Adding Fuel To The Fire: With Water (by Mark St.Cyr)

By -

He we are the day after when the “Storm of Storms” has hit the
eastern seaboard of the U.S. with the devastation rivaling the asteroid
believed to have hit the Yucatan millions of years ago and wiped out the
largest lifeforms of the planet.

At least that’s the way Sandy has been portrayed across the media.
She’s causing distress and hardship yes, but as of this morning her
trail of destruction seems more inline that she’ll fall more into a
nuisance based aftermath rather than the death and destruction
equivalent of a Mayan apocalypse.

So here is where things begin to just not add up. When the tragedy of
September 11th, 2001 happened one of the first concerns regarding the
markets was to ensure in the event of any similar events; the markets
could operate, operate correctly, and efficiently.


We were told at great lengths from all the powers that be both past
and present not to worry because – contingencies were now in place.
Shorthand for: “Don’t worry, be happy. We got this.” It would seem like
all of that has had cold water (salty as a matter of fact) thrown all
over those reassuring statements.

I understand the need of not having or needlessly placing or putting anyone
in harms way. However, what I don’t understand is this: If you had
contingency plans in place to handle disasters and keep people safe. You
mean to tell me you those plans can’t or won’t be implemented because
one would need to put people at risk to implement them? Really? I
mean…Really?

Maybe I’m not that smart (but I did stay at a Holiday Inn® once) but
it would seem to me that you actually didn’t have a plan. Which is
exactly what adds fuel to the fire of the markets are both broken,
rigged, and Joe and Jill public are on their own. The very same people
the market needs.

It seems every time one turns on the television or radio to see
exactly what protections were in place to protect participants in the
markets after some event we see exactly the opposite of what we thought
we should.

Scandal after scandal shows the protective bodies seemed more
concerned on protecting their own derrieres rather than the public they
were entrusted with.

We have glaring examples such as Bernie Madoff running a scheme for
decades as the bodies to ensure such a thing couldn’t happen run around
screaming to anyone who’ll listen (or print); “This was so sophisticated
we can’t be to blame. We need better tools.” I think it became apparent
there were just maybe a few too many “tools” that caused this debacle.

Just when that seemed behind us we get headlines one after another
along the lines of “Rogue trader loses BILLIONS” or “Hedge Fund
Illegally Uses and Loses All Their Customers Money” and one of the
latest “The Algo’s Turn on Their Creator Nearly Collapsing Firm.” Yet we
are supposed to feel safe because a boatload of agencies containing
more acronyms than a warehouse of alphabet soup was eying the horizon
for any storms. Maybe the scope was fogged. Or worse, someone pulled the
prism.

All the above is just touching the surface of problems one has
witnessed at far more of an alarming rate than one is comfortable
pointing out. Not to mention the scandals within the scandals that you
just can’t help shake you head at. i.e.: The MF Global scandal of using
customer funds only to find out Mr. Corzine will be exonerated to some
extent because of some legal technicality where we seem back to what the
definition of “is” is. I bet the poor traders, and others that lost
their money and lively hoods don’t have any alternative definition for
how they feel where their money was supposed to be.

What part of “Don’t Touch” needed to be clarified exactly? Oh, and by
the way in case you haven’t heard. It’s rumored he’s considering
starting another hedge fund. I feel safer already.

Which brings us around on a slow row boat to today. The markets in an
unprecedented move are closed for a second straight day. While at the
same time there are rumblings on whether or not they will be open
tomorrow. Here’s where this once again looks and feels down right
squishy and fishy.

How could the electronic markets be closed all day Monday when Sandy
was off shore not due to reach landfall till near 8pm EST. Closed all day
Tuesday when Sandy had passed and the aftermath apparent. Yet the
switches are turned on at 6pmEST Monday night while Sandy was actually
overhead wreaking havoc, flooding subways, businesses, and more. Only to
watch the electronic markets operate what appeared as flawlessly
overnight through all that destructive may lay causing massive blackouts
and wind damage leaving millions of people without power.

And yet not as much as a blip. The only blips on the screens (or lack
there of) seems to be caused by the continued hand wringing of whether
or not to open Wednesday. Something just seems wrong with the reasoning
given.

So to throw even more water on this smoldering pile I can’t get out
of my head an interview that happened Monday morning with Charles
Gasparino on Fox Business® channel with one of the heads of the
electronic agencies.

As I stated earlier one of the reasons given why they didn’t want to
turn on the electronic only systems was out of concern for the people
who were needed to man the actual technology centers. OK, but I’ll say
it again: You made a backup system that in order to protect people from
danger, you have to put people in danger? Something is wrong with that
answer, and for me sounded alarm bells.

One of the suggestions why they weren’t opening eluded to by Mr.
Gasparino was that he was hearing from his sources that it was the HFT
players (High Frequency Traders) that were up in arms about the
exchanges opening on some form of emergency backup system. Whether true
or not it makes a thinking person ask if it were true: Why? What would
be the reason? How would that hurt them, or worse hurt the markets?

Then it hits you like the first wave of a storm surge. Maybe it’s
because the emergency system that runs the markets are exactly where the
HFT players are not. At an undisclosed location! The problem with this
scenario is it fuels conspiracy theories because it makes sense if you
like the dark alleys of conspiracy as much as the exchanges love their
dark pools.

It’s been well reported and documented elsewhere that these menacing
machines have been placed as close as possible to the actual servers the
exchange uses to route their order as to enable them to front run or
what ever else they do. The closer they are, the more of an advantage
these algo’s have over anyone else. Including each other.

Could it be that the markets were actually closed not because they
couldn’t operate but rather that the HFT computers couldn’t operate
because what they rely on for their advantage would be gone? i.e., Their
proximity.

If the algo’s lost their advantage of order execution they would be
at the mercy of efficient markets. You know, that thing they always say
they’re responsible for. Heaven forbid there would be a Bid and Ask not
generated by them with the ability to be pulled in nano seconds. Rather
by an actual order placed with someone willing to actually Buy at said
price or Sell. Oh the humanity if that is the case.

Would the markets themselves also have a stake in making sure the
illusion of “deep markets” was perpetuated? Imagine if the markets
opened and to what is normally reported 70% of all the markets trading
didn’t show up because the HFT computers couldn’t play? Would something
like this almost be more frightening to the markets than the chaos
currently being dealt with in the aftermath of Sandy?

The longer the markets stay closed, the more fuel this smoldering
pile lives on. Just when you think water puts out fires, you find out it
just might fuel it more. Or put another way: The emergency system can’t
be used because it may cause an emergency.

© 2012 Mark St.Cyr   www.MarkStCyr.com

Mark This Post as a Favorite