Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Plunging Inventories have Zinc Bulls Ready to Run - 15th Feb 19
Gold Stocks Mega Mergers Are Bad for Shareholders - 15th Feb 19
Retail Sales Crash! It’s 2008 All Over Again for Stock Market and Economy! - 15th Feb 19
Is Gold Market 2019 Like 2016? - 15th Feb 19
Virgin Media's Increasingly Unreliable Broadband Service - 15th Feb 19
2019 Starting to Shine But is it a Long Con for Stock Investors? - 15th Feb 19
Gold is on the Verge of a Bull-run and Here's Why - 15th Feb 19
Will Stock Market 2019 be like 1999? - 14th Feb 19
3 Charts That Scream “Don’t Buy Stocks” - 14th Feb 19
Capitalism Isn’t Bad, It’s Just Broken - 14th Feb 19
How To Find High-Yield Dividend Stocks That Are Safe - 14th Feb 19
Strategy Session - How This Stocks Bear Market Fits in With Markets of the Past - 14th Feb 19
Marijuana Stocks Ready for Another Massive Rally? - 14th Feb 19
Wage Day Advance And Why There is No Shame About It - 14th Feb 19
Will 2019 be the Year of the Big Breakout for Gold? - 13th Feb 19
Earth Overshoot Day Illustrates We are the Lemmings - 13th Feb 19
A Stock Market Rally With No Pullbacks. What’s Next for Stocks - 13th Feb 19
Where Is Gold’s Rally in Response to USD Weakness? - 13th Feb 19
US Tech Stock Sector Setting Up for A Momentum Breakout Move - 12th Feb 19
Key Support Levels for Gold Miners & Gold Juniors - 12th Feb 19
Socialist “Green New Deal” Points the Way to Hyperinflation - 12th Feb 19
Trump’s Quest to Undermine Multilateral Development Banks - 12th Feb 19
Sheffield B17 US Bomber Crash 75th Anniversary Fly-past on 22nd February 2019 Full Details - 12th Feb 19
The 2 Rules For Successful Trading - 12th Feb 19 -
Financial Sector Calls Gold ‘Shiny Poo.’ Are They Worried? - 11th Feb 19
Stocks Bouncing, but Will They Resume the Uptrend? - 11th Feb 19
EURO Crisis Set to Intensify: US Dollar Breakout Higher
Stock Market Correction Starting? - 10th Feb 19
Gold Stocks Gather Steam - 10th Feb 19
Are Gold Bulls Naively Optimistic? - 9th Feb 19
Gold, Silver Precious Metals Update - 9th Feb 19
The Wealthy Should Prepare to Be Soaked - 8th Feb 19
US Business Confidence Is Starting to Crack - 8th Feb 19
Top Myths and Facts about ULIP Plans - 8th Feb 19
A Major Stocks Bear Market in 2020? - 8th Feb 19
Gold Market Extremes Test Your Mettle - 8th Feb 19
The Venezuela Myth Keeping Us From Transforming Our Economy - 8th Feb 19

Market Oracle FREE Newsletter

The Real Secret for Successful Trading

When Stock Market Computer Herds Hit Exits

Stock-Markets / Stock Markets 2018 Nov 22, 2018 - 12:37 PM GMT

By: Doug_Wakefield


"In a 2010 study of the 2010 Flash Crash, the U.S. Securities and Exchange Commission and the Commodities Futures Trading Commission  found that high frequency traders substantially increased volatility during the event and accelerated the crash...The Australian Securities and Investments Commission, the stock regulator in Australia, found in a 2012 study that during volatile markets high frequency traders reduce their liquidity supply and increase their liquidity demands....The Bank of Int'l Settlements looked at foreign exchange markets and concluded in a 2011 study that high frequency traders exacerbate volatility in stressed markets... The UK Gov't Office for Science published a large 2012 study of capital markets around the world and concluded that HFT/AT may cause instabilities in financial markets in specific circumstances.... High Frequency Trading: A Bibliography of Evidence -Based Research, March 2015

During the fall of 2005, while working on my research paper Riders on the Storm: Short Selling in Contrary Winds, I read very detailed research presented by Bruce Jacobs on the crash of 1987.  Jacobs laid out the case for portfolio insurance being a major contributor to the 22% one day record decline on Monday, October 19th.1  

The basic premise of this trading tool was to limit the losses of large money managers by buying stock market futures as the market was rising and selling market futures when it crossed a key threshold. 2

Sounds like a good idea, right? One problem; the fallacy of composition.

