You Can’t Fool All Of The People All Of The Time

Every day that passes, the public is becoming more and more aware of what takes place on an intraday basis in the equity markets. Every day we get emails and calls from both retail and institutional investors asking questions and looking for answers. And it seems like almost every day, we are reading another article about volatility and high speed trading. Yesterday, Bloomberg BusinessWeek published an article by Mark Buchanan Read Article Here). Mr. Buchanan is a theoretical physicist but definitely knows a few things about the markets. He says:

“And this brings us to the main point — that it’s the sudden evaporation of such liquidity that propels events such as the flash crash. All in all, then, it seems likely that the very high-frequency trading that makes the markets run so smoothly in quiet times does the opposite in stormy times, exaggerating the chaos.”

Exactly, Mr. Buchanan. Tight spreads mean nothing if there is hardly any size in the quote. Now let’s contrast Mr. Buchanan’s shrewd observation to that of a New York Fed economist. At a conference yesterday, the Fed official had this to say Read Article Here:

”It’s hard to recommend any kind of policy or enforcement. Frankly, right now I don’t think we have a good understanding of what high-frequency trading is and what is the impact on the market. That would be a first step.”

We also heard something similar recently from an SEC official at a SIFMA conference:

“This is because our present market structure is itself the product of evolutionary advancements in regulations, technologies, products, venues, news, investor sentiment, and probably even twitter. It is not a simple mosaic of different actors operating in isolation. The interdependencies of every participant and every system has led to an exponential growth in complexity.”

It sounds like our regulators are very aware of how complex the seemingly simple process of trading stocks has become. They are struggling still to understand all the mechanics of the equity market. But as they try to sort the machine parts out, the public is catching on. They are figuring it out, not by years of studying the data and writing academic reports, but by simple common sense. And many of them do not like what they see and are pulling their funds out of the equity market. As Abraham Lincoln (and Bob Marley) said:

“It is true that you may fool all of the people some of the time; you can even fool some of the people all of the time; but you can’t fool all of the people all of the time.”