You can fool some people sometimes, but you can’t fool all the people all the time


Amazing how a four month rally lets people forget all about our market structure issues.  After May 6th last year, the media and politicians were whipped into a frenzy and wanted some blood.  Our friendly neighborhood HFT was quick to be blamed for much of what ailed the market back then.  The HFT industry quickly launched a DC lobbyist led defense and were able to hold off the angry mobs for a while.  But the heat was still on late in the summer as Senator Kaufman pressed forward and demanded that our regulators at least begin to understand what the heck was going on in the equity market.  Then, something magical happened in Jackson Hole, Wyoming.  The Bernank opened the spigot in late August and unleashed an amazing, no-look-back 4 month rally that quickly shelved any talk of market reform.

All was good again in market structure world.  Stocks began rising (as did most all other asset classes), volatility all but disappeared and the media soon were more interested in rare earth stocks than dark pools.  Good news got even better for the HFT crowd in November after the CFTC and SEC issued their post mortem on the May 6th Flash Crash.  Even though the report focused on the problems with internalization and HFT hot-potato volume, the HFT crowd was successful at spinning it as one rogue algo caused the Flash Crash.  And then the final piece of good news for the status quo equity industry – Senator Kaufman had completed his term as US Senator in early November.  Nothing, nothing could now stand in their way of ruling the world ( Dr. Evil emphasis here, pinky in mouth).

 But did our market structure issues that caused the Flash Crash just magically fix themselves?  We think not and we think most investors know this as well which is why even the hint of a selloff like we had yesterday causes very itchy trading fingers.  Even the Motley Fool investor website knows something smells with how stocks are being priced.  They say: “Don’t trust price swings. It’s entirely possible that artificial trading algorithms will create price movements that wouldn’t have occurred otherwise. It’s essential that you recognize those movements for what they are, rather than mistakenly assuming that they have some connection to the fundamentals of the stock’s underlying business.” (

 We live in a market now that has been totally hijacked by speedy arbitrageurs who look to profit from tiny price differences across various asset classes.  They cloak themselves as liquidity providers and spread shrinkers that are doing a service for the market.  They hold the market hostage to their “liquidity”and most investors do not even realize that they are paying a ransom on each and every trade. Do these liquidity providers really care about true fundamental valuations or are they just 22 second renters of stock?  True price discovery is getting harder and harder to achieve.  When 32% of all trades (up from 14% in 2008) are traded off the major exchanges, the price discovery process has been seriously deteriorated. Forbes ran a piece yesterday titled “The $50 billion Stock Market Fee” where they quantified the cost of these off exchange prints (

 “In the stock market, Professor Weaver compared stocks that trade mostly on exchanges with stocks that have a lot of off-exchange volume. He found that the more off-exchange trading a stock has, the wider its spread. He figures if you take a stock with 40% of its trading off an exchange and get rid of that off-exchange trading, the spread would narrow by 3 cents. Those 3 cents add up to $10 million per year per stock. There are 5,000 listed stocks, give or take. So if all stocks have that much off-exchange trading (they dont now, but Weaver says were heading in that direction), that cost would add up to $50 billion. Spreads on stocks with lots of off-exchange trading are much wider than they should be. Investors are paying too much when they buy stocks and selling them for too little,he says.”

As Abraham Lincoln (and later Bob Marley) said, “You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.”