First Thing We Do, We Kill All the 'Bots

While the punditry still searches for a "glitch", ZH got it right: we are seeing the consequence of a market driven primarily by 'bots. Read the WSJ take on this in The Dark Side of Algorithms, followed up by Computer Trading is Eyed, summarized:

When the NYSE went into a circuit-breaker slowdown, called by the human specialists, trades spilled over into other exchanges. The specialists only manage 25% of trades anymore. 

The 'bots take advantage of inter-exchange divergences and found them, as the NYSE fell behind.

Two major 'bots had also shut down from trading. The buyers had left the market. 

You can listen to the voice in the pits: there were simply no buyers, no bids. 

This is how Accenture got to 1c: the 'bots ran down price points in microseconds looking for a bid, and  seeing none, went to the bottom. No buyers, no bids. 

The mindless machine did what a human market maker would never do. A person would have realized something odd was up and stopped. The human market-makers did react, but their time scale is measured in seconds - an eternity to a 'bot. 

When the 'bots hit the bottom, literally, at 1c, they stopped, as any idiot-savant machine would do. When a real (human) bid came in, it was way above the fake HFT attempt to suck all the margin between bid/ask.

You could do a pretty funny treatment on this, when the dust settles: see what happens when you turn the market over to HFT 'bots gaming each other! Maybe this is how we can get to Dow 36,000!

Maybe instead this fall will scare the H (as in HFT) out of us. Read Sy Harding's morning rant: program trading used to arbitrage inter-market divergences, but that is below 1% of their activity. The other 99% is gaming the system for no useful value. Ever wonder why we get magic runs up near the close? Did you know that 'bots are now 50-70% of all trading? And where was their supposed liquidity when we needed it? 

How did our rudderless SEC let it come to this? HFT is designed to skim the margin between bid & ask, scamming the real traders who are trying to take or lay off a real position in a real market. The machines trade back and forth, gaming each other, and not taking real positions. Now that we know the purported "liquidity" justification is bogus, why wouldn't the SEC ban HFT Monday morning?

The fault lies not in our machines, but in our saves - our reckless attempts to paper over real problems with gobs of debt and heaps of hope. 

Economists talk of "moral hazard" and people's eyes glaze over. Let me try this: 

We live in the Era of Entitlement where: 

• Greece can live beyond its means
• Greek public workers can retire young
• California public workers deserve above-market salaries
• It is ok to fake an injury to get better retirement benefits 
• People who cannot afford a house should be able to buy one anyway
• Liar loans are ok as long as fees get paid and someone else bears the risk
• Katrina may have been a problem, but it was somebody else's problem, so we didn't need to stock fire-booms to prepare for an oil spill

... and on and on across all sectors of responsibility.

There is feverish activity this weekend between the IMF, central banks, European governments and investment banks to come up with a better bailout of Greece: a Wolfpack Fund. The first solution ran into the Creditanstalt Problem that I warned about two weeks ago: instead of calming markets, creditors took it as their last chance to run for the doors before the rest of the PIIGS-in-Poo failed. 

The Wolfpack solution is based on the false premise that the problems are coming from the pack of wolves (shorts) trying to drive down the Euro and the bonds of the PIIGS. The wolves are simply calling the bluff of papering over the problem without fixing it (which means getting the PIIGS debt back in alignment with their income). The Wolfpack fund is larger (€500B) than the last fix (€110B), but rather than ameliorate the run is likely to embolden it: it gives liquidity when the problem is insolvency. The PIIGS are still insolvent with no way to cover the debt nor the will to take tough measures other than to rely on the generosity of strangers to push the can down the street a little farther. 

The whisper this weekend is Wolfpack will be further backstopped by €1T from the Fed and ECB, financed by quantitative easing (QE). Since no one believes the Greeks are serious about solving their problems, what if this backstop fails? There is no other bullet left in the gun. 

The crash last week may have finally begun to change minds: Tom Friedman in the Sunday NYT talks of taking a root canal to the problem rather than painkillers. Andy Kessler in the WSJ suggests that the cornerstone of confidence in the Euro has broken, and the Euroland entitlement problem has to be faced. Papering over the problems and continuing the Era of Entitlement with false promises fueled by debt is not the path of serious people. Maybe it is time to take the problems seriously. I fear, however, the blue pill of the Keynesian dreamworld will require the final $1T backstop to be tried, and fail, before we can finally take the red pill and deal with the reality. 

