives. Even before some individual stocks collapsed to just a penny a share, data from the NYSE Euronext's electronic Arca exchange started to appear questionable, say traders.

"In the disarray, some huge superfast-trading hedge funds that now provide much of the liquidity for the stock market pulled to the sidelines. The working theory among traders and others involved in the exchange meltdown is that the "Black Swan"-linked fund may have contributed to a "Black Swan" moment, a rare, unforeseen event that can have devastating consequences." [The article continues.]

Algo bots all ran to the same side. How did the market recover so quickly? A different set of algo bots that were hunting the bargains ran to the other side:

"Around 3 p.m., the selling pressure abated. Just as swiftly as the market fell, it recovered ground. One factor behind the swift recovery, traders say, were funds that use computers and formulas to sniff out bargains in the market. These funds swooped in on hundreds of cheap stocks, helping push the market higher."

Forget the quaint idea that the stock market is a price finding mechanism. It's been rendered just a playground for bots.

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SEC, Stock Exchanges Agree on Circuit Breaker Even Though They Don't Know What Caused the Plunge

Is the SEC clueless or pretending to be clueless so that it doesn't see the big elephant in the room (High Frequency Trading)?

Does that make sense to you? They don't know (or say they don't know) what caused it and probably won't know for weeks, but let's fiddle with the market circuit breaker right now and see what that will do in the next big freefall..??

SEC: Exchanges agree in principle to new rules (5/10/2010 AP via Yahoo Finance)

"NEW YORK (AP) -- The major securities exchanges put aside some of their differences Monday and agreed to coordinate trading rules to prevent stock plunges like last week's historic dive.

"The Securities and Exchange Commission said the six exchanges agreed in principle during a meeting with regulators to a uniform system of "circuit breakers." Those are restrictions that would curb trading when a stock index or individual stock or other security rises or falls to a specified level in the course of a trading day.

"Four days after the plunge that sent the Dow Jones industrials down to a loss of nearly 1,000 points in less than 30 minutes, regulators were still saying publicly that they did not know the exact reason for the drop. But there is a growing belief that the varying trading rules on different exchanges contributed to the intensity of the selling and the size of the market's slide.

"People familiar with the situation said regulators believe the disruption was caused by the way different exchanges manage their trades and rapid price swings. A definitive answer could take weeks because regulators are going through information from across the market by hand, said the people, who spoke on condition of anonymity because they were not authorized to discuss the investigation." [The article continues.]

The AP article tries to tell us that if only all exchanges have the same circuit breaker the freefall wouldn't have happened.

Well, we wouldn't know that, would we, until "next time"?

Besides, it seems it was the NYSE's circuit breaker mechanism that made the plunge much worse, by sweeping the sell orders into the other electronic exchanges.

In the meantime, the article does mention High Frequency Trading toward the end, in a totally neutral light, nowhere near even hinting it might have been the cause.

So, to recap, they don't know what happened, but let's put more regulations in to "protect investors". From what?

It's likely from being able to sell and get out of position when a disaster hits. Under the new regulations, all exchanges would slow down or shut down in the time of a crisis, preventing the investors from fleeing from the market. What a way to further fleece the investors in order to "protect" them.

Slowing down or shutting down "at the same time" may be problematic, too. With High Frequency Trading, we are talking milliseconds here.

HFT firms will simply write new and improved algorithms to take advantage of the slowdown mechanism. Without addressing predatory HFT and flash trading, putting in the uniform circuit breaker will probably do next to nothing in preventing a freefall we've experienced.

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Goldman Sachs Made Money Trading, Every Single Day

How do you like this statistical impossibility?

Goldman Sachs Has First Quarter With No Trading Loss
(5/10/2010 Bloomberg)

"May 10 (Bloomberg) -- Goldman Sachs Group Inc.’s traders made money every single day of the first quarter, a feat the firm has never accomplished before.

"Daily trading net revenue was $25 million or higher in all of the first quarter’s 63 trading days, New York-based Goldman Sachs reported in a filing with the U.S. Securities and Exchange Commission today. The firm reaped more than $100 million on 35 of the days, or more than half the time." [The article continues.]

I am sure GS and the fellow Wall Street banks and their hedge fund friends have been playing it perfectly since last Thursday, raking in collective tens of billions.

Now that the EU has offered up to $1 trillion for them to take, they are all set, aren't they? Helicopter Ben will make sure of it by unlimited currency swaps. Oh happy days are back again.

(NOT)

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More on May 6 Market Meltdown: HFT and Dark Pools

Wall Street Journal has some interesting bits of information about the stock market near-meltdown on May 6.

