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Non-Tech : Bill Wexler's Trading Cabana -- Ignore unavailable to you. Want to Upgrade?

To: RockyBalboa who wrote (4538)	11/17/2008 1:47:29 PM
From: Kevin Podsiadlik	2 Recommendations Read Replies (1) \| Respond to of 6370

Alan Farley just published a great piece on TSCM on various recent changes to the stock market and how they've led cumulatively to the wildly unstable market we have today. Quoting in part: "Regulation NMS has infected the financial markets with a major destabilizing force. In a nutshell, it has fractured order flow into microscopic pieces because hedge funds and other institutions now place minimum size at the top of the bid-ask heap and refresh in tiny segments, as market players jockey for the spread in the next microsecond. "Modern computer systems also let these orders back away and disappear instantly. This vanishing act has shifted monopolistic power into the index futures, which are also dominated by program algorithms and easily manipulated by relatively few transactions. That's why bids on a thousand stocks will evaporate on a minor S&P 500 swing. "Humans, such as old-fashioned money managers and public investors, can't compete in this environment, because their orders have no impact on short-term pricing. Simply stated, there's no supply to be taken out or demand to be filled in this electronic paint job. Instead, we're forced to trade using outdated notions, such as "value" or "support levels." "This fragmentation has set the stage for even more frightening consequences. First, the mythical market order book, open or closed, has effectively been destroyed. Second, its spawned a new generation of program algorithms tasked with executing cross-market environments at faster and faster speeds, automatically and without human intervention. "The rule is also responsible for the rapid growth of dark pools and other stealthy, off-exchange systems that keep institutional strategies out of the public eye. However, the massive transactions on these unregulated systems still reverberate into index prices through late reporting, options offsets and exchange-traded funds. "We know that exchange-traded funds and ETF Ultras have become the preferred execution routes for program algorithms because of liquidity, leverage and dampened exposure to stock-specific risk. This places absolute power into the hands of a few wealthy institutions that have enough cash to manipulate the index futures and a relatively small basket of funds."