Until then, party on! A Wolfpack Bailout will likely bolster the Euro and spark a 300-400 pt rally in the Dow. 

Comments

[Wave Rust]

Well said, Duncan. But you and many others have repeated the same message to the choir before.

Liquid insovency has traction in the US.
When the Fed gives up here, the poop will hit the fan jet.

The social memory of the babies of the 30's has just about died off. Those left have no voice to be heard by the generation left behind to live through and manage the potential debacle.

As Mr. Nash wrote, "Teach your children well ,,,"

wave rust

[Hank Wernicki]

hello there are no bots just fractals eom

[Wave Rust]

TraderQ posted these two

" Here is the Smoking Gun that decline was Natural Law....

http://3.bp.blogspot.com/_OSfvk1xrysQ/S-YsVj5Ir9I/AAAAAAAAERY/yroL5PgD-3g/s1600/1422caldays.GIF

Source: http://csiwallstreet.com
Posted by: TraderQ | Sunday, May 09, 2010 at 01:27 PM
-------------------------------------------------------------
Looking at that 1422 day cycle, it has caused some other interesting drops. Famouse one being the June 1932 panicky 10% slide.

June 1932 was 20 cycles of 1422 ago.

Posted by: TraderQ | Sunday, May 09, 2010 at 02:01 PM "

What is more significant about the June '06 date derived from Mahoney's "1,422 days crash cycle" (see chart linked) is that the price high a few days ago was the exact price low in June '06 for the Dow, SPX, OEX and NYSE, but not for the Naz's or Rut's and the rest of the small stock riff raff indices.

I don't remember simultaneous exact repulsions at the same resistance points at the exact price by so many indices.

Maybe I have missed that convergence before but this startling to me. It maay not mean much in the long run but it sure is unusual at least.

musta bin a fed bot. haha!

wave rust

P.S. Hank!
Bots exist to create fractals for you. But you knew that, right? :)

[?]

They should not have busted the trades that the BOTS did (do an audit trail to find out which sellers down to 1 penny were BOTS). Teach them a lesson for exploiting the system for their own benefit.

[Roger D.]

This market went up faster than it declined for 13 months and the market "breaks". People think that "break" is highly irregular,strange. Parabolics always break and after the unsuspected move a retrace of 62 to 66 pct is a common occurance. A rise to the 1155-1160 area is expected and then a collapse to 850-900 level initially.

Roger D.

[TraderQ]

Two more Smoking Gun charts this event was a Natural Law fractal....

http://csiwallstreet.com/new-page-6.htm

[TraderQ]

Latest Stock Market Recap
http://www.youtube.com/watch?v=DwdGQQnYqyc

[Chabazite]

Great post Yelnick. Exactly the way I see it.

[joe]

"First Thing We Do, We Kill All the 'Bots"

How about first thing is trash Bob and Duncan for running this ponzi website

Joe

[Wave Rust]

Crash up and bullish, as I stated ,,, but it's only going to last for a few days.

That crash will be a crash up and they will condemn it again- all the way to new highs.

,,,,

It's a trader's market. Investors beware. Down crashes are bullish, eventually ,,,, and usually quite soon.

Posted by: Wave Rust | Friday, May 07, 2010 at 07:49 PM

[Account Deleted]

DG Yelnick !!

It seems the Triangle count has gone awry.Now what other alternatives can we look at.

Regards
VB

[t]

short short !!!!! the top is in !! ha ha ha ha
u loosers

[MHD]

In Robert Prechters book CTC, one wonders whether his view that the Feds will not print their way out of this mess as it would destroy their only power which is the value of its currency. It seems that the Feds are doing exactly what Mr. P. said they can't possible be that stupid to do.
Would you not agree Yelnick?

[MHD]

Gee, do you think GS went long Friday. Should be 36 winning days in a row!

[Molecool]

Good job Roger - now let's see if the shoe drops.