In the May 8 article "Computer Trading Is Eyed",

There were abnormally wild moves in currency tradings, [particularly Japanese yen, which surged more than 2% in a matter of minutes (a huge movement in currencies)], before the turbulance started in the stock market.

The heavy sell order on Procter and Gamble (PG) doesn't look like a "fat finger" - i.e. trading mistake, but it does seem to have caused the indices (it is a Dow and S&P500 component) to drop. It does coincide with the withdrawal of liquidity by high-frequency trading firms (see below).

The high-frequency trading firm Tradebot Systems Inc. dropped out of market making when Dow hit -500 mark. So did other HFT firms, draining the market liquidity that they were supposed to provide.

NYSE, when the plunge started, did halt trading, or slowed it. But that probably caused more damage than good, as sell orders, which were growing extremely heavy by the second, were routed to other electronic exchanges including dark pools like DirectEdge, where there was hardly any liquidity. So the sell orders were met by ever-disappearing, ever-dropping bids.

The article still doesn't say WHO placed the big sell order on PG, and WHO stopped the freefall and HOW.

I should also ask, WHY?

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High-Frequency Traders Were Short LAST WEEK

CNBC casually mentions that some hedge funds and high-frequency traders were heavily shorting certain stocks LAST WEEK, betting on the imminent decline in the stock market. It reports these funds were doubling down on SHORTS this week.

Well, "decline" was an understatement, wasn't it?

Smart Money Betting More Downside To Come (5/7/2010 CNBC)

"Chatter suggests some hedge funds may have seen this plunge coming and got short last week. So what are they doing now?

"Before we get to that, we first wanted to make sure there was substance behind the chatter.

"And analysis from LocateStock.com seems to confirm that there is, in fact, a great deal of substance.

"LocateStock.com is a company that finds stocks in the marketplace that hedge funds and high frequency traders are looking to short.

And CEO John Tabacco tells us last Thursday the number of requests to locate stocks to short jumped 50% above the normal 60-day average; with top requests listed below:

Most Requested Stocks To Short Last Week
Ambac
Citigroup
Bank of America
MBIA
Frontier Financial
Source: John Tabacco, Locatestock

"So what's the smart money doing now?

"With the market turning negative for the year on Friday, you'd think the smart money would be covering. But they're not.

"”Now, they’re doubling down and shorting more,” says Tabacco, “with financials the most shorted again.”

"You read that right. Despite the sharp declines this week the smart money is getting shorter.

"”Our analytics suggests there’s a big event out there and there could be more downside,” says Tabacco." [Emphasis is mine. The article continues.]

To call them "smart money" annoys me, unless "smart" means "devilishly crooked". Thursday's market near-meltdown may well have been caused by those hedge funds and investment banks using high-frequency trading. They were shorting big LAST WEEK.

This is no trading, not even betting. They go short on stocks or indices, and they CAUSE the breakdown. A guaranteed, huge profit. This is swindle; from the non-HFT institutional traders and investors who (used to) supply real liquidity to the market, and from the general public who invest and trade in the financial markets.

As to the stocks in question, this is how they fared in one week:

Ambac (ABK): $1.51 (April 30) to $1.38 (May 7), 8.6% drop
Citigroup (C): $4.37 to $4.00, 8.5% drop
Bank of America (BAC): $17.83 to $16.18, 9.3% drop
MBIA (MBI): $9.58 to $8.73, 8.9% drop
Frontier Financial (FTBK): $3.57 as of April 30, but the firm declared bankruptcy on May 3. Good luck closing the short trade during bankruptcy, algos.

During the same period,

Dow Jones Industrial: 11,009 to 10,380, 5.7% drop
S&P 500: 1,187 to 1,111, 6.4% drop
Nasdaq: 2,461 to 2,266, 7.9% drop
Russell 2000: 716 to 653, 8.9% drop
Dow Jones US Financials Index: 291 to 270, 7.2% drop

Tech, small/mid cap, and financials were hit hard.

Just about the only thing that not only held but increased in price during the mayhem was gold:

Gold continuous contract: $1,179 to $1,208, 2.5% increase

We the hapless small investors and traders have few choices to protect what is left in our portfolio against these high-frequency trading raiders. Either you join them in shorts and probably get burned when they flip to massively long in a millisecond, or just buy gold and/or gold miners' stocks and sit on it. (This is no investment advice, do your own due diligence.)

Just be aware that paper golds (gold ETFs and ETNs, straight or leveraged) are heavily held by some of the largest institutional investors and speculators (George Soros, John Paulson, to name a few), which means they may not be as safe as they portray themselves to be.

