Best of the Week
Most Popular
1. Crude Oil and Water: How Climate Change is Threatening our Two Most Precious Commodities - Richard_Mills
2.The Potential $54 Trillion Cost Of The Fed's Planned Interest Rate Increases - Dan_Amerman
3.Best Cash ISA Savings for Rising UK Interest Rates and High Inflation - March 2018 - Nadeem_Walayat
4.Fed Interest Hikes, US Dollar, and Gold - Zeal_LLC
5.What Happens Next after February’s Stock Market Selloff - Troy_Bombardia
6.The 'Beast from the East' UK Extreme Snow Weather - Sheffield Day 2 - N_Walayat
7.Currencies Will Be ‘Flushed Down the Toilet’ Triggering a ‘Mad Rush into Gold’ - MoneyMetals
8.Significant Decline In Stocks On The Cards! -Enda_Glynn
9.Land Rover Discovery Sport Extreme Driving "Beast from the East" Snow Weather Test - N_Walayat
10.SILVER Large Specualtors Net Short Position 15 Year Anniversary - Clive_Maund
Last 7 days
Watch This Group Signal Stock Market Trend Changes - 22nd Mar 18
Stocks are Gapping Beneath the Trendline Support - 22nd Mar 18
Fed Action Casts Shadow on Bullish Case for Stocks - 22nd Mar 18
A Strong Economy and Weak Stock Market is Bullish for Stocks - 22nd Mar 18
Fed Raises US Interest Rates 25bp – Where Are We In The Stock Market Cycle? - 22nd Mar 18
Why Spotify Will Likely Surge During Its IPO - 22nd Mar 18
SY Police Arrest Woman for Blowing Trumpet at Sheffield Tree Felling Protest - 22nd Mar 18
Facebook: The Anti-Social Network Covert Data Gathering - 21st Mar 18
Additional Signs for Gold and Silver Amid Increasing FOMC Tension - 21st Mar 18
Credit Concerns In U.S. Growing As LIBOR OIS Surges to 2009 High - 21st Mar 18
Stock Markets Are Flat-to-lower Before the FOMC - 21st Mar 18
Will Powell’s Actions Pop Stock Market Perfection - 21st Mar 18
Economic Moral Hazards of the International Criminal Court - and Philippines Withdrawal - 21st Mar 18
Larry Kudlow vs. Vladimir Putin on Gold - 21st Mar 18
Trump Builds Economy and War Machine - 21st Mar 18
This Stock Market "Illusion" Can Destroy Once-Vibrant Portfolios - 21st Mar 18
Gold Short-term Pull Back in Progress - 20th Mar 18
Stocks Appear to be Under Pressure - 20th Mar 18
Time To Eliminate Your Wall Street Tax? - 20th Mar 18
The Beast from the East Snow, UK Roads Driving Car Accidents - 20th Mar 18
Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - 19th Mar 18
2018 Reversal Dates for Gold, Silver and Gold Stocks - 19th Mar 18
This Tech Breakthrough Could Save The Electric Car Market - 19th Mar 18
Stocks Set to Open Lower, Should You Buy? - 19th Mar 18
The Wealth Machine That Rising Interest Rates Create Conflict With The National Debt - 19th Mar 18
Affiliate Marketing Tips and Network Recommendations - 19th Mar 18
Do Stocks Bull Market Tops Need Breadth Divergences? - 19th Mar 18
Doritos Instant £500 Win! Why Super Market Shelves are Empty - 19th Mar 18
Bonds, Inflation & the Market Amigos - 19th Mar 18
US Housing Real Estate Market and Banking Pressures Are Building - 19th Mar 18
Stock Market Bulls Last Stand? - 18th Mar 18
Putin Flip-Flops Like A Drunken Whore On Bitcoin Cryptocurrency Legalization - 18th Mar 18
How to Legally Manipulate Interest Rates - 18th Mar 18
Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - 18th Mar 18
Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - 17th Mar 18
Strong Earnings Growth is Bullish for Stocks - 17th Mar 18
The War on the Post Office - 17th Mar 18
GDX Gold Mining Stocks Fundamentals - 16th Mar 18
Nationalism, Not the Russians, got Trump Elected - 16th Mar 18
Has Bitcoin Bought It? - 16th Mar 18
Crude Oil Price – Who Wants the Triangle? - 16th Mar 18
PayPal Cease Trading Crypto Currency Bitcoin Warning Email Sophisticated Fake Scam? - 16th Mar 18
EUR/USD – Something Old, Something New and… Something Blue - 16th Mar 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

The Day the Free Market Died

Stock-Markets / Market Manipulation May 13, 2010 - 09:51 AM GMT

By: Christopher_Quigley


Best Financial Markets Analysis ArticleFollowing quite a number of requests this brief will deal with my understanding of what transpired last Thursday the 6th. May when just after 2.30 PM the Dow Industrials collapsed by nearly 10% and then suddenly recovered in 11 minutes. The implications of what occurred are far reaching and unless the regulatory issues are resolved we can expect similar “events” of like nature.

