Market: Mr. Toad’s Wild Ride … butterflies, head fakes & accelerants.

It was an interesting week on Wall Street … a huge drop on Monday …  followed by 3 days of high intra-day volatility … and ending right about where things started.


So, what happened?


For what it’s worth, here’s my take …




Let’s start with the butterfly

A trite example of chaos theory is how a butterfly can flap its wings in Brazil and set off a meteorological chain reaction that causes a typhoon in Asia.

This week’s butterfly: China’s markets tanked … a dramatic confirmation that China’s economy is slowing.

Not much new news there … everybody knew that China’s economy was slowing.

But, the butterfly flapped its wings and started the chain reaction.


Oil Prices

During the week, a barrel oil traded at around $40 plus or minus a couple of bucks.

The low price (around $40) was validation the the global economy is slowing … but that wasn’t new news.

Since the butterfly flapped, though, each buck move up-or-down got exaggerated attention as an indicator of economic bust or recovery.

Silly, but true (I think).


Fed Head Fakes

Fed officials leaked a series of contradictory indications re: whether interest rates would be increased this year.

Some said, in essence, the stock market isn’t our focus and we’re going to stay the course.

Others said that “the case for a rate hike is becoming less compelling”.

The statements seemed to have been crafted astrologer-like ambiguity.

Nonetheless, the market moved with each and every head fake from Fed officials.



Bottom line:

Fundamentals are weakening and market was/is probably overvalued.

That explains a trend, but not a sharp drop and wild swings.

Something else must be going on, right?


HFT Accelerants

Early in the week, the CEO of one of the big High Frequency Trading firms boasted that Monday was his firm’s most profitable day ever … thanks to high trading volume, high volatility in intra-day prices, and a couple stock price u-turns – down, then up, then down then …

Mid-week, Mark Cuban cut to the chase and said, in essence, the robots have taken control of the market.

His advice: step back, take a deep breath, wait for “system” to stabilize … turned out to be pretty good advice.

More specifically, Cuban said:

“You get other trading effects — the exchange-traded funds being on market stop-loss orders, you have the high-frequency traders.

I’ll use a pejorative word, and if the cap fits they can accept it, front-running some of the other selling.”

Following-up, CNBC ran a piece on “this week’s front-running machines”.

Tech note: Front running is a loose term that can refer to the practice of so-called high frequency traders using lightning-quick network connections, proprietary information  and algorithm-based computer programs to detect orders from rival traders, then jump in front of that trade.

CNBC quotes Jim McCaughan, CEO of Principal Global Investors:

“There are mechanisms that turn a 2 or 3 percent fall in the market into a 10 percent fall.

I think that’s what happened

The steep falls in U.S. equity markets at the start of this week were accentuated by “front running” from high-frequency traders.”

Of course, that’s an opinion … not proof … but, I find it pretty compelling.

Even without front-running, the HFTs have the capability to to keep nudging the market in a direction with quick in & out trades that bank successive trading profits … and react quickly when the tick reverses.

Nothing illegal … just market distorting.

Turning a “natural” 3% drop into a 10 pointer.


P.S. The wild market prompted me to speed-read Michael Lewis’ book “Flash Boys” … think Moneyball hits Wall Street … an interesting story centered on high frequency trading.

Worth reading … I may post some snippets next week.

Connecting some dots

In Flash Boys, Lewis repeatedly mentions that most of the mathematicians & computer geeks programming the HFT algorithms are Russian & Chinese.

This morning, Bloomberg and other business wires ran a story “U.S. Is Drafting Potential Sanctions Over China Cyber Hacking”

Think about that when the market gyrates this week.



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