Shills Shovel Shit to Protect Hobbyhorses in "Flash Crash" Circus

This is a modified and much expanded upon excerpt from our preceding post that addressed the Flash Crash, though only in passing, but which, dear readers, we kindly suggest you read as well. But until then:

Pissing Not Raining:

Note that some market-making banks and brokers and high-speed traders, acting to protect their interests against what seemed very odd trading activity in our American stock markets, took liquidity away - stopped or slowed buying and selling and/or accepting bids and offers (prices) on stocks - from said markets during the so-called "Flash Crash" of May 6, 2010, when a big sell-off of derivatives contracts linked to blue chip stocks contributed to the biggest - and certainly the quickest - one-day point decline in the Dow Jones Industrial Average's history.

Everyone in this debacle is blaming everyone else for the problem. Fact is, the banks and traders lobbied the regulators for years to basically get the system we've got, which is extremely fractured - there is no fair access or single, level playing field - and is so obviously less than close to failsafe or sufficiently backstopped (no system is, but with nearly everyone's nest egg at stake, this one ought be a bit more reliable, and/or less easily gamed, no?). Again, as always, it takes leadership and good old-fashioned courage to admit the problem, which neither the regulators, the industry nor its analysts have shown they possess any whit of yet in this dissolution. Instead, finger-pointing and it's resulting cousin - confusion - reins.

But it becomes immediately clear to anyone that steps back for a moment to take a reasoned look at the facts of the situation, that rules that the industry asked to install, quash or ultimately shape, and the regulators either enacted, snuffed or modified according to the aforementioned desires, have got us the market that we have and they asked for: The rules have also worked to solidify brokers as advantaged gatekeepers in trading equities and their derivatives, and have empowered algorithmic, automated and high-speed traders. So the arch defensiveness of these brokers and traders is understandable, if not admirable: They've a long and hard road to hoe to prove the resulting positions of privilege are worth protecting. In the meantime, they might do themselves and everyone else a favor by admitting they are one class of ax wielders creating the potholes in our pockmarked road toward what could otherwise be a sufficiently smoother transit to a workable - and fairer - trading system, versus blaming wholesale the regulators for whom such criticism that our markets are biased and nearly uncontrollable should actually be shared: You get what you ask for, (and they did and have); 'least with this gang you do (so close to always it's a mere follicle shy of consistent.)

Players make money on the fucked-up-ness of markets. And so much loot is harder to make on a smooth-running one with fair and equal access. That's why a fair and equal market does not exist.

The trigger of the Flash Crash, turns out, according to seemingly everyone, was human error; that of a Kansas mutual fund trader at, it's been reported, Waddell & Reed, who put on an algorithmic (automated) futures trade that focused solely on volume but did not (by design) take time and price into account, so its selling steamrolled amid its own and other volume, which spooked other actors who also began to sell but eventually also pull back from the market due to this odd dip. It's a reaction comparable to people freezing to watch a car crash as it happens, standing by bewildered as a stranger makes a sudden run at jumping off a bridge, or an awed parent hugging her children as a meteor streaks overhead; certain of our brains need a moment to comprehend the sheer oddity of an anomalous situation. (A future is an agreement to buy or sell an equity or similar securities contract on a specified future date based on a price [and quantity and quality] that's agreed on today or in the present.)

However, this interpretation of May 6 events is hotly disputed by skeptics, who say the blame lies more with brokers and high-speed traders. But to cut through the mist, here's what we can say for certain:

This futures trade trigger ("cause" is an imprecise moreover inappropriate descriptor), if it truly was, isn't the real problem anyway - nor is some trader in Kansas. The market's biased, fractured structure, is. And playing the larger role in powering the swift tumult in question was everyones' (and their systems') reactions to the market's dynamics that day, as well as to this trade, which was technically executed NOT by Waddell & Reed but by a yet-to-be-named executing broker (only brokers have direct access to most execution venues like exchanges; mutual funds do not) although the algorithm, according to reports, was supplied by Barclays.

Brokers were found by the Securities and Exchange Commission, for instance, to have stopped filling retail (yours and mine) orders with their own "internal" inventory, and instead are reported to have routed a large portion of these trades into the public market as the market was falling. If your response is to say: Wow. Thanks. For nothing. Mean brokers. Remember that high-frequency traders, also, pick off your shit, all day long. You're buy and hold (or sell and fret); they're not.

The problem the Flash Crash shows is the odd, frail, decentralized, partisan, hierarchical, often unknowable nature of a market structure that The Street built. But sadly, asking certain of this bunch, particularly the loudmouths, to be the least bit introspective, is like trying to reason with a carpet viper.