Wall Street Journal Discovers How Algorithms Broke The Financial Markets

This blog and the other websites controlled by Greenteeth Digital Publishing have always warned against the tendency to be fooled by the hyperbole that is attached to concepts like Artifical Intelligence, Machine Learning and Algorithms.

“Algorithms will always make better decisions that humans because they are not hampered by emotions,” the people who long for they day when all humans will have processors implanted in our brains so our every action can be controlled by that bunch of fascist nerds who run Google. These people are not human enough to understand emotions are a vital part of decision making just as undefinable qualities humans possess are what propelled us to the top of the food chain.

One of the areas in which we are told machines have already surpassed humans is trading in the financial markets. Computer Algorithms can trade shared many times in a minute, which has been responsible for the crazy fluctuations we have seen over the past few years in stock markets. Computers, algorithms and mathematical models of various market sectors look at the numbers but do not see the bigger picture.

“Governments to ban petroleum fuelled vehicles by 2050 scream the headlines.”
“Buy Tesla, buy NIO, Buy Frarday Future the algorithms tell the automated trading systems seeing the likelyhood that these stocks will rocket in value. Go long on cobalt says the wise human trader, seeing after in depth research that sales of EVs in nations which have cut subsidies on green vehicles have collapsed, but calculation that despite technical and practical problems not being talked about (if you live in mountainous country, forget that Tesla, they’re rubbish at getting up hills,) EVs have a future as city cars and short range delivery vehicles. Cobalt is an essential component of lithium – ion battery packs, there are not enough cobalt reserves to make battery packs for a tenth of the number of vehicles now on the world’s roads and lithium is not exactly plentiful when we consider the amount needed to provide batteries for 1.4 billion vehicles (the estimated number on the road in 2017.

Logically, when news of a cut in subsidies, or the threat posed by China controlling 90% of the world’s cobalt reserves his the financial news feeds, algorithms will pick it up, stocks are going to crash in price, but demand for cobalt will still be there.

Rather belatedly (it’s algorithms spooked by the massive losses suffered in global markets towards the end of 2017 perhaps, )it seems the wall Street Journal has picked up on this flaw in algorithm driven trading.

Since about two years after the last great crash in 2008, markets rose in what appeared to be an irreversible trend, driven by  the $£€ trillions of Quantitative Easing cash central banks [umped into the major economies. Algorithms were programmed to ‘buy the dip’ while frontrunning (an illegal insider trading practice,)  every buy , virtually nobody – except for a few “fringe”, “fake news” blogs – complained about the threat posed by algo trading and thee accompanying deterioration in market stability.

Algorithm  – driven trading enables trades to be conducted so quickly it is almost impossible to police this practice. A few financial pundits and bloggers who tried to warn that the practice would artificially inflate share prices were dismissed as fake news merchants as the official line that the economies of the liberal democracies were first recovering strongly and then forging ahead as demonstrated by competely false measures like the Dow Jones Industrial Index and The Financial Times 100 share index.

In December 2018 it looks as if the financial centres are entering their first ‘bear’ market since the 2008 crash, which those with long memories will recall was brought about by banks’ and investment funds’ exposure to dodgy debt derivatives (toxic debt,) and now as then politicians, media and regulators launched witch hunts as they sought scapegoats (anyone but the guilty banks of course,) and tried to deflect blame from the real culprit, then the irresponsible risks taken by traders looking for quick profit, this time, in their quest to help commercial banks make risk free profits the central banks, supported by governments, have pushed the cause of “computerized trading.”

*

An article on the front page of The Wall Street Journal, 26 December 2018, titled “Behind the Market Swoon: The Herdlike Behavior of Computerized Trading”, features contributions from a number of WSJ writers who collectively opine that “behind the broad, swift market slide of 2018 is an underlying new reality: Roughly 85% of all trading is on autopilot—controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast.”

Absolutely true, furthermore a majority of the “autopilot” trading is also on the upside, that is on the assumption that a stock already trading at its highest valuation ever will go even higher. Strangely government finance chiefs, bankers and financial journalists did not see fit to mention this  for several years. Of course, to new media readers, the story is all too familiar: after all we bloggers and citizen journalists have covered all of this not just on occasions when markets dipped sharply lower, but more importantly in the times when on an almost daily basis they soared to new, ever crazier heights, making an eventual crash inevitable.

From the WSJ article:

Today, quantitative hedge funds, or those that rely on computer models rather than research and intuition, account for 28.7% of trading in the stock market, according to data from Tabb Group–a share that’s more than doubled since 2013. They now trade more than retail investors, and everyone else.

Add to that passive funds, index investors, high-frequency traders, market makers, and others who aren’t buying because they have a fundamental view of a company’s prospects, and you get to around 85% of trading volume, according to Marko Kolanovic of JP Morgan.

