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May 6, 2010 Trading Was Crony Capitalism!!

Posted by Larry Doyle on May 7, 2010 9:27 AM |

While the market is working to digest the better than expected Unemployment Report this morning, put the pom-poms away please. No, I am not negative on the report, I am calling bulls%*# on a crony capitalist system that allows for so-called market exchanges to develop and function as they did yesterday.

Fat finger (meaning a trade size was incorrectly entered)? I do not buy it. I think yesterday was nothing more than so-called liquidity providers engaging in high frequency trading, and taking investors to the hoop in a HUGE way. How so?

As sell orders built, the liquidity, which high frequency traders pretend they provide on the upside (it’s called front running, boys and girls) evaporated as the HFT literally turned off their machines. What happened as a result? The market plunged and trades were executed on selected stocks at some exceptionally low prices. How would you like to be the investor that got filled on a sale of Procter and Gamble below $40 on the gap down and then saw the stock whip right back to close above $60.

Is that trading? Is that investing? Is that a credible marketplace? No, that is a rigged game in which those who control the process are taking advantage of their physical and financial positions. Who are these entities?

1. The exchanges themselves which have cut deals with the large high frequency trading entities to capture volume.

2. The high frequency trading entities run by the large banks and assorted dealers.

3. The regulators in Washington which have curried favor with the industry and allowed this marketplace to develop. Are these regulators protecting investors? Anything but. The regulators have shown themselves to be in bed engaged in incest with the industry. That smells!!

Yesterday was crony capitalism at its best!! The market structures are BROKEN!!

Count me out.

LD

  • Matt

    AMEN Larry – thank you so much for saying that. Count me out too. Yesterday was a crystal-clear sign that this market is broken and is extremely risky for investors. All of the Financial Planners/Investment Advisors this morning are out in the media outlets telling people to “calm down” and “don’t panic” and “the worst thing you can do is sell right now”. As always, that is NOT financial advice and it is NOT objective investment advice. They told Auction Rate Securities investors that same B.S. 2 years ago and that money is STILL frozen today! Those statements are just a sales pitch from salespeople trying to sell you the product they are commissioned to sell. As Jon Stewart told Jim Cramer – “it’s not a f%*!ing game”. This is people’s life savings that they have worked hard for decades to accumulate. It’s not Monopoly money. I am so sick of hearing that propaganda and thank you so much for speaking truth Larry and for your blog.

  • getfitnow

    I’ve been “out” for a while now. Yes, we need you more than ever, Larry. what do you think, LD?

    Here’s a little of what Roubini said yesterday:
    **********************************8

    “The first stage was this massive re-leveraging of the private sector that led to the financial crisis and which has responded now with a massive re-leveraging of public sectors with budget deficits of the order of 10 percent,” Nouriel Roubini aka Dr. Doom told CNBC’s Maria Bartiromo.

    “So I think that the markets are realizing that we have socialized a lot of the private losses with unsustainable fiscal deficits.”

    He believes the bond markets in parts of Europe seriously began realizing the depth of the problem today cautioning, “And soon enough they’re going to wake up in the United States”

    • LD

      I very much agree. The shifts in the financial tectonic plates, given the size and scope of our underlying problems, are currently (and will continue to be) seismic. These are not mere cyclical changes – although the media and politicos would like us to believe they are.

      The structures need to be addressed. That process will not only bring change but stress as well. They may not happen easily, but the underlying forces driving our economy are pushing them.

      I think Roubini is right. Thanks for highlighting his quote.

  • Chris

    Seems like a pretty good scam that they’ve all set up. Let the general populace invest money pre-tax through defined contributions plans under the premise that the money will be there for retirement, while the congress remains in a defined benefit plan knowing that no one will ever touch their money. Then let the banks sell toxic assets to each other and earn massive bonuses. Once those assets implode, convene the bankers and let them tell us how to save the world. Surprisingly they decide to give themselves cheap gov’t loans, while dumping some of the toxicity into the a nicely named company such as Maiden Lane LLC, and dump that onto the Fed balance sheet. Now that bonuses aren’t what they used to be, drive up the market to 11,000, a completely unjustified number, and get the average Joe to invest again. Program trades to make the market plumment, pick up the scraps for fifty cents on the dollar, and start all over again.

  • Fred

    LD,

    High frequency trading manipulates the bid ask order book. Orders are entered and pulled (by computuers) some with no intention of being executed but with the intention of triggering stops. This is what happened yesterday.

    No longer is it necessary for a security to trade thru a specific price to trigger a stop. It is a fraudulent (intent to deceive)transfer of ownership.

    Those that enter Bids or Asks of a certain size should be required to honor them for a specific period of time. Further, extensive access to order books should be limited to “responsible” market makers only.

    I learned of this scam the hard way awhile back. When I contacted the SEC I was told “don’t call us, we’ll call you.

    Long story short, GS downgraded a stock I owned overnight, my stop was triggered premarket by a low ball bid that was never excecuted; in fact, the stock never traded at my stop price the entire next day but I was stopped out anyway.

    • LD

      Fred,

      Great insights. Thanks for sharing them. The scenario you painted about yesterday and the reality of what happened to you should NEVER be allowed to happen.

      That is not capitalism. That is market manipulation which is all part and parcel of cronyism.

      I believe investors will now begin to price this reality into the market, and that we will see even lower volumes trading along with lower prices.

      Thanks again for the input.

    • TeakWoodKikte

      Fred, thanks for telling your story. What is most interesting is the words you used to describe what transpired.

  • Sean

    Can you say “Plunge Protection Team??” That’s probably what caused the bounce-back on Thursday.






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