Some thoughts on the real (and ongoing) manipulation. By World Complex,
Now here’s a funny thought. Market volatility has been unpleasant, to say the least just lately. Liquidity has vanished, thanks to HFT. Arguably, the S&P 500 should be a good deal lower than it is.
Suppose you are an institutional holder of shares, and your models are telling you to sell; but every time you try, liquidity vanishes and you end up completing your sale at a much lower price than anticipated. Your boss yells at you. Worse, your year-end bonus suffers. So what do you do?
What can you do? Any attempt to sell in size collapses the price of the security in which you are trading. You have to come up with a strategy to minimize your losses in selling. Either you limit your orders, which means under the HFT regime they never fill (except for a handful of shares), or you don’t sell at all. It’s possible that some of these institutions are locked into positions they can’t get out of (except at desperately lower prices).
There could be a whole country full of institutions that want to sell but dare not for fear to the scalping they’ll receive from the algo traders.
Here is another “gift” HFT has given us. Liquidity on the buy side has already vanished; now liquidity on the sell side is going too. The likelihood of a fair price discovery through the market has taken another beating. Although arguably this allows the market to levitate at far above reasonable value, it also means long years of pain for “investors” as every tick up is desperately sold.
Like we suggested yesterday, the markets should stabilize somewhat, volatility fall short term and we end up with the much awaited bounce (on no volume). Despite this, don’t forget, US has some problems, that nobody is adressing. From one of the few free thinkers, Hudson;
The cost of the 2011 cutbacks in federal spending will fall most directly on consumers and retirees by scaling back Social Security, Medicare, Medicaid and social spending programs. The population also will suffer indirectly, by lower federal revenue sharing with U.S. states and cities. The following chart from the National Income and Product Accounts (NIPA, Table 3.3) shows how federal financial aid has helped cities shift the tax burden off real estate, although the main shift has been off property taxes onto income – and onto consumption (sales) taxes.
State and local revenue, 1930-2007.
Full reading, click here.
Due to server upgrade today, we have been offline, but are back on track now. Here is today’s delayed News That Matters;
Spreads on dollar-denominated bonds sold by financial institutions have hit their widest levels in nearly two years amid growing concerns about the impact on the sector of European sovereign risk and US economic weakness http://ftalphaville.ft.com/thecut/2011/08/24/660961/us-banks-bond-spreads-widen-to-2009-levels/
A 5.8 magnitude earthquake shook the east coast of the US on Tuesday afternoon, the FT reports, forcing the evacuation of buildings in Washington, including the White House and Pentagon, and rattling nerves as far away as Ohio and Toronto. The earthquake was centred at Mineral http://ftalphaville.ft.com/thecut/2011/08/24/660926/us-earthquake-forces-evacuations/
A US federal judge ruled that the Federal Deposit Insurance Corporation has to face a $10bn lawsuit tied to the failure of Washington Mutual Bank, Reuters reports. The judge refused the regulator’s requesthttp://ftalphaville.ft.com/thecut/2011/08/24/660896/fdic-loses-bid-to-avoid-wamu-lawsuit/
Deals in the technology and telecoms industry have returned to pre-recession levels this year, thanks to a number of big acquisitions such as AT&T’s $39bn purchase of T-Mobile, the FT reports. After two years in the doldrums http://ftalphaville.ft.com/thecut/2011/08/24/660881/tech-deals-at-pre-recession-levels/
Japan’s sovereign-credit rating was lowered by Moody’s Investors Service, Bloomberg reports, which cited “weak” prospects for economic growth that will make it difficult for the government to rein in its public debt burden. Moody’s lowered the grade by one step to Aa3, http://ftalphaville.ft.com/thecut/2011/08/24/660841/japans-credit-rating-cut-by-moodys/
Gulfsands Petroleum, the London-listed oil and gas company, agreed to give a share of profits from its production activities in Syria to a company controlled by Rami Makhlouf, the first cousin of Syrian president Bashar al-Assad http://ftalphaville.ft.com/thecut/2011/08/23/660776/gulfsands-petroleum-in-oil-payments-to-assad-cousin/
The battle to become Japan’s next prime minister changed course dramatically on Tuesday after Seiji Maehara, the former foreign minister, entered the race, reports the FT. His decision to challenge for the leadership reduces the chances of Yoshihiko Noda, http://ftalphaville.ft.com/thecut/2011/08/23/660741/maehara-joins-battle-to-become-japan%e2%80%99s-pm/