Sunday, August 7, 2011


The high-frequency-trading funds have taken the role as the dominant investor in the U.S. stock market.

If one talks to institutional traders, they are very quiet, with not an abundant amount of orders.

The same is true with high-net-worth salesmen.

Hedge funds are sitting on their hands, and so are individual investors -- and both classes of market participants have de-risked, so margin calls are not really coming into play.

But the high-frequency-trading funds are very active and have taken the role as the dominant investor in the U.S. stock market.

The market's spastic action reflects, in part, the disproportionate role of high-frequency-trading funds on the market over the past few weeks.

The very nature of price momentum trading strategies is serving to dramatically exaggerate market price movement, while talking heads try to relate them to fundamental developments and news (especially of a euro kind) and/or margin calls.

A good portion of the price movement is unrelated to news or margin calls. Stated simply, the role of high-frequency trading is adversely and violently impacting our markets -- once again.

The downgrade in Japan years ago had no impact whatsover on the Nikkei.

Private sector payrolls beat expectations, and the last reading was revised higher.

Markets around the world have lost their equilibrium. They have become battlefields of:

1. utter disbelief and loss of confidence in domestic and overseas policy makers (who face multiple non-traditional economic and fiscal challenges) on one side; and

2. on the other side, well-anchored (profitable and liquid) large corporations, a more stable banking system, growing (albeit, moderate) economies, reasonable valuations and low investor expectations (and participation).

The quickness of the downside moves in the world's equity markets is historic and is bound to have economic reverberations (in the form of reduced business and consumer confidence and, in all likelihood, in capital spending and personal consumption expenditures).

As well, panic often begets panic-selling; that's a way of saying we don't know where the bottom is when emotion takes over.

If you are shaken, whether you are an individual investor or the most sophisticated hedge-hogger, you are not alone as you have plenty of company.

In such a volatile and emotional setting, your personal investment time frame should be the overriding consideration in your actions. Bargains likely abound for those who have an intermediate-term horizon but are unplayable for those who are seeking short-term trading returns in such a hostile, volatile and unpredictable backdrop.