Entries tagged with “mutual fund”.


The subtle airbrushing of market manipulation out of the public consciousness continues apace.  Despite clear evidence from IFPRI that market manipulation is creating the conditions of uncertainty that are driving up global food prices, nobody seems to want to address this in a forceful manner – and heaven forbid you raise this in any food security discussions in a development agency.  People will blindly argue that there is no evidence (except, of course, there is), and then when confronted with the IFPRI study will make absurd arguments like the uncertainty is creating the appearance of manipulation because, you know, IFPRI wouldn’t bother to make sure they had the causality going in the right direction before they published.*  So, we will just keep plugging away at the issues of supply to address global food issues, because why address the only factor that IFPRI could identify as having a causal effect on the rising food prices in 2008?

And now we see the same blindness spreading into our discussions of the financial markets.  In the January issue of Wired Felix Salmon and Jon Stokes return to the Flash Crash, the sudden near-600 point drop in the Dow that occurred back in May.  The regulatory agencies assigned to policing market manipulation more or less abdicated their responsibilities and absolved everyone of blame in their report.  This was absurd, and doesn’t hold up to the slightest bit of logic.  Now Wired is on board, running a “blame the algorithms” story that uses the flash crash as exhibit A.  They argue that Waddell and Reed (the managers of the mutual fund that made the trade)

used an algorithm to hedge its stock market position.  The trade was executed in just 20 minutes – an extremely aggressive time frame, which triggered a market plunge as other algorithms reacted, first to the sale and then to one another’s behavior

Sure – this is exactly how it played out.  But the issue here is not that the algorithms themselves were to blame.  Someone had the PROGRAM THE ALGORITHM FOR THE FIRST TRADE.  The algorithm did not decide to dump all of those futures contracts in 20 minutes.  The person who designed the algorithm (or, more likely, his/her employer) made that decision.  Once set in motion, I have no doubt that this trade cascaded through other, more conventionally designed algorithms, triggering all sorts of “irrational” behavior as they tried to adjust to the rapidly-changing market conditions.  I also have no doubt that whoever set up the original algorithm had some idea that this is exactly the sort of chaos that would ensure from their insane trade.  Everyone is now focused on events after the initial trade, and how trading algorithms might need more controls or oversight.  I think that is a reasonable position, but it does nothing to address the behavior of individuals willing to initiate market chaos by setting up insane trades.

Incidentally, nobody in their right mind would set up an insane trade for no reason.  I wonder if the SEC spent any time looking into who was short on the Dow that day and made out big (including people who made out huge before a bunch of trades later in the crash were invalidated), and then examined the connections those folks might have had to Waddell and Reed.  Then again, it seems few folks in major development agencies want to seriously examine market manipulation and its impact on food security.

At what point does willful obliviousness turn into criminal negligence?

*these were actual arguments raised when a colleague of mine attempted to address the issue of market manipulation at a meeting in one of our major development agencies.  Really.  How the hell, exactly, does uncertainty create the appearance of manipulation?

Remember the Flash Crash – the May 6 “unexplained” stock market dive?  Well, the Securities and Exchange Commission and the Commodities Futures Trading Commission now say they have found the cause, and nobody did anything wrong to cause it.  According to the NY Times, these commissions

“found no evidence of market manipulation. Instead, the temporary crash resulted from a confluence of forces after a single fund company tried to hedge its stock market investment position legitimately, albeit in an aggressive and abrupt manner” via NYTimes

This . . . is . . . insane.  I mean, read the rest of the report, and this conclusion seems like an almost willful departure from reality.  According to authorities, here is what happened:

  • A single mutual fund, Waddell and Reed, decided to sell $4.1 billion in futures contracts.  That’s a lot, but hey, it happens.
  • The sale of these funds, however, is insane.  To quote the Times, “The mutual fund started a program at about 2:32 p.m. on May 6 to sell $4.1 billion of futures contracts, using a computer sell algorithm that over the next 20 minutes dumped 75,000 contracts onto the market, even automatically accelerating its selling as prices plunged.”

In plain English, they decided to dump at all costs, without regard for losses or market impact.  The firm claims it was dumping the contracts because it was concerned about the European financial crisis spreading to the US – they found themselves long on a lot of trades in the contracts in question, and decided to get out while they could in the face of what they expected would be a reversal in the contract values.  OK, so maybe they got a bit jumpy . . . but the logic here comes apart when you look at the sale mechanism – they basically started dumping these contracts onto the market, creating an oversupply which would drive the contract price down . . . and they would keep pumping contracts into the market even as they exacerbated this problem.  In other words, they tried to offload these contracts to avoid losses when their value dropped, but the way in which they offloaded the contracts ensured their value would drop.  This is where the whole thing turns really nuts – they set up their sale algorithm to sell everything in 20 minutes.  They dumped $4.1 BILLION DOLLARS OF CONTRACT ONTO THE MARKET IN 20 MINUTES!  What the hell did they think would happen?  Hell, the only rationalization I can come up with here is that they hoped to dump it all so fast that they would actually beat the market collapse they were likely to trigger.

You cannot tell me that the folks running this fund did not understand what this sale, executed in this manner, could do to markets.  The justification of the sale structure is itself illogical on its face.  And the fact that these guys still have jobs, and have not been beaten to death (metaphorically speaking) by other funds for what they did (like many of those who shorted the 2008 financial crisis) makes me really wonder what the hell went on here.

But the SEC and the CFTC have turned into Officer Barbrady from South Park: “Move along, nothing to see here”

Which reminds me of a classic South Park exchange (South Park, season 2, episode 2):

Mayor: Officer Barbrady, let’s pretend for one second that we had a competent law enforcer in this town. What would he do?
Officer Barbrady: Hmmm. That’s a good question, Mayor. Let me get right on that, with thinking.