Wednesday, May 26, 2010

DOW Breaks 10,000

Now how did THAT happen?

No, really, was it only a month and change ago that the DOW surged over 11k, and everyone was sure that whatever was wrong, it wasn't wrong anymore, and things were going to get better, at least for the masters of the universe and the social investment funds that propped up the stock market. And we could stop kvetching about how Wall Street was falling apart and go back to complaining about how Wall Street was recovering and leaving Main Street behind (again)?

And it doesn't seem that there IS any one villain here, according to the trades. Market correction. People are mad that the gummint is being mean to the bankers. People are mad that the gummint is being insufficiently mean to the bankers. Greece, Iceland, Spain, or your favorite floundering western economy of the week. The BP spill. The fact that the BP spill is still spilling. Government action, government inaction, or (shakes magic 8-ball) just a market correction after all.

Actually, I think one of the culprits is High Frequency Traders. These aren't real traders in the pits, but rather financial bots armed with primitive AI and very, very short attention spans. A lot of operations work off algorithm trading, making their choices based on computer models. The HFTs, however, work at blinding speed, buying into and then selling within fractions of a second, finding opportunities where mere mortal meatspace traders cannot follow. Indeed, they can see a large retirement fund lumbering towards a target, dance ahead of it to invest, and then, when the fund has purchased, quickly sell off from the resultant bump the purchase gives the stock value. Then do it again, at a speed that would impress The Flash.

Such HFTs also create a lot of churn in the market, and a lot of liquidity. And that seems to reflect in the fact that it becomes a self-fulfilling prophesy. When stocks are trending up, they tend to follow that trend and help to perpetuate it beyond a supportable point. Similarly, when the market takes a short, sharp, shock, these same HFTs can be pulled quickly out of the system, drying up ready money and with it the liquidity that greases the wheels of modern capitalism. And that can make a sudden downturn a cliff for everyone still trading in Realtime.

This happened with the sudden precipitous drop a few weeks back when it seemed that the bottom fell out of the market (did I mention that these HFTs are not as regulated to the same degree as other investments? Ah, the joys of freedom of the marketplace). And now we see a general deflating as algorithms are rehoned and refined.

So there should be a lot of wild rides in the near future, and I would be unsure if we are moving upwards or downwards. But I am keeping my magic eight-ball handy.

More later, e