There is actually a third choice: sell out the positions and sit on the pile (big or small) of cash. But then, there is this thing called the government, who wants to grab whatever they can -new taxes, fees - to feed itself. On top of that, it can cause (the central bank attached to the government actually wants to cause) inflation, taking away the purchasing power of the money further.

"Between a rock and a hard place" is another understatement.

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Dylan Ratigan, Phil Angelides, Jon Najarian on May 6 Market Meltdown

It was NOT because of a "fat finger"... Listen particularly to Jon Najarian, as he explains how the High-Frequency Trading and flash trading work.

Visit msnbc.com for breaking news, world news, and news about the economy

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US Stock Market Plunge and Snap Back - Algo Bots Gone Crazy or Cyber Terrorism?

(Yes, I have my tinfoil hat on...)

Not that they are mutually exclusive.

First it was a rumor that European banks stopped lending (did they?). Then it was a "fat finger" by a trader. Then it was a "fat finger" by a trader at Citigroup. Then it was NOT a Citigroup trader. Then it turns out that in addition to this alleged fat finger of someone, eight stocks which normally trade with modest volume and are not exactly household names spiked down to one cent or zero during the period when the entire market violently slid and snapped right back up.

CNBC's Bartiromo: 'That is Ridiculous. This Really Sounds Like Market Manipulation to Me' (Jeff Poor, 5/6/2010 Business and Media Institute)

"While everyone is scratching their heads and trying to figure out how the Dow Jones Industrial Average (DJIA) lost nearly 1,000 points before rallying back to lose only 347 points – it appears not to be limited to just one stock.

"On CNBC’s May 6 “Closing Bell,” correspondent Matt Nesto explained that investigators for both the stock exchanges and for Citigroup, the firm that some are pointing fingers at for a so-called trader error, have narrowed it down to a futures index called the E-mini S&P 500.

"“A person familiar with the Citi investigation said one focus of the trading probes were the futures contracts tied to the S&P 500 stock index known as the E-mini S&P 500 futures and in particular that two-minute window in which 16 billion of the futures were sold,” Nesto said. “Again, those sources are telling us that Citigroup’s total E-mini volume for the entire day was only 9 billion, suggesting that the origin of the trades was elsewhere.”

"Nesto named eight stocks that were hit with the supposed computer error/bad trade, if that’s indeed what happened, that went all the way down to zero or one cent, including Exelon (NYSE:EXC), Accenture (NYSE:ACN), CenterPoint Energy (NYSE:CNP), Eagle Material (NYSE:EXP), Genpact Ltd (G), ITC Holdings (NYSE:ITC), Brown & Brown (NYSE:BRO), Casey’s General (NASDAQ:CASY) and Boston Beer (NYSE:SAM)

"... Nesto calling these trades “bogus” drew backlash from the host and CNBC veteran Maria Bartiromo, who said those trades sounded like “market manipulation” to her.

"“ That is ridiculous,” Bartiromo replied. “I mean this really sounds like market manipulation to me. This is outrageous.”" [The article continues.]

Market manipulation? Hello Maria, where have you been all these years?

It was more like a complete breakdown of any order. For more, read Zero Hedge "The Day The Market Almost Died (Courtesy Of High Frequency Trading)".

So here's what happened to these eight stocks between 2:47 and 2:56PM EST today:

2:47 PM EST
ACN: went from $38 to $0.01
CNP: went from $13.15 to zero
ITC: went from $45.90 to $0.01
BRO: went from $18.07 to zero

2:48PM EST
CASY: went from $35.24 to $0.01
SAM: went from $54.32 to $0.01

2:50 PM EST
EXP: went from $29.41 to zero

2:56PM EST
G: went from $15.58 to $0.01

Dow Jones Industrial Average hit the low of the day (9,887) at 2:46PM EST. Nasdaq and S&P 500 hit their lows at the same time as Dow.

I think these are the examples of algo bots gone haywire, but whoever put in the initial bomb of selling 16 billion S&P e-mini futures, which came through CME, wasn't a bot. After the bomb detonated, all the algo bots decided to pile on to one side, in this case sell sell and more sell.

Whoever detonated this e-mini futures bomb must know the high-frequency quant trading programs very well, inside out. And in the last second the switch was turned off, and the market snapped back.

OK, tinfoil hat off.

To make up for the fear and loathing that they caused, they (whoever they are) are busy buying the stock futures so that the market will open high and cheerful tomorrow morning. Right now, Dow futures up 60, Nasdaq futures up 11, S&P futures up 6.5, according to Bloomberg.

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