More Stuffing?


I know, I know… it is not November. And to be honest I never liked turkey, especially with all the stuffing. The Wall Street Journal reports that the SEC is in fact looking into the role quote stuffing played in the Flash Crash of May 6th: SEC Probes Canceled Trades (ht ZH). The article highlights already reported-on and blogged-on findings by Nanex, who also demonstrates how P&G stock was manipulated on April 28th, where a flood of orders slowed down NYSE to be behind the “real market”, creating an arbitrage between the “real market” and the slower NYSE market. Latency Arbitrage on demand! We recall how some astute observers noted that May 6th was not a symptom of poor market structure; it was a feature.

Will the activity prove to be benign, and a function of “legitimate market making”? I’ll be open minded and say, “maybe”, although our experience has taught us that where there is smoke there is fire, especially where market structure issues are concerned. Go get ‘em Mary. We know that it is politically difficult for the SEC to find fault in a system created by the SEC, albeit unintended. And we know that it is hard to do the right thing, when you have pressure from a lobby, complete with their “powerful” representatives in Washington. But know that a great many have faith specifically in you.

Please allow us to make one last point this morning regarding market structure, the stock market, and implied correlations. With the implied correlations of so many distinct asset classes, as well as within stocks, reaching bizarre levels of late, we would like to reiterate what we stated in our paper in mid 2009, entitled What Ails Us About High Frequency Trading:

“HFT Trading Possibly Affecting Asset Valuations

The third issue we have with HFT is that we are concerned that it is causing a disconnect between market prices and real asset values. As everybody knows, the value of security assets are based on the pricing established every day by market trading. But shouldn’t we be wary of the pricing of a good if 70% of the transactions taking place are done by a few very large players? Would you prefer to buy a diamond in a marketplace controlled by one family, or in a marketplace of controlled by many players? Given the wild volatility in the oil market in the past few years, and now in currency, commodity, food and securities, are we avoiding examining another systemic risk?”

Good morning everyone, and remember that US Open Tennis is on the tube if CNBC gets to be too much!