In the main to comprehend the evolving situation in the “Market” one must realise that there are now many markets. In the good old days, in America, all we had was the New York Stock Exchange where real people dealt with real market makers in real time. But computers in general and the internet in particular have changed all that.  Now in addition to the NYSE “public market” we have the (OTC) Over the Counter Market. The OTC is basically a private market between banks and large institutions which has little or no active supervision. I find this development strange because the trading activity on the OTC is 60 trillion dollars annually, while turnover on the public market is 5 trillion. Now in addition to public markets and private markets let us now bring “Dark Pools” into our explanation.

 “Dark Pools” What are they ? ” Dark pools of liquidity” are crossing networks that provide liquidity that is not displayed on order books. This situation is highly advantageous for institutions that wish to trade very large numbers of shares without showing their hand. Dark liquidity pools thus offer institutions many of the efficiencies associated with trading on the exchanges’ public limit order books but without showing their actions to other parties. This is achieved because neither the price nor the identity of the trading entity needs to be displayed. Many of the OTC “exchanges “used by the dark pools use high frequency trading programmes to minimise order size and maximise order execution. Now you may think that this manner of doing business on the “stock market” is carried out by minor unknown entities but this is not the case. Below I list the Independent dark pools, the broker-dealer dark pools and exchange-owned dark pools that we currently know about.

Independent dark pools: Instinet, Smartpool, Posit, Liquidnet, Nyfix, Pulse Trading, RiverCross  
and Pipeline Trading.

Broker-dealer dark pools: BNP Paribas, Bank of New York Mellon, Citi, Credit Suisse, Fidelity, Goldman Sachs, Knight Capital, Deutsch Bank, Merrill Lynch, Morgan Stanley, USB, Ballista ATS, BlocSec and Bloomberg.

Exchange-owned dark pools: International Securities Exchange, NYSE Euronext, BATS Trading and Direct Edge.

When you understand that all the big players in banking and finance are using the OTC system and have a turnover 12 times that of the “public” markets you get to wonder why there is a New York Stock Exchange at all. In fact there is a big difference between the OTC “private” market and the NYSE “public” market. The NYSE is comprised of market makers. These market makers are specialists who are obliged to buy and sell on their own and the publics’ account to create a liquid active market. The OTC market faces no such obligation. Over the past number of years attempts have been made to abolish the specialist role and remove the “human” engagement. The events of Thursday last indicate that this would be a move in the wrong direction.

In essence what happened on the 6th May was that the high frequency OTC trading programmes created “maverick trades” (the now infamous fat finger trade) which did not make sense to the NYSE specialists. Accordingly the NYSE stopped handling orders so that the situation could be analysed. The OTC computerized networks then began rerouting orders to other “markets” and with no “public” markets participating prices collapsed through sell stops and the rest is history.

There are many questions to be asked about this event, such as:

1.          Is a financial “market” that is only 8% “transparent” actually a market (5 trillion dollar public auction as opposed to a 60 trillion dollar private one).

2.          Is it time for more stringent regulation of the OTC market ensuring a more level playing field for all investors.

3.          Are additional “circuit breakers” necessary so that high frequency trading is brought deeper into the public management loop.

4.          What role is the SEC playing in ensuring that the introduction of new technology cannot compromise systemic integrity.

Whatever the eventual fallout from this mini intra-day crash, technically the market cannot take many repeats. Such re-runs would call into question the confidence the world has in American financial prowess and lead to a breakdown in the macro trend towards global integration of cross- trading networks.

By Christopher M. Quigley
B.Sc., M.M.I.I. Grad., M.A.

Mr. Quigley is 46 years of age and holds a Batchelor Degree in Management from Trinity College/College of Commerce, Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the Stock Market in San Francisco, California where he lived for 6 years. Now based in Dublin, Mr. Quigley actively trades utilising the principles set out in the modules above. This Wealthbuilder course has been developed over the last 9 years as a result of research, study, experience and successful application.

© 2010 Copyright Christopher M. Quigley - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Christopher M. Quigley Archive

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules