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