Why Thursday's Market Crash Was Caused by Computer Failure or Errant Trades

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The trading pattern on the U.S. markets on Thursday, May 6th can be explained by only one of two things - a huge erant trade or a computer system failure.  Even after the market close, the NYSE was claiming that there were no technical problems with its trading system. Citi specifically issued a statement that it had nothing to do with implementing an errant trade. Nasdaq however said that it was investigating possible erroneous transactions executed between 2:40 and 3:00PM.

It wasn't so much the drop that was unprecedented. The waterfall decline that took place for approximately eight minutes somewhat after 2:30PM is common in crashes. Even during crashes however, numerous intra-period gaps on the one-minute chart aren't common. There were four such gaps yesterday in S&P 500 trading. Large market indices almost always trade continuously and the probability of this type of trading pattern is extremely small. Even less probable was the instantaneous recovery of the indices. The S&P 500 also has four gaps on the upside in only eight minutes, when it rose approximately 50 points.  During that same time the Dow Jones Industrial Average was rising around 500 points. None of this represents a normal trading pattern.

The major indices were damaged enough as is on the day.  The Dow was down 348 point of 3.2%. The S&P 500 dropped 38 points or 3.2%. Nasdaq gave up 83 points or 3.4% and the small cap Russell 2000 lost 28 points or 4.0%. Of all the major sectors, financial stocks were hit hardest closing 4.1% lower. The confusion caused the VIX, the volatility index, to spike above 40. It was in the mid-20s only two days ago. It closed at 33.19, up 41% on the day. This type of movement in the VIX is extreme and is likely to be reversed in short order. Gold rallied in the confusion.

Having looked at the charts as the sudden trading plunge and the subsequent recovery that took place during and after the market close, I noted the charts changed over time. Some of the gaps on the charts disappeared and a straight-line trading pattern the existed for a while before and just after 3:00 disappeared on later charts. The straight-line trading pattern only exists if trading has been halted or if there has been a break in the information feed from the exchanges so no data is forthcoming. Either way, traders and investors are entitled to an explanation of what really went took place. Otherwise, they might think there is either a cover-up of a serious technical glitch or collusion by the big players in manipulating the market.

Disclosure: Sold VXX.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Feds Probe Hedge Funds in Euro Collusion Plot

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


According to the Wall Street Journal, the Justice Department has launched an investigation into whether hedge funds colluded to drive down the value of the euro. Not stated in their coverage was that collusion may have gone well beyond just trading activities however. Manipulation of media news flow concerning not just the euro and the U.S. dollar, but also the condition of U.S. government finances were almost certainly a part of the bigger picture.

The euro lost 10% of its value from early December to its recent low because of the Greek debt crisis, even though Greece represents only 2% of the euro zone economy. The euro's drop has been accompanied by a rise in the U.S. dollar - money coming out of the euro has to go someplace after all. Any reasonable analysis however indicates that U.S. finances are as bad as Greece's, which in turn are the worst in the euro zone. Selling the euro to buy the U.S. dollar just doesn't make sense on a fundamental basis. Mainstream media coverage buried that message however and this was particularly noted in financial circles in Europe. Was supportive mainstream media coverage that helped the hedge funds make money just a convenient coincidence?

As usual the only place the investing public was assured on getting an unbiased slant on this issue was from the independent blogosphere (readers take note, not all blogs are operated independently of Wall Street). Some of these blog posts were strongly attacked by commenters who went to great lengths to talk up the strength of U.S. finances.  If these attacks were coming from the hedge funds themselves, it wouldn't have been unprecedented. It is well documented that before Fannie Mae was nationalized it had a large slush fund used to depower and silence its political critics using misinformation tactics. Other major corporations have also investigated and smeared their critics as well, with GM's handling of Ralph Nader being one of the most prominent examples.

According to reports, the Justice Department is investigating the euro trading activities of Soros Fund Management, Greenlight Capital, Paulson & Co., and SAC Capital Advisors in its probe. George Soros is of course well known for making a fortune by causing a major devaluation of the British pound in 1992. A centerpiece of the investigation seems to be a dinner supposedly attended by representatives of all of these funds on February 8th where the euro and Greek debt were discussed. It is highly unlikely this was the beginning. If collusion did indeed exist, it was probably already underway by last November. Dedicated readers of financial news should remember that two internationally famous and globally well-connected uber-bears on the U.S. dollar suddenly became bullish at that time. Did they have access to information that the public didn't? The Justice Department should certainly try to find out.

The euro started trading down in early December. To conduct a thorough investigation, the Justice Department needs to look at trading records and emails (both sunponaed in the probe) from well before that time.  It also needs to look at any an all contacts with public relations firms and consultants, media outlets and employee activities that might have been used to influence both traditional and online media. The trading records are only part of the puzzle; efforts made at public relations support will fill in the rest of the picture.

It was only a short time before the news of the hedge fund euro manipulation investigation was released before articles began appearing online about how the Justice Department will never be able to prove anything and even if they do if will not be warranted.  We indeed have a very good recent example of the inability of the authorities to prove even the largest and most obvious Wall Street crimes. Bernie Madoff's $50 billion multi-decade Ponzi scheme was investigated by the SEC many times. They couldn't find anything. A whistle blower provided them all the details of how the scheme worked. The SEC still couldn't find anything. Mainstream media outlets were also informed about Madoff's activities. With the exception of Barron's, they sat on the information. The scam was revealed by Madoff himself only after it collapsed. If investors think that the powers that be make even the most minimal efforts to protect their interests, they should reconsider that thought. Perhaps the Justice Department will surprise us this time. We can always hope.

Disclosure: None

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Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.