Hard-nosed Fed sends global markets reeling

Posted on August 27th, 2010 Dan

Revolution Not

More ominously, some Fed officials fear the central bank is already “pushing on a string” and does not have the means to revive the economy. Whether or not they are right, this comes as a psychological shock for investors schooled by the “Greenspan Put’ into thinking that there is a deus ex machina in the wings.

What goes up must go down… especially in a world being depleted of resources faster than ever.

Goldman Sachs said the yen was now overvalued by 20pc, or two “standard deviations” out of kilter

This is the most interesting aspect of this article. This implies that Goldman’s algorithms for calculating prices aren’t working any more. This has several very important meanings.

  • The High Frequency Trading Algorithms used by the banks aren’t or can’t take into account macro economic trends.
  • Their algorithms are much less effective at controlling the market now.
  • Most importantly, the markets have broken out of long and old trading patterns.

Add in that their algorithms have known bugs or purposeful defects, as was demonstrated by the Flash Crash, and this is a recipe for disaster. Now, anything could happen.

Here is a good example of the problem:Demonstrating An HFT Algo Gone Apeshit

Well, today we just experienced another mini flash crash, after some algo went apeshit and decided to hit every bid on the way down, all the way to 0.0001 (gotta love that sub penny quoting just above zero). Below we show how this algorithm pushed the stock price of Core Molding from its normal price of $4.12 all the way down to $0.0001 in the span of one second, after an HFT program went ballistic, and would have kept on hitting the subpenny $0.0001 bid in perpetuity. It must have been swell to be a CMT holder: one second your stock is worth $4.12, the next, it is worth $0.0001 (and no, not $0.0000, how else will the computers game the NBBO in subpenny increments).


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