Deutsche Bank argues that momentum has emerged as the most important force in markets, something we have claimed for years:

However, one key reason why trading has become so complicated for most, and certainly the algos, is that there is currently virtually no momentum in the market – with the MTUM ETF which tracks momentum stocks having its worst month and quarter since its 2013 inception – results in making any attempt to piggyback on the market a money-losing trade.

Bad news for those whose savings or pension pots are invested in index tracking funds. But what does it mean in plain English. Let’s turn to that WSJ article again and some quotes from traders who after a week of crazy fluctuations are suddenly very concerned about maret conditions:

Boaz Weinstein, founder of credit hedge fund Saba Capital Management LP, said the market had been underpricing uncertainty. Now it’s taking into account political issues “at the same time as the Fed is hiking, the economy is slowing, and a lot of people are feeling like the best days for markets are over,” he said.

Mr. Weinstein says there are dangers building in the junk-bond market. One worry, he says, is that so many junk bonds—he estimated about 40%—are held by mutual funds or exchange-traded funds that allow their investors to sell any day they like, even though bonds inside the funds are hard to sell.

When enough investors want to cash out, such a fund has to start selling bonds. But without much liquidity, finding buyers could be hard.

A selloff could start simply, he said. “It has its own gravity.”

The punchline to all this is delivered by COOPERMAN [Sorry US reders, that joke will only be accessible to UK readers of a certain age 🙂 ] :

Electronic traders are wreaking havoc in the markets,” says Leon Cooperman, the billionaire stock picker who founded hedge fund Omega Advisors.

There is much more in the full WSJ article, which also addresses a collapse in market liquidity, the a knock on effect from equity markets to the credit market. If that happens, and it seems to be happening already, the stage it set for an almighty crash, but let’s face it, afall from around 26000 to 21600 between December 1 and close of business on December 24, followed by a 1100 point rally on 26 December is not sane trading, unless we accept that the behaviour of the electronic herd is “the new sanity.”

Pundits were not talking about algorithm driven, high frequency EFT trading “wreaking havoc in the markets” when the indexes were soaring ever higher. 2018 has been a terrible year for financial traders, the wild fluctuations have become more exaggerated than ever while public trust has fallen below decimal zero and is heading from absolute zero. This maybe explains why the WSJ article reports on the previously unmentioned aspect of what the force that propelled markets to such unrealistic heights. For around a  decade now High Frequency Trading by computer, algorithm driven decision making  and various other computer based trading technologies including the ridiculously misnamed Artificial Intelligence Systems that so many people not old enough to understand how computers actually work place such great faith in, have been overruling the professional traders most vital tool, gut instinct. Computers and their algorithms and Artificial Intelligence only do what their human programmers, who are rarely people who have ever been equity, currency or commodity traders, instruct them to. Thus they  simply accentuate momentum either up, or down by frontrunning the orders from investors

HFTs can only frontrun the flow of orders,to elaborate on the brief explanation in the opening paragraphs, looking at figures on financial news feeds only visible on the deep web it seems that after the massive sell off in December fund managers needed to tie up cash over the quarter end (I’m not going to go into why, I’m an IT systems person not a fund manager,) and placed orders for around $60 billon-worth of equities to bed-and-breakfast their cash for tax reasons. And the algorithms, having noted the sell off, followed their programmed instruction to “buy the dip” to the tune of that $60 billion.

In the process, instead of adding liquidity to the market, the HFTs sucked liquidity out of it. It’s good that mainstream media is finally reporting on the problem which will ultimately kick off the next big crash and possibly bring down the corporatist economy, i.e.  the takeover of the market by computerized trading.

*

– a crash which, however, will only be made possible by the Fed blowing the biggest asset bubble in history to monstrous proportions, something which the WSJ article does at least acknowledge in its final paragraph:

“It’s not just about the equity market throwing a temper tantrum, it’s far deeper than that,” said David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto. “This is a much broader global liquidity story.”

Encouraged by signs of economic strengthening, the Fed has been gradually raising interest rates from rock-bottom levels and selling back the trillions of dollars in bonds it bought in the postcrisis years. The central bank says the roll-back of stimulus is smooth. Others aren’t so sure what comes next. There has never been such a huge stimulus, and one has never before been unraveled.

Some believe there’s a hidden risk in debt that consumers and companies took on when borrowing was inexpensive. The Fed’s campaigns were  “fundamentally designed to encourage corporate America to lever up, which makes them more vulnerable to rising borrowing costs,” said Scott Minerd, chief investment officer at Guggenheim Partners. “The reversing of the process is actually more powerful,” he said.

