Flash Crash II – HFT and Computers Run Amok… AGAIN

Well that was certainly fun on Monday! Stocks crashed 1100 points at the open, rallied 800 points and the fell almost 300 points to close down 588 points. Given yesterday’s full Street$marts edition and the two blog posts I did here, I am sure most people were expecting a market update. After all, I did offer 3 Scenarios for Monday’s Trading and the market did end up following scenario number one the most. I will get to the market in a subsequent post. Of note, almost every single interview I saw and comment I read called for “staying the course” or not selling. I guess those were the same folks who told investors that all was well over the previous few months as the major indices peaked. Hmmm…

It’s not a topic I often mention, but from my seat, the system was clearly broken in the first half hour and the computers ran amock. It was beyond embarrassing and ridiculous, AGAIN. Just like we saw in May 2010, this was a second Flash Crash. NYSE and NASDAQ? Goldman Sachs, Citadel, Merrill Lynch and Virtu? You can hear crickets from the cats who ate the canary.

As someone who had forecast and was positioned for the correction, I was chomping at the bit to deploy some cash. Without any widespread firsthand knowledge, I believe that High Frequency Trading or HFT was responsible, not for the whole stock market decline, but for the quick acceleration and pricing dislocations or anomalies. Remember, HFT thrives when markets are volatile and liquid. Not so much in quiet and less volatile markets.

What I did see firsthand was enough small orders of less than 100 shares early in the day to make me believe that the computers were out of control as one of the footprints of HFT is odd lot trading or orders less than 100 shares. Let’s add in the outrageous pricing in the opening few minutes that went away quickly enough that I couldn’t even finish getting my orders in the que to execute. A little sour grapes perhaps? Absolutely, but there was also something very wrong with our markets.

As the day began and I was glued to my screen, I noticed that XLV, a healthcare ETF was in free fall, showing an opening loss of 6% which almost immediately became 20%. These are not high flying micro cap technology stocks that don’t trade volume. These are the most liquid stocks in the healthcare field. Johnson & Johnson and Pfizer account for almost 18% of the ETF. Memories of May 2010 and the Flash Crash immediately came to mind. I quickly checked IBB, a biotech ETF, and saw similar but not as dramatic weakness. That was clue number two as biotech is almost always more volatile than XLV and should have been down more.

xlv2

You can see what I am talking about in the chart above. XLV opened down 6% and quickly collapsed to down 26% at the bottom of the green candle right after the tall red one. Minutes later, XLV was trading at $69 or 20% higher. That’s not only abnormal, but shows a system not functioning like it was supposed to. And during this brief period as you can see above, volume was enormous, another hallmark of HFT.

I started looking at random large cap individual stocks both in and outside the healthcare sector and saw some truly astounding pricing dislocations in my opinion. Again, these stocks should not have fallen 20% in a matter of a few minutes. None had company specific bad news. GE, JP Morgan, CVS, McKesson and Verizon to name a few. I have not done a lot more research since then because I don’t think it’s worth the effort at this point, but I know from speaking with colleagues and peers that it was widespread in the ETF space. Just look at VHT, also in the healthcare space, below.

vht

I am not big crier of injustice and “demander” of government intervention to fix our problems, so you won’t find me flooding the SEC with calls and emails or creating a grassroots campaign to do so. I won’t be surprised, however, if the SEC does open a formal inquiry into Monday’s opening of trading as another Flash Crash did occur. While my clients may have lost an opportunity, there were thousands of investors who were likely stopped out of their positions when they should not have been, costing them untold amounts of money.

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STILL Targeting JP Morgan?

It’s really amazing how the media latches on to a story.  Not long ago, Apple was all the rage. Positive story after positive story.  As you know, I took the very unpopular other side of that equation publicly.  And they trashed me all over the place.  Funny how that chatter has really quieted down!

Now we have JP Morgan in the very unenviable position of being at the other end of that spectrum.  Negative story after negative story.  The media just feeds on it!  Once again, I am taking the unpopular side and saying that the JP Morgan news is totally overblown and much ado about very little. 

I will take Jamie Dimon over every single banker not only in the US but around the world.  He took control, owned up to the problem and heads rolled.  Citibank, are you listening and watching?  Bank of America, hello, anybody home?

http://articles.economictimes.indiatimes.com/2012-05-14/news/31701123_1_jp-morgan-dollar-bull-market-equities

JP Morgan, The Next Recession and The Wave of New Jobs

I did an interview with FOX Business on Friday where I offered my comments on the overblown mess at JP Morgan, which is the story of the day/week.  I also opined that the next recession in the US will likely be seen in 2013 or 2014.  I was somewhat surpised that the anchor thought that was so outrageous.  Except for the 1990s, we typically see one or two recessions per decade with one being more severe than the other when there are two.  Given that the last one ended in 2009 according to the folks who keep the data, by 2013 or 2014, we will be due for another. 

While I certainly don’t want to see another recession or navigate through another bear market, they are a fact of capitalism.  The key is what kind of shape the consumer and corporate America are in right before it hits.  I would argue that we are in a better position to weather the storm than at any similar period during the modern investing era.  And guess what happens on the other side of the next recession???

http://video.foxbusiness.com/v/1634285059001/is-jp-morgan-the-beginning-of-a-crisis-or-contagion