May 10, 2010

Stock Market: Flaw, Conspiracy, Terror

Filed under: Bailouts Only Reopened the Casino — Tags: — Russ @ 3:03 pm


So last Thursday was one of the craziest single days we’ve had since the Bailout began. While in Congress two serious reform measures seemed to have chance but were of course beaten back, one voted down and one gutted, the stock market performed its oddest dance yet.
Everyone’s still perplexed or outraged by the market’s bizarre behavior. The day was already storming along at tremendous volume and losing hundreds of points when at 2:41 the Dow commenced a 1000 point plunge in 15 minutes, followed by an improbable surge. At the bell the Dow was down 347.8 points on the day.
During the pivotal 25 minutes the trading behaved suspiciously. Small players found themselves boxed out. Liquidity often disappeared. Prices which were supposed to flow continuously were making dubious quantum leaps. What really happened?
Before getting to that, let’s pause to put the stock market in context. We all know this stuff, but I think it helps to have reminders so that we always keep the big picture in mind. So the right context for any discussion of the stock market is:
1. It has become in principle parasitic. It does not exist to channel available investment capital to productive investments as per the market fundamentalist lies. At best the real investment capital flows in during the IPO. After that stocks exist mostly as a pair of dice or a deck of cards. Almost everything that happens in the market is stuff which should be relegated to the realm of extralegal, noncontractual gambling.
2. Institutional investors have been assimilated into this casino. The goal of this is to further enforce the submission and compliance of the people. For example, anyone with a private pension (and I think the same is true of most or all state pensions) is held hostage by the stock market, since most of the money is in stocks. For years now they’ve been trying to do the same with Social Security privatization, and this seems to be Obama’s ultimate goal.
3. Even the way the market’s run is a scam in practice. That brings us to Thursday’s action.
Everyone correctly rejects the MSM bullshit about a “fat finger”. That’s nonsense, as this piece demonstrates. The surge in volume was well underway before the crash.
So what are the levels of the structural “flaws” in this system, from structural stupidity to greed to systematic political terrorism to conspiracy theory?
A. Structurally the system seems prone to let itself be stampeded as events trigger procyclical algorithms which turn steep downward trending into avalanches. The “circuit breakers” allegedly built into the system to forestall such chain reactions seem to have failed in this case.
Meanwhile even as the sell side was going berserk, the vaunted liquidity and market making functions (which are supposed to be the reason HFT is allowed to exist) abdicated.
According to Yves Smith’s anonymous correspondent:

3. While the market was well offered, it was not well bid. Liquidity disappeared. For example, in P&G, 200 shares traded at $44.10 at 2:51:04 in the afternoon and one second later, at 2:51:05, three hundred shares traded at $47.08. That’s a three dollar jump in one second. Bids disappeared, spreads blew out, and no one was trading except a handful of orphaned algo orders, stop sell orders, and maybe a few opportunists who had loaded up the order book with low ball bids (“just in case”). High frequency accounts and electronic market makers were, by all accounts, nowhere to be found.

It boils down to this: this episode exposed structural flaws in how a trade is implemented (think orphaned algo orders) and it exposed the danger of leaving market making up to a network of entities with no mandate to ensure the smooth and orderly functioning of the market (think of the electronic market makers and high freqs who can pull bids instantaneously as opposed to a specialist on the floor who has a clearly defined mandate to provide liquidity).