Read the full WSJ article here.

 

Market Rigging: Another Conspiracy Theory Is Expose As Truth

goldman-sachs
Evidence of market rigging

A few days ago I had a comment from outside the community complaining about my having suggested several times in one article that the Rothschild Banking Dynasty was well served by the latest scaremongering pack of lies about climate catastrophe to come out of the United Nations Inter Governmental Panel on Climate Change (IPCC). I was gobsmacked to learn that there was still somebody who either did not know Goldman Sachs is owned by Rothschilds or did not know that Goldman Sachs was the leading player in efforts to create a trillion dollar carbon trading market. G. S. made many times more money from the putative carbon cap and trade scam than even Al Gore.

But after a promising start back in 2009 the putative carbon cap and trade market stalled and the Rothschilds had to look elsewhere for opportunities to loot the saving and pensions of ordinary punters. And their greedy, beady eyes focused on other cash cattle. And that is where out latest “conspiracy theory” that has proved to be pure, 24 carat truth.

Why then did Goldman re decide to redesign its uber-profitable FX vertical and redo it from scratch? Simples – their ability to rig and manipulate FX markets, which are now under every global regulator’s microscope after the “Cartel” members so foolishly let themselves be caught with their fingers in the till, no longer exists. The last big sting by the Goldman banksters was the gold bubble a couple of years ago when after spiking briefly at around $1900 an ounce, the yellow, shiny stuff crashed back to below $1200. That was done by short selling, a system for getting rich in the markets by selling stuff you don’t have and that probably does not exist at all as I explained in Naked Finance.

Exposure of a conspiracy to rig FX markets, coming so soon after the Libor scandal which exposed the manipulation of interest rates was a gift to make us “conspiracy theorists” (aka truth tellers) feel a little tingle in our lower abdomen.

Goldman’s move out of the naked shorting business in foreign exchange was confirmed when news broke that a dozen large investors have filed law suit against 12 major banks for “allegedly conspiring to rig global foreign-exchange prices.” Actually, “allegedly” is redundant in that sentence, anyone who has not known for years that the foreign exchange markets were rigged is either a Buddhist monk or a heavy drug user.

Wall Street Journal had this to say:

“The class-action lawsuit, filed in U.S. District Court in the Southern District of New York late Monday, was from a group of investors across the U.S. and Caribbean, including city and state pension plans.

“They accused the banks of communicating “with one another, including in chat rooms, via instant messages, and by emails, to carry out their conspiracy,” and for rigging foreign-exchange rates as far back as January 2003, the lawsuit said.

The banks sued are BofA, Barclays, BNP, Citi, Credit Suisse, Deutsche, Goldman, HSBC, JPM, Morgan Stanley, RBS and UBS, or, in other words all the usual suspects. And certainly all the Too Big To Fail banks that know they can rely on our money being stumped up to cover their arses.

In the complaint, the investors accused the banks of controlling foreign-exchange rates via a “small and close-knit group of traders.” They allege it became possible for banks to rig the market because the traders “have strong ties formed by working with one another in prior trading positions” and by in many cases living “in the same neighborhoods in the Essex countryside just northeast of London’s financial district.”

“They belong to the same social clubs, golf together, dine together and sit on many of the same charity boards,” the complaint adds.

And I can tell you they are often linked by having shagged the same women, oh yes, it’s an incesteous little world out there.

But the punchline is not that FX is rigged, as I said everybody who was paying attention knew that, but that as Goldman has shown by shifting its focus, the commodity market is the only one where manipulation, rigging and fraud are not only possible but smiled upon by regulators. Because one of the key commodities in said market is gold. And as everyone knows, alongside getting the stock market indices to all time highs, the other core mandate of central bankers everywhere is to push gold to 0, thus making fiat money the only currency in which goods can be traded and making us all slaves of our debts.

The worst news for champions of scepticism and freethinking is we are rapidly running out of “conspiracy theories” that haven’t been revealed as conspiracy facts yet.

(picture source)

RELATED POSTS:
TAFTA another free trade and corporate fascism treaty
Our New Unhappy Lords

Reverse Midas

You can always rely on Gordon Brown. More than any other Labour chancellor he has the reverse Midas touch. Everything he does turns to shit.

Since Gordon, desperate for revenue to underwrite his burgeoning public sector deficit, decided to sell off Britain’s god reserves not only has the price of gold quadrupled but the major trading nations (China and India) having lost confidence in the pound and dollar, are once more doing business in gold. The interest on our nation’s debts has to be paid in gold and thanks to Gordon we ain’t got none and so are at the mercy of a market n which the people who own the gold we must buy to pay our debts are the people we owe money to.

All together now, Gordon is a moron, Gordon is a moron.