GOOG and Exchanges

Wow! You guys read the New York Times article over the weekend on Google, and The Dirty Little Secrets of Search? Here it is if you missed it; it is “must read”: Dirty Little Secrets Of Search.

Apparently, J.C. Penny was showing up tops all over the internet in thousands of Google internet searches, from “dresses” to “area rugs” to “Samsonite luggage”. It was stupefying, as there could be no possible way that J.C.Penny would be number one organically (i.e. naturally).What then was going on? J.C. Penny was paying “black hat” (as opposed to “white hat”) marketing firms to boost its rankings in Google, and those firms were placing links on hundreds of thousands of “dead” web addresses, knowing that the Google Algorithm uses the number of times other sites link to an address in scoring its showing in search results. These firms were tricking the algorithm used by Google to increase their clients showing on top of search results! Think about this! These web-consulting firms were manipulating Google algorithms, and behavior, for their profit motive, and for their clients profit motive. Who knows how many times consumers clicked on J.C. Penny, and bought an online dress or area rug there? Well… J.C. Penny knows.

Outraged yet? Think about the deception and how it makes you trust the search engines. Think about the millions of web sites whose sole purpose of being created is to just “be there” as shill sites housing these bogus paid-for links, all because Google uses cross links in its algorithms to rang sites. That’s an entire bogus shill industry!

Outraged yet? How did Google deal with the J.C.Penny dishonesty? Despite the company’s guidelines against using “link schemes” to improve search engine rankings, and how if it finds such schemes Google claims it will tank the offender’s search result rankings to page 86, it did not do that with J.C. Penny! Despite finding several instances on its own regarding J.C. Penny’s deceptive practices, Google claims to have taken “corrective action”, although J.C.Penny remained tops in searches the last three months! Incidentally, J.C. Penny also pays Google $2.4 million per month “legitimately”. Perhaps that is why Google did nothing to penalize the department store. That is, until they were confronted with the NYT story. Then Google went into action. J.C. Penny dropped from #1 to #off-the-earth overnight because of “manual” action.

OK. This is an interesting story, to be sure. But why does it have us squirming and twitching? We cannot help but see the parallels between this story, and the story of our stock exchanges. In the NYT story, Google is a for-profit operator of an information highway. It runs it. It makes the rules. And it safeguards it. It has supreme power over the whole process. This is identical to how our market structure has morphed! Think about today’s stock exchanges. They are for-profit operators of our financial capital highway.  They run it. They make the rules of fair play. And they safeguard those rules. Has fair play been compromised on our exchanges? We have repeatedly argued in the affirmative. Just as with Google’s behavior here, when faced with a conflict between their bottom line and fair play, the exchanges have chosen to optimize their bottom line (flash orders, data feeds, etc.).

Heck, on May 6th, the exchanges and their systems actually allowed for remora-like robot algorithmic programs to prey off a mutual fund’s 9% POV eMini order. The insanity of that day could have been avoided if there were manual checks in place! And just as in Google’s case, where it ultimately took a human being’s manual intervention to put a stop to J.C. Penny’s chicanery, we are realizing the dangers of having algorithms automate the process of ethical judgment.

Oh, and Happy Valentine’s Day. Make sure you buy chocolate and jewelry to bring home. If you don’t know where to get those items, use Google to search for them. I hear J.C. Penny is having a sale.


Where we left off 4:00pm EST:

INDU                     12,273.26                              +43.97

SPX                        1,329.15                                                +7.28

CCMP                    2,809.44                                                +18.99

Futures now at 7:00 am EST:

DJA                                        -5 

SPA                                        -2.20

NDA                                       -1.00

Key Data out today:




Since the prior close, some key stories:


–       CSFB boosts capital with $6.2 billion from investors in Qatar and Saudi Arabia.

–       Stocks rise in emerging markets, as rumors circulate that China’s CPI number tonight will be less than feared.

–       Obama to submit $3.7 trillion budget.

–       Geithner Quietly Tells Obama Debt-to-GNP Cost Poised to Increase to Record (Bloomberg)

–       Japanese stocks rose due to an in-line 4Q GDP number.

–       Irish bailout already showing strain.

–       Egypt is calming. We think. Despite its constitution being dissolved and its parliament suspended.  Freedom is entrenched there, and all is well. Oh, and the Egyptian Stock Exchange will now be opened on Wednesday of this week, instead of yesterday.

–       Increasingly protests are popping up in other Arabic countries: Tunisia, Algeria, Jordan, and Saudi Arabia.

–       Inflation in the US is about to spike, courtesy of rents: CNBC story here

–       Coffee Wars? Too funny: SBUX is considering a product similar to WMT’s “Walnut Grove” pods (made by Sturm Foods, a division of THS) which avoid GMCR’s Keurig patents by using a blend of regular & instant coffee (SBUX Via Ready Brew could likewise avoid using Keurig’s patented filter by using an instant coffee product). SBUX spokeswoman says that “no clear delivery system has been established as the gold standard so it is important to look at all options.”…SBUX intends to do to single-serve what AAPL did the mobile phones w/iPhone.

–       Read Barron’s Abelson on the DN BYX merger! The Schnitzel Takeover

–       BA unveils its biggest plane: 747-8. Should be delivered  by April, 2040

–       EMS close to being bought by PE firm.

–       GE buys the well-support division of UK’s John Wood Group for $2.8bil

–       JPM- may raise dividend, announce buyback- reiterated buy @ BofA

–       RIMM- says their Playbook tablet is still on track- WSJ

–       SATS- will acquire HUGH in a $2bil deal





Pre-market:  MGM, ASF, CTRP, DBD, RLOG, STEC, TSEM, VAL    




Significant Movers This Morning:

VECO +4.8%, CBST +3%, PWER +3%, EMS -10%, GME -5%, HUGH -4%