Posted on 05/16/2011 7:29:07 AM PDT by TigerLikesRooster
Eric Burroughs
Warning signs on market liquidity risks
May 15, 2011 07:28 EDT
If the great commodity selloff of 2011 shows nothing else, it is that markets are undergoing serious structural changes that need to be followed closely. Our commodities analyst John Kemp has compared the oil plunge with the May 2010 flash crash in U.S. shares, and rightfully so. Four standard deviation moves in oil futures are not normal, even if Gaussian distributions underestimate the chance of such a move. The rise of high-speed electronic trading appears to be creating imbalances between buyers and sellers in nanoseconds that lead to outsized moves. It would probably be manageable if these problems were tied to smaller markets not so correlated with the rest of the world. But in this age of highly correlated global markets, these changes matter and need to be better understood — both by market participants and regulators.
One curious outcome about the rise of algo-driven trading is the volume is not leading to better liquidity, especially in these flash crashes. Liquidity — defined as the ease with which trades can take place without causing a major price impact (and not referring here to overall bank liquidity/funding risk) — appears to suddenly vanish in some of these big market moves, leading to massive swings.
(Excerpt) Read more at blogs.reuters.com ...
P!
Please. A four standard deviation move? These were common in markets long before "high-speed electronic trading." Remember October '87? Markets are not random. They are so complicated that we model them as if they are random, because they're too complicated for anything else. But they're not random. So a four standard deviation move is not at all rare, since "standard deviation" has no true meaning for non-random processes.
Really?
We've had TOO MUCH liquidity in recent years, which has led to bubbles. The recent tightening of margin requirements, ** gasp **, had the hideous effect of making vital commodities MORE AFFORDABLE to those who actually consume them.
What a steamin' pantload. Someone finally insitutes a sane policy of increased margin requirements that makes sense and the usual suspects are complaining about liquidity.
Congrats on not reading the article. That’s not what he’s talking about.
Well, then, he missed the bigger story about the recent commodities swoon - the fact that margin requirements were increased. The drop in silver, for example, can be directly correlated to such changes.
No, dirtboy is on to something. There is too much liquidity out there today, and too much liquidity can cause illiquidity if it’s entirely one side of the bid/ask.
We have printed so many dollars that have ended up in the hands of our financial institutions that their accumulated sum is many many times the size of daily volume of any given market. Low margins have exacerbated that as have computer trading and portfolio management techniques.
But as Thane_Banquo says it’s happened for years. It’s as simple as seeing the train coming and getting out of the way. It’s just more common now because a market can get swamped if player or players coming in at that time overwhelm the current bid/ask structure. And it happens faster with the electronic factor. That’s the downside to computers, when they act they act like a meat hammer.
Another salient point is that the market is NOT something that can be summed in statistical variable. The market is the study of application of force. I don’t care what your computer model says, if the market is parabolic and everyone who’s bought has bought, the market WILL go down.
Too many of these rocket scientist financial geeks devise these insanely complex portfolios based on statistical assumptions as if the market is a computer that spits out a given output for a given input. The markets are volume driven and operate by herd dynamics. They don’t understand this and often stay in a position way too long because their stupid statistical computer model say to, then they panic dump to get out. They do that because they don’t understand how markets work.
All models assume that markets, and by extension buyers and sellers are rational. And, over the long term they probably are.
However, in the short term buyers and sellers...and by extension markets...are often irrational.
Institutional money is POURING into both commodities and stocks, lacking a home elsewhere. Eventually they will realize demand has fallen and they'll turn around to notice there's nothing but a cold wind at their back.
They are rational, but not by the statistical standards that are often applied.
Accumulation - Markup/Markdown - Distribution, that has how the markets operate and always will operate. The big boys getting in ahead of the next move, moving it, and getting out while the public is still in a buy or sell frenzy, then doing it all again in reverse. Not fibonacci, trailing averages, or any other statistical voodoo they try to apply.
Why should people invest in financial instruments after what happened to the GM bondholders?
Thanks for introducing massive uncertainty (noise) into capital markets, Bam bam.
The Gansta destroyed Rule of Law — TORE UP peaceful, voluntary credit contracts, to pay back union crooks/cronies.
What does the Administration THINK would happen to incentives to take risks and invest, after that violent interventionist action?
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