[yelnick]

VB, DG - the alternatives were in my Hold the Optimism post:
If the pop on Monday breaks through the 1129 and 1138 levels, the triangle may be a larger structure. Neely suggests this could be the start of a wave B triangle before the final rally to new highs. A bit of a dramatic triangle, but a count worth keeping in the back of the mind as we see how Monday turns out. 
The other possibility is that yesterday was an extended fifth wave, and is done at the Sp1066/Dow9870 level. A strong bounce would be expected, but not to new highs. A corrective wave cannot be a simple five-waves down. Typical levels for the bounce would be: 

38% bounce to 112550% bounce to 1143 62% bounce to 1162
The S&P got to 1164 in the pop and faded. That is the level to watch. Right now if we consider the Thurs plunge as the end of a five-wave down-move, the bounce went ABC with the B wave legs bcd of the putative triangle, which broke as a flat. The pop up is the C wave, or the start of the C wave. 

A reasonable alternative way to look at this is not to take the 'bot bottom as the bottom, but the prior level before the machines went haywire, of around Sp1090. Then the target retrace is 1170 for 62%. This would suggest that wave C may drop then have a final wave up to 1170 +/- 8 pts. 

[yelnick]

Joe from Disney - Ponzi website? I think you meant Mickey Mouse website! Or Goofy. Or my favorite, Buzz Lightyear ("to infamy or beyond!").

[MHD]

I'm with Karl Denninger, everyone should stop paying on any debt, and let the government take care of it. Or better yet, just give everybody their own personal printing press!!!

[Account Deleted]

Yelnick !!

As Neely says a fifth Wave Extension is the only wave that has to be retraced by more than 61.8 % but can never be completely retraced.So incase of an assumption of 5th Wave extension we should look for a level higher than 61.8 or something higher than 1162 or 1170 minimum but less than 1219.

Really the way mkt has been tearing away NEELYs count now gain more prominence as the entire fall has been retraced by more than 0.618 in less time which makes a larger B wave triangle more than a possibility.

Regards
VB

[Michael]

Still ong ACI, BTU, CLF, and FCX from Thursday.

:)

[yelnick]

VB, great to know that the 62% rule is off! this will make everyone sweat even more as the bounce pushes the limit!

[yelnick]

MHD, as to the Fed printing money, not yet. The Fed assumed some toxic waste in exchange for $1T reserves, but has a plan to sterilize those reserves from turning into money y keeping them in the Fed (ie via interest on those reserves). We have not yet tested that. Instead the Fed has been swapping those bad debts out in exchange for mostly mortgage backed securities plus new Treasuries. So far they are simply repairing their own balance sheet.

Now possibly the swaps with the ECB could leak out as new money, but that does not seem the goal. The ECB however just lost its virginity by monetizing the solution. So we might now see inflation emerge in Europe to the horror of the Germans.

The WSJ lead editorial today is worth reading. Summary is that the Euro is not the problem (ie all the bleating about how a Euro without taxing/spending power is a thin currency); Keynesianism is the problem. LEtting the PIIGS act foolishly was the mistake. You cannot blame the Euro weakness on the Euro when the blame lies on the fiscal profligacy of the PIIGS

[Account Deleted]

Yelnick !!

The Triangle Neely has been talking about would be quite a big one considering the minimum thrust requirement out of this triangle would be 75 % to 125 %.That brings in to consideration a rise 112 to 187.5 points on SNP from whereever the e leg ends.This would be one hell of a rally man.IF this turns out we may not find a bear on Wall Street for Decades i think.

Regards
VB

[Account Deleted]

Yelnick !!

Did u consider my earlier count I had posted regarding the fall from 2007.

Regards
VB

[vipul garg]

VB,
the previous rally was 1050-1220 , that didnot take out all the bears, what would be different this time if lets say rally of 180 spx points comes about.

[yelnick]

VB, yes, have been pondering it. Seems to me it is a stretch to define a triangle with a deeper c leg (the wave from Jan to Mar 2009). Deeper B, ok; long C, ok; but deeper C is odd.

Neely's triangle uses the Nov20 low (741) fits better, and oddly enough ends about where Prechter started calling for the top (late Aug into late Sep). A third idea is one I raised in Oct/Nov, of a triple correction that will end with a horizontal contracting triangle. You could get there with July the first X and Jan/Feb the second X, and the run from Feb5-Apr26 as A of the final triangle .. we would be in the B. 

Here is the original idea from VB for new readers:

wave A down off 2007: From 26Dec07 as a Double Combination Ending with a Triangle:
- The first combination being 1499 (26/12/2007) to 840 (10th Oct2008), followed by an X wave
- The second Combination starts from 4th Nov2008 as a Triangle with a Large C wave."a" 
-- a from 1007 to 741
-- b from 741 to 944 (6Jan2009)
-- c from 944 to 666
-- d from 666 to 930 (8May2009)
-- e ending at 869 (8July2009)


The Triangle ended on July9 2009. The B Wave actually Starts from July8 2009.

