On October 29, 2013, I wrote an article titled “Understanding Equities (Stocks)”, specifically highlighting my concerns about algorithm-based high frequency trading (HFT) and how it exacerbates a system already prone to market manipulation. I even discussed the market influence exerted by the herd mentality of institutional investors.
Toward the end of the article, I wrote, “…equity markets will experience rapid capital flight once interest rates start to rise, because investors will seek the income and relative safety of bonds.”
On December 19, 2017, I wrote an article titled “Five Simple Steps to Mitigate Risk and Restore Market Fundamentals”, spending a considerable amount of time (again) discussing the perils associated with HFT, Dark Pools, and the group-think of institutional investors. Below, is an excerpt.
High Frequency Trading (HFT) is basically the computer equivalent of the old-style stock market floor trader. HFT executes trades in fractions of a second, providing far greater efficiency, but the computer algorithms that drive them can also produce erratic market swings, driving profits or creating losses. To the big firms running them, it doesn’t matter, because they make money on both sides of the buy-sell order.
Dark Pools are where large institutional investors trade large blocks of stock virtually off the radar, with the claim that it provides pricing efficiency while protecting the market via price stability. In reality, it prevents price discovery by the little guy (smaller institutional investors) who may profit from seeing the bid-ask pricing structure before the deal is done. By the time the Dark Pool transactions are complete, it’s too late.
Combined, they have all but eliminated the ability for individual investors to accurately and actively manage their portfolios without employing robo-advisors that can react to market activity with the same agility as HFT machines.
Suddenly, when HFT is working precisely as it was designed, but not in favor of the market manipulators, the purveyors of propaganda on Wall Street are starting to ring alarm bells…as if no one saw this potential disaster in the making.
Sure, it’s happening later than I expected, but that’s because it has been propped up by the easy money policies (think low interest rates) enabling the manipulators to leverage and gamble with other people’s money. Now that interest rates are rising, even if it’s only a threat of rising rates, the flight of capital out of equity markets is showing the fragility of the leveraged house of cards built by institutional money managers, especially hedge fund managers.
In a December 25, 2018 Wall Street Journal article titled “Behind the Market Swoon: The Herdlike Behavior of Computerized Trading”, the opening paragraph confirms my warnings going back five years ago.
Behind the broad, swift market slide of 2018 is an underlying new reality: Roughly 85% of all trading is on autopilot—controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast.
In my 2013 article, I wrote, “Depending on the report you read, HFT is estimated to exceed 70% of all trades. These trades include individual stock issues, options, and futures.” Apparently, the problem has grown since then. Where was the great concern from Wall Street concerning the 85% on autopilot while the system was making them money?
My favorite quote from the article is from the founder of Omega Advisors hedge fund, Leon Cooperman: “Electronic traders are wreaking havoc in the markets.” Wow, really? And the Oscar goes to…all of Wall Street and the Too Big to Fail banksters.
It’s almost as if they’re trying to absolve themselves of any blame in advance of when the HFT mechanisms they created finally reveal how their automation destroyed the world of finance long before they destroyed its wealth.