The fallacy of composition states it is an error to assume that what is true for a member is true for the whole. In other words, if you and a few friends have a signal to get you out of the market once it drops say 10%, then this should have little to no impact on the entire market. However, if your actions reflect a part of the largest and most informed money in the markets, your impact can now become THE MARKET.

I know, we are much smarter now. Our technology is far more sophisticated thus we assume this could never happen again. Right? Wrong.

If you have never studied or reviewed the lessons from the May 6, 2010 flash crash, I would strongly encourage you to do so now. Embedded in this text is a link to the SEC and CFTC’s report on the May 2010 flash crash.

A few lessons one can learn from merely reading the first few pages, is that today’s speed of light computer programs make decisions far faster than any human. In a mere 14 seconds that afternoon, high speed computer programs sold over 27,000 futures contracts back and forth between each other. This accounted for 49% of the trading volume while completing less than 1% of their buys (app. 200 contracts). 3   What did the public see? A 3% drop in the S&P 500 in 4 minutes before recovering.

Consider these comments from the section, “Lessons Learned”:

“One key lesson is that under stressed market conditions, the automated execution of a large sell order can trigger extreme price movements, especially if the automated execution algorithm does not take prices into account. Moreover, the interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets.” 4  [change to red text mine]

Knowing that the NASDAQ 100, S&P 500, and Dow Industrials produced their longest equity bull markets in American history as of this September, investors should not dismiss the recent big down days as merely another pull back. Maybe we will get a rally into 2019, but what if the all-time highs in Chinese and German stocks in January, and all-time highs by Canada, Australia, and the US between July and October are telling us the bust part of this credit cycle is here? Could trading computers “surprise” us and go from buyers to sellers?

A $30 Billion Computer is About to Start Selling Stocks, ZH, 11/14/18

This recent article asserts that UBS’ $30 billion computer, used for its Wealth Management clients, manages $2.4 trillion. Clearly only a tiny fraction of “investors” has this level of power in global markets.

It’s head of global asset allocation, Andreas Koester, stated that its quantitative – investing platform is close to reducing holdings from 50% to 20%. This is a sizeable amount to move out of equities as a defensive move.

With these massive computer trading platforms as buyers of stocks in the last few years, it was easy to ignore rising interest rates from 3 CENTURY lows (summer 2016), and central bankers REDUCING their balance sheets. However, with more signs of stress from real estate bubbles popping and warnings of a global economic slowdown, if trading computers herd as sellers, ignoring these realities will not be possible.

A Fifth of China’s Homes Are Empty. That’s 50 Million Apartments, Bloomberg, Nov 8 ‘18

BIS Warns Global Economy Risks Crisis ‘Relapse’, The Business Times,

Cycles have been around for centuries. No amount of market intervention and “assistance” will delay the cracking of a debt bubble forever. For this reason, every investor, big or small, should consider this comment:

“This is more like timing the big cycles right,” said Koester, who wouldn’t comment on the strategy’s performance or fees. “It’s not for being in and out every second week.”

When the bubble burst, the NASDAQ 100 fell 83% over the next 30 months before the bear cycle was complete.

When the banks cratered during the Great Recession, the KBW Bank Index fell 85% over the next 24 months.

To push these markets back to their 2018 all-time highs we also had to watch the largest intervention by central banks on record.

The Risks in Central Bank Balance Sheets are Clear, Bloomberg, 12/17/17

The numbers prove it; the debt bubble we have seen over the last decade is THE largest in market history.

Computers have no emotions. They merely react to buy and sell signals they have been programmed to monitor.


  1. Capital Ideas and Market Realities: Option Replication, Investor Behavior, and Stock Market Crashes (1999) Bruce I. Jacobs
  2. Here’s One Key Factor That Amplified the 1987 Stock – Market Crash, CBS MarketWatch, Oct 19, 2017 (30th anniversary)
  3. Findings Regarding the Market Events of May 6, 2010: Report of the Staffs of the CFTC (Chicago Futures Trading Commission) and SEC (Securities and Exchange Commission) to the Joint Advisory Committee on Emerging Regulatory Issues, Sept 30, 2010, pg 3
  4. Ibid, pg 6

Doug Wakefield

Best Minds Inc. a Registered Investment Advisor

1104 Indian Ridge

Denton, Texas 76205

Phone - (940) 591 - 3000

Best Minds, Inc is a registered investment advisor that looks to the best minds in the world of finance and economics to seek a direction for our clients. To be a true advocate to our clients, we have found it necessary to go well beyond the norms in financial planning today. We are avid readers. In our study of the markets, we research general history, financial and economic history, fundamental and technical analysis, and mass and individual psychology

Doug Wakefield Archive

© 2005-2019 - 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