by Jeff Nielson, Sprott Money:
Over the past decade; our markets have ceased to behave like “markets”, at all. We see obvious perversity, such as the simultaneous (and extreme) bubbles in U.S. stocks and bonds, something which is mathematically impossible in any legitimate marketplace.
More generally; we see what are supposed to be divergent stock markets (representing diverse, independent economies), diverse sectors, and diverse companies being marched up-and-down, collectively, like some gigantic, synchronized yo-yo. This is more impossible behavior – in legitimate markets.
Such insanity, and such extreme/impossible market phenomena are not confined to Western markets. Two weeks ago; blockbuster news emerged out of China, via Zero Hedge. China’s government is:
…seeking public opinion on limiting the use of automated trading programs in the stock market.
This initial news acquires even greater significance with the additional context provided by the China Securities Journal:
The stock market regulator said such automated systems could fuel market volatility and affect fairness.
It plans to tighten access and also review the mechanisms behind automated trading systems and would authorize stock exchanges to levy extra charges on such automated systems. [emphasis mine]
The first part of that excerpt is nothing more than stating the obvious. Computerized trading algorithms began (literally) “taking over” our markets roughly a decade ago. Today, these computer programs now account for roughly ¾ of all trading volume, dwarfing all human trading in what are (supposed to be)human markets.
Oceans of automated “stupid money”. Non-coincidentally, it is over precisely the same time-frame that we have seen “circuit-breakers” created in all of the world’s major markets. Then we’ve seen all those circuit-breakers tightened (again and again), as so called “HFT trading” became more and more dominant. Liquidity run amok.
Or is it “amok”?
In fact, as regular readers already know, evidence has emerged to strongly suggest that all this automated stupid money is a brute-force means of herding and controlling all our markets. In a lawsuit against the Chicago Mercantile Exchange, evidence was introduced allegedly showing that 50% of all trades at the CME were merely phony and illegal “wash trades”; pseudo-trades between the same entity. This amounts to roughly 100 phony/illegal trades per second, market-rigging which could only be perpetrated via computerized trading.
Following this, some independent research has (finally) been done, looking at the obviously manipulative potential of these computerized trading algorithms for the first time. The research was based upon the U.S.’s fraud-ridden markets, and the results of that research were staggering.
- a) 74% of all U.S. equities showed significant evidence of algorithm manipulation.
- b) There was an “abnormal correlation in message flow” in this algorithm manipulation, implying that a single, Invisible Hand was responsible for most/all of this computerized manipulation.
It is with this context in mind that we can examine the latest news from China. This comes on the heels of China’s government banning one of the largest U.S. trading companies from China’s market (which specialized in algorithm trading), as well as suspending the accounts of dozens of U.S. based-traders – for their algorithm trading. Here what is most notable is the highlighted portion of the previous excerpt, the intention of China’s government to “review the mechanisms behind automated trading systems”.
All these investigations (and suspensions) occurred immediately after China’s stock market was marched (literally) straight up, and then crashed straight down. It doesn’t take much reading-between-the-lines to deduce that the “review” currently being undertaken is a search for this same, Invisible Hand – which regular readers know better as the One Bank.
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