The the Breakout (Thrust) from this triangle achieved near abouts 125% pattern implication. The widest leg of the triangle C leg measuring around 278 points (347 points being 125% of 277). 347 added to 869 comes to 1216 and this is what we achieved in this rally.

[DG]

VB,

Just out of curiosity, why do you think that Neely's "big picture" count needs to be modified? I can see disagreeing with him on the potential path forward, but that structure has been in place for years now and has served him pretty well. Given the fact that he's had years to consider whether or not it's the "right" structure, don't you think that he'd have revised it by now if it were in defiance of an important rule or there were a better count? Granted that he's shifted back and forth on whether November 2008 or March 2009 is the more significant low, but that is a minor issue relative to the 8-9 years of wave structure already "confirmed".

[Mamma Boom Boom]

A couple of weeks ago, I mentioned that the PPT was not in the mood to support the market. As a matter-of-fact, they may even be thinking of teaching everybody a lesson.

This from Max Keiser:
"May 6th was an unequivocal act of domestic financial terrorism in America. A day that will live in infamy.

To scare the lawmakers, themselves large owners of the very banks and stocks that they are supposed to be regulating, a financial Weapon of Mass Destruction was put to their head and they acquiesced.

As the inventor of the continuous double-action, market-making technology (VST tech. US pat. no. 5950176) that is referenced 132 times by program trading and HFT patents since 1996, I can tell you that Goldman, JP Morgan and the gang simply pulled the ‘buys’ from their computer trading programs and manufactured a crash. And when the coast was clear, and it was clear the politicians were not going to vote for anything that would break up the ‘too big to fail’ banks; all the ’sells’ were pulled from the computers and the market roared back.

This is a Manchurian Candidate market where program trading bots start the ball rolling in whatever direction Wall St. wants the market to go and then hundreds of thousands of day-traders watching Cramer on CNBC jump on the momentum bandwagon and commit the crime for the Wall St. financial terrorists, who then say, ‘It wasn’t us, it was ‘the market!’"

[Steven_737]

http://www.zerohedge.com/article/unfuckingbelievable-goldman-has-zero-trading-loss-days-last-quarter

[Account Deleted]

DG !!

I am in no way altering NEELYs long term count.All I am saying is that the C Leg of Neely long term FLAT or NEUTRAL Triangle from 2000 starts from 26Dec2007 thats all

Regards
VB

[DG]

VB,

But you would possibly put us in the wave-(D) of the Neutral Triangle since March 2009, no?

You should bounce that idea off of Neely. He is pretty good at responding to people with serious inquiries.

[Account Deleted]

DG !!

Yes we could be in a D leg of a NEUTRAL TRIANGLE since July09 and only MArch09.

Regards
VB

[Account Deleted]

DG !!

Alternatively we couldve just completed the "a" leg(July09) of C leg of Neutral triangle could be currently in the "b" Leg which could lead us to know whether this entire C leg is forming as a Triangle for a FLAT or a ZIGZAG.

Regards
VB

[DG]

"Yes we could be in a D leg of a NEUTRAL TRIANGLE since July09 and only MArch09."

The "thrust" out of the July lows was probably not powerful enough to qualify as a thrust out of a Triangle.

[Account Deleted]

DG !!

Alternatively we couldve just completed the "a" leg(July09) of C leg of Neutral triangle and we could be currently in the "b" Leg which would further tells us whether this entire C leg is forming as a Triangle for a FLAT or a ZIGZAG.

Regards
VB

[marketman]

Is Neely still short the June S&P futures at 1187 on an hourly and daily basis, and the SPY on a weekly basis at 119.11?

Looks like he's giving a TON of money back, if he is.

[Dratler]

Neely exited all shorts Friday.

[upstart]

I don't see any big deal. Correction was like a super-mini 1987, explained as just one of those things that naturally occur in the markets. You probably couldn't do anything to change it except something that would have made it take more time to be over. You could argue it was the c-wave of a flat that had a rather extended b-wave.

[AJ]

Not really a coincidence in my opinion that the sudden drop stopped at the price level of the 4th wave of the prior impulse. A nice (really) sharp bearish zigzag!