Don't blame traders. This mar­ket force isn't hu­man

The Pak Banker - - OPINION - Kenny Pol­cari

When the mar­ket goes into a fren­zied sell­off like it did on Mon­day, so many mar­ket pun­dits try to make it about the in­di­vid­ual in­vestor or the trader - but it's not. It's about the al­go­rithms. The U.S. eq­uity mar­ket is an in­sti­tu­tional mar­ket, con­trolled by the very in­sti­tu­tions that are now scream­ing about mar­ket volatil­ity. These, by the way, are some of the very in­sti­tu­tions that wanted to do away with hu­mans, wanted com­pletely au­to­mated mar­kets, wanted to let the com­put­ers and "high fre­quency" mar­ket mak­ers step in and take over, wanted mas­sive mar­ket frag­men­ta­tion to make the U.S. cap­i­tal mar­kets "more com­pet­i­tive." (Cur­rently there are 10 ex­changes and 60+ al­ter­na­tive venues that do noth­ing but add to the chaos). So, how's that work­ing for you?

You see, cur­rent mar­ket struc­ture does not al­low for fair and or­derly trad­ing when the sh*t hits the fan - oh, no. Al­go­rithms and com­put­ers make assess­ments and place or­ders well out­side of the last sale in mul­ti­ple mar­ket cen­ters in times of dis­tress - as the com­put­ers makes de­ci­sions based on what it per­ceives to be fair value at that mo­ment. On Mon­day, we saw some stocks - Amer­i­can blue chips - open 10 per­cent to 15 per­cent lower than their last sale, caus­ing sellers to scream bloody mur­der. But who can they blame? The bro­kers? NO. The spe­cial­ists? NO! (Spe­cial­ists no longer ex­ist - you see they made them all go away.) And so, you ask, what about all those elec­tronic mar­ket mak­ers that were go­ing to fill in the gaps?

Those are ex­actly the peo­ple who aban­doned the sys­tem when they were needed the most. Un­like the mar­ket mak­ers on the New York Stock Ex­change, the off-floor elec­tronic mar­ket mak­ers have NO obli­ga­tion to do any­thing and so they chose to sit it out and see how it all shook out. And when the mar­ket had suf­fered enough, they come run­ning in like gang­busters to scoop up the bar­gains, while the sellers, who are now ex­hausted, leave a void in the mar­ket­place, caus­ing prices to rally to al­most un­changed. Since those elec­tronic mar­ket mak­ers weren't there to buy stock on the way down, they are not there to sell stock on the way back up - and so, you have a mar­ket that ap­pears to be more volatile than it should be.

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