|Dow||+88.68 to 18,038.27|
|S&P 500||+10.67 to 2,107.96|
|Nasdaq||+21.07 to 5,035.17|
|10-YR Yield||+.056 to 1.972%|
|Gold||-$17 to $1,186.10|
|Crude Oil||-$0.28 to $56.33|
I remember May 6, 2010. Vividly.
I’m sitting at my desk, watching the markets like usual. TV is on in the background tuned to CNBC. Then all of a sudden, stocks fall off a cliff!
Not 10 or 20 Dow points. HUNDREDS of them … in the blink of an eye! It reminded me of the worst days during the 2008-09 meltdown, where news or whispers of a failed bailout or bank collapsing would cause stocks to implode in an instant.
Only this time, there was nothing.
Not a single, solitary fundamental “reason” or headline for the collapse.
It was absolutely, completely baffling — and terrifying — that so much wealth could go up in smoke in an instant. Then just as soon as the meltdown started, it was over. Like nothing happened!
|The Flash Crash was baffling and terrifying that so much wealth could go up in smoke in an instant.|
The incident was dubbed the “Flash Crash.” And now, authorities in the U.S. and U.K. are claiming it was significantly exacerbated by just one man: Navinder Sarao. The owner of Nav Sarao Futures Ltd. trades futures out of a nondescript house in a London suburb near Heathrow airport.
Officials charge that Sarao rapidly entered and then yanked orders to sell tens of millions of dollars worth of S&P 500 futures. That “spoofing” process, repeated thousands of times that day and on many others since, helped cause the market to collapse in 2010.
It did so by creating a massive sell imbalance in the E-mini futures, and tricking fundamental players into believing huge sellers wanted out of stocks. The Commodity Futures Trading Commission (CFTC) alleges he generated $40 million in profit from his activities.
The U.S. is requesting that the Brits extradite him here to face 22 charges ranging from wire fraud to commodities fraud. But Sarao indicated he will fight that request in a U.K. court today.
Of course, government officials have been saying for years that the cascading market failure actually stemmed from trades made by Waddell & Reed Financial (WDR, Weiss Ratings: A-). They said it was a case of “algorithms gone mad,” computerized trading programs selling into a falling market at such a pace that it caused liquidity to dry up and prices to implode.
Now, they’re clearly changing their tune. And it gets worse! According to news reports, the government and exchange officials effectively let Sarao keep doing his thing for years after the flash crash — and didn’t even manage to track down Sarao’s allegedly fraudulent activity on their own. A whistleblower supposedly spent hundreds of hours investigating the flash crash, and spoon fed regulators with the information. That resulted in this week’s arrest.
There are so many ridiculous and concerning things going on here, I hardly know where to start …
How did regulators and exchange operators allow the system to get so vulnerable to flash crashes in the first place?
How did they fail to track this guy down on their own?
|“If Sarao was truly guilty for largely causing the May 2010 incident, how come we’re just hearing about him now?”|
If Sarao was truly guilty for largely causing the May 2010 incident, how come we’re just hearing about him now?
And if not, why did regulators blame a separate company entirely not long after the crash?
Do they really know what happened that day? Or why this past fall, we had yet another “flash crash” — this time in the Treasury bond market? And if not, does that mean we could see more and more of these meltdown-in-an-instant-type events?
I’m not going to pretend I have all the answers. But it’s not my job to police the markets and prevent this kind of crap from going on in the first place! It’s the job of hundreds of supposed “cops on the beat,” cops who seem like they’re from Keystone rather than Scotland Yard!
So what do you think? Are these new charges the end of the story? Or do you think regulators are grasping at straws to explain what happened in May 2010?
What does the existence of these kinds of flash crashes say about the fragility or resilience of our capital markets? Are computers taking over — and do we need to pull the plug to protect market integrity? Or are algorithmic trading systems just being made a scapegoat for scummy human-driven manipulation?
These are very important issues, so definitely weigh in on them at the Money and Markets website when you have a minute!
|Our Readers Speak|
Boy, did my piece on new chip cards bring commentators out of the woodwork! The bottom line? Many of us have been victims of fraud or theft — multiple times. So if chip cards can make things even marginally better, that would be a plus!
Reader E. C. said: “My Diners Club Card (BMO MasterCard) has been a chip card for several years. In Europe, one of the nice things about a pub or restaurant transaction is that the card never leaves your sight. It’s about time America catches up.”
Reader Steve L. added: “Chip cards will not eliminate fraud, but greatly reduce it. In Canada, we have had chip cards for years. Been wondering when the U.S., who seems to lead in everything else, would catch up. U.S. folks will find that credit card companies will suspend your card almost on a whim if they at all suspect fraud. This can become a nuisance.”
Reader Terry C. said he and his wife had card shutdown issues, too, and recommends the following:
“My wife and I solved the problem of a credit/debit card being turned off while on or beginning a vacation. It happened as we were leaving town and were able to get cash before the local bank closed — cash is difficult to use at lodgings.
“Anyhow, we now each have our separate cards. A card for each of us, and we each carry a different card. The odds of both having a card closed at the same time is very remote. I’ve had five cards closed in the past six years.”
Finally, Reader Richard K. said: “Personally I never had an issue of having my purchase being rejected because of an issue with the chip, whereas in the old days, I had my card rejected because of scratches or some other issue with the magnetic strip forcing me to get a new card.
“While the cards do not eliminate credit card fraud completely, they do make it much more difficult for criminals to steal the information off the chip than the magnetic strip, which just requires a simple scanner. No matter how secure your personal information is on a chip card, if the banks’ or retailers’ computer systems have weak computer security, hackers will still be able to steal the data and your money.”
Thanks for all the insights and comments. It’s obvious that we’re all fed up with subpar card security and the annoyances that come with card fraud. Hopefully, chip cards will make a dent in it. Please do add any additional thoughts you have at the Money and Markets website.
|Other Developments of the Day|
Remember what I said several weeks ago? That Federal Reserve and U.S. government officials were sick of seeing the dollar rise relentlessly, and were going to push back? Sure enough, the Wall Street Journal confirmed today that we were right on target!
The story goes into great detail about how multiple Fed officials are worried about the dollar’s impact on exports and inflation. It even suggests the dollar surge since last July is equal to — if not worse than — the “Taper Tantrum” surge in interest rates that we saw in 2013.
My conclusion remains the same now as it was a few months ago: The dollar rally is over, at least for now.
We may be in for an oil price shock. A shock of significantly HIGHER prices! That’s the consensus of many industry experts and analysts, who cite the massive project delays and capital spending cutbacks energy companies are enacting these days.
The $114 billion-plus in cutbacks are a reaction to lower prices now, but they virtually guarantee much higher prices later! That’s because many large projects designed to ensure the world has enough oil and gas take years from planning to execution — and today’s cutbacks will leave us with an energy shortage down the road.
My conclusion here? Buy energy stocks, just like I’ve been advising for the past few months!
French police arrested a 24-year-old IT student, alleging the Algerian man was planning terrorist attacks on at least one church. He reportedly had an arsenal of military weapons, but managed to shoot himself — and by calling an ambulance, get himself arrested.
Will McDonald’s (MCD, Weiss Ratings: C+) finally get its act together, and turn things around? That’s what investors are wondering in the wake of news CEO Steve Easterbrook will present a revised corporate plan.
In the meantime, the fast-food chain missed earnings per share estimates in the latest quarter. Same store sales also fell 2.6 percent, worse than the 2.1 percent decline expected.
So what are your thoughts on the dollar? The latest terrorist plans in France? McDonald’s and its latest turnaround plan? Let me hear ’em over at the website.
Until next time,