Adding Fuel To The Fire: With Water

He we are the day after when the “Storm of Storms” has hit the eastern seaboard of the U.S. with the devastation rivaling the asteroid believed to have hit the Yucatan millions of years ago and wiped out the largest lifeforms of the planet.

At least that’s the way Sandy has been portrayed across the media. She’s causing distress and hardship yes, but as of this morning her trail of destruction seems more inline that she’ll fall more into a nuisance based aftermath rather than the death and destruction equivalent of a Mayan apocalypse.

So here is where things begin to just not add up. When the tragedy of September 11th, 2001 happened one of the first concerns regarding the markets was to ensure in the event of any similar events; the markets could operate, operate correctly, and efficiently.

We were told at great lengths from all the powers that be both past and present not to worry because – contingencies were now in place. Shorthand for: “Don’t worry, be happy. We got this.” It would seem like all of that has had cold water (salty as a matter of fact) thrown all over those reassuring statements.

I understand the need of not having or needlessly placing or putting anyone in harms way. However, what I don’t understand is this: If you had contingency plans in place to handle disasters and keep people safe. You mean to tell me you those plans can’t or won’t be implemented because one would need to put people at risk to implement them? Really? I mean…Really?

Maybe I’m not that smart (but I did stay at a Holiday Inn® once) but it would seem to me that you actually didn’t have a plan. Which is exactly what adds fuel to the fire of the markets are both broken, rigged, and Joe and Jill public are on their own. The very same people the market needs.

It seems every time one turns on the television or radio to see exactly what protections were in place to protect participants in the markets after some event we see exactly the opposite of what we thought we should.

Scandal after scandal shows the protective bodies seemed more concerned on protecting their own derrieres rather than the public they were entrusted with.

We have glaring examples such as Bernie Madoff running a scheme for decades as the bodies to ensure such a thing couldn’t happen run around screaming to anyone who’ll listen (or print); “This was so sophisticated we can’t be to blame. We need better tools.” I think it became apparent there were just maybe a few too many “tools” that caused this debacle.

Just when that seemed behind us we get headlines one after another along the lines of “Rogue trader loses BILLIONS” or “Hedge Fund Illegally Uses and Loses All Their Customers Money” and one of the latest “The Algo’s Turn on Their Creator Nearly Collapsing Firm.” Yet we are supposed to feel safe because a boatload of agencies containing more acronyms than a warehouse of alphabet soup was eying the horizon for any storms. Maybe the scope was fogged. Or worse, someone pulled the prism.

All the above is just touching the surface of problems one has witnessed at far more of an alarming rate than one is comfortable pointing out. Not to mention the scandals within the scandals that you just can’t help shake you head at. i.e.: The MF Global scandal of using customer funds only to find out Mr. Corzine will be exonerated to some extent because of some legal technicality where we seem back to what the definition of “is” is. I bet the poor traders, and others that lost their money and lively hoods don’t have any alternative definition for how they feel where their money was supposed to be.

What part of “Don’t Touch” needed to be clarified exactly? Oh, and by the way in case you haven’t heard. It’s rumored he’s considering starting another hedge fund. I feel safer already.

Which brings us around on a slow row boat to today. The markets in an unprecedented move are closed for a second straight day. While at the same time there are rumblings on whether or not they will be open tomorrow. Here’s where this once again looks and feels down right squishy and fishy.

How could the electronic markets be closed all day Monday when Sandy was off shore not due to reach landfall till near 8pm EST. Closed all day Tuesday when Sandy had passed and the aftermath apparent. Yet the switches are turned on at 6pmEST Monday night while Sandy was actually overhead wreaking havoc, flooding subways, businesses, and more. Only to watch the electronic markets operate what appeared as flawlessly overnight through all that destructive may lay causing massive blackouts and wind damage leaving millions of people without power.

And yet not as much as a blip. The only blips on the screens (or lack there of) seems to be caused by the continued hand wringing of whether or not to open Wednesday. Something just seems wrong with the reasoning given.

So to throw even more water on this smoldering pile I can’t get out of my head an interview that happened Monday morning with Charles Gasparino on Fox Business® channel with one of the heads of the electronic agencies.

As I stated earlier one of the reasons given why they didn’t want to turn on the electronic only systems was out of concern for the people who were needed to man the actual technology centers. OK, but I’ll say it again: You made a backup system that in order to protect people from danger, you have to put people in danger? Something is wrong with that answer, and for me sounded alarm bells.

One of the suggestions why they weren’t opening eluded to by Mr. Gasparino was that he was hearing from his sources that it was the HFT players (High Frequency Traders) that were up in arms about the exchanges opening on some form of emergency backup system. Whether true or not it makes a thinking person ask if it were true: Why? What would be the reason? How would that hurt them, or worse hurt the markets?

Then it hits you like the first wave of a storm surge. Maybe it’s because the emergency system that runs the markets are exactly where the HFT players are not. At an undisclosed location! The problem with this scenario is it fuels conspiracy theories because it makes sense if you like the dark alleys of conspiracy as much as the exchanges love their dark pools.

It’s been well reported and documented elsewhere that these menacing machines have been placed as close as possible to the actual servers the exchange uses to route their order as to enable them to front run or what ever else they do. The closer they are, the more of an advantage these algo’s have over anyone else. Including each other.

Could it be that the markets were actually closed not because they couldn’t operate but rather that the HFT computers couldn’t operate because what they rely on for their advantage would be gone? i.e., Their proximity.

If the algo’s lost their advantage of order execution they would be at the mercy of efficient markets. You know, that thing they always say they’re responsible for. Heaven forbid there would be a Bid and Ask not generated by them with the ability to be pulled in nano seconds. Rather by an actual order placed with someone willing to actually Buy at said price or Sell. Oh the humanity if that is the case.

Would the markets themselves also have a stake in making sure the illusion of “deep markets” was perpetuated? Imagine if the markets opened and to what is normally reported 70% of all the markets trading didn’t show up because the HFT computers couldn’t play? Would something like this almost be more frightening to the markets than the chaos currently being dealt with in the aftermath of Sandy?

The longer the markets stay closed, the more fuel this smoldering pile lives on. Just when you think water puts out fires, you find out it just might fuel it more. Or put another way: The emergency system can’t be used because it may cause an emergency.

© 2012 Mark St.Cyr