So this is the big mystery – where did these guys run off to, and why?
B. Everyone has a variation on the obvious answer – it was a scam. It was greed-based market manipulation. It would’ve been orchestrated to force sell orders to pile up, so big players could buy them up more cheaply. (As for how they could be confident the price would then surge back up, who knows – secret government buys?)
On its face this is plausible, since we know there’s no level of con or crime which would abash these gangsters. The only limit to their crimes is their capacity to commit them. Everyone agrees on this, which is why the only debate seems to be whether this level of orchestrated market manipulation is possible yet.
C. Then we get to the politics of the day. Much to the chagrin of Obama, Dodd, and Wall Street, those nasty peasants got uppity enough that the Senate actually had to vote on the Brown-Kaufmann break-up-the-banks amendment, while the Sanders Fed audit amendment also loomed big. These were both defeated, B-K by a 61-33 vote, with half the Democrats rushing to vote against the people, while Sanders was induced to cave in to the point that his audit will be a castrated one-time-only publication of the history of now-defunct Fed facilities. Meanwhile open money operations going forward will remain outside the bounds of accountability, democracy, constitutionality. (And that’s just the deal as we heard so far; there’s still time for it to get worse, for Sanders to cave in completely, as he’s done before like with his single-payer amendment to the health racket bailout bill.)
The stock market has a history throughout the Bailout of punishing anything which looked bearish on the Bailout itself. When Lehman was allowed to go bankrupt, when the TARP was first voted down, when Geithner was irresolute in describing how the new administration would push forward with the Bailout, and on up to the feared and loathed amendments on Thursday, upon these and other discouraging stimuli the market has tanked.
It’s clear that this is no accident, that on the contrary this is systematic terrorist action intended to strike fear in the people and punish any sign of action or inaction in the public interest.
D. However, I don’t think we need to assume there’s actually some master cabal, the way this piece speculates. It’s a chilling piece. (And the Senator is an excellent portrayal of the cowardly “progressive” who can’t bear the thought of anybody breaking a nail, so he caves in as soon as there’s any trouble.)
I’m not saying it’s impossible that there actually is a secret council of the highest Wall Street elites which decides exactly when and how to tank the market, and sends down orders to that effect. (And I’m not sure how politically useful such a conspiracy theory could be.) But I doubt it. There’s no need for some master coven to literally plot things to that extent. Everybody on Wall Street knows what the Street wants to do. Unlike the workers (alas…), they have a clear perspective on their short-term interest (long-term interest’s a different story) and good discipline, so they act as a group. When they see the Bailout and their gangster prerogatives under any kind of significant pressure or uncertainty, they act to punish America. That’s a core verity of Bailout America, and how the real America has been kidnapped and stowed away. It’s an elite version of herd behavior.
So while A through C are clearly true, and this clearly is blackmail, that’s enough to explain the phenomena we’ve seen. C is both necessary and sufficient, though D could also be true.
So in conclusion, we see how the system is set up to begin with in a reckless, sociopathic way. It can never, other than by accident, provide any of the benefits alleged for it (anything from the grand purpose of rationally directing investment capital to guaranteeing liquidity during an acute market plunge). In fact these guarantees represent political fraud, since “legally” the entities, the traders and “market makers”, have no such mandates.
Ironically, the short story I linked above is too lenient on the system, since it implies that events this severe could only occur through a strenuous, coordinated action by the finance cabal. But the reality allows for disasters to occur by accident or absent-mindedness as well.
But this doesn’t absolve them of criminal intent. Although I don’t think cadres receive orders in sealed packets to tank the market when Congress is getting uppity, that’s just because they don’t need to.
Whether or not they have means to orchestrate exactly that kind of crash, they certainly have means, motive, and opportunity to crash the market in general. The ideological algorithm is simple:
Progress for the Bailout, for corporatism, secrecy, congressional freeze-outs of “populist” amendments, etc. = good, seek market stability, bull, buy.
Any hint that ideas in the public interest are advancing or even getting a hearing = bad, seek chaos, bear, sell, crash.
The stock market’s often insane, and the one time it has a coherent agenda is where it functions as a collective terrorist entity, like a malevolent column of army ants.
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  1. Old Grandstander Sanders. As feckless a character as exists in The Senate and that is saying something. He rarely misses an opportunity to line Vermont’s pockets at the expense of some greater good. His tenure in Congress is excellent proof that the system absolutely doesn’t work since ostensibly he is ideologically in opposition to the positions of most of his colleagues. And yet, he bends (over) in the same direction as folks with seemingly very different political affiliations.

    Comment by Edwardo — May 10, 2010 @ 11:25 pm

  2. In Congress, it’s unanimous.

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