MooTrades.com

Just when I thought I had seen it all, an article surfaces that says a botnet organized by unscrupulous geeks manipulated stock prices for a profit of about 100,000 euros.

“A Belgian federal investigation into an electronic bank account heist reveals a sophisticated attack designed to manipulate stock prices, a Belgian newspaper reported over the weekend. 20 Belgian victims were infected, and the cyber-thieves used those accounts to manipulate share prices and profit about 100,000 euros.“

In this incident the attack was on a small scale,  but imagine for a moment such an attack on a much larger scale.  Stocks rising or falling by the will of compromised trading systems controlled by a group of crooks.  Wait a minute.. that sounds vaguely familiar.  Sort of like the alleged stock price manipulation that large firms engage in with high frequency trading?

More bad news for the housing market as mortgage delinquencies and foreclosures surge to record levels of close to 15%.  This means that just about one out of every six home owners in America are in serious financial distress.

Danger! Danger!

This should be a wake up call.  There is not a recovery happening.  Jobs are not being created in large enough numbers to bring down unemployment and many people can no longer afford their homes.

The notion of solving a debt crisis with more debt will not work.  Giving the majority of the support to the bankers and big businesses in the form of corporate welfare is causing more problems than it is fixing.

Reflation nation

With all of the bailout money that’s been spent so far, what do we have to show for it?  A stock market rally alone does not signify a healthy economy.

It’s time to start looking beneath the surface here, because it’s apparent that the only groups that are benefiting from the government’s bailouts and stimulus are the very wealthy.  Meanwhile the middle class and working class are getting eviscerated by this economic crisis.

The answer

Small businesses, the most significant generator of jobs and the true engine of American growth, are largely being ignored by the government programs and tax breaks.

The only way to get back to prosperity is to engender an environment that allows entrepreneurs to start companies that create jobs and real wealth.  It’s time that America goes back to its roots!

Update: The Fed is moving in to further appease Europe’s ailing banks by restarting the US dollar currency swap program they used during the last financial crisis.

As the EU moves to establish a 750 billion Euro bailout slush fund, political opposition in Germany and the UK is growing and the problems within the EU may be getting more serious.

Hiding the truth

EU politicians claim the fund is being created to defend against the “wolf pack” of banks betting against the Euro and EU sovereign debt.  They say they will defend the Euro at “any cost”.

The reality is that Greece misrepresented its debt, hiding it with the help of Goldman Sachs.  This fraud triggered the downfall of Greece’s bonds once it was discovered.  Other EU countries are now struggling to get their house (of cards) in order.

The contagion could spread

Greece is struggling, if not failing, and with it may come a domino effect. The other “PIIGS” (Portugal, Ireland, Italy and Spain) may also begin their descent on debt woes and poor economic performance.

Even the UK is not immune to these problems as its economy is in bad shape and the debt keeps mounting.  The UK government is facing uncertainty as recent elections delivered a hung parliament, the first such event since 1974.

Germany’s Merkel has potentially exhausted all her political favors as she offered the German taxpayers’ money to Greece in the form of a debt bailout.  Her party has suffered significant losses in recent elections as a result.

Anger grows

Meanwhile, in Greece, where severe austerity measures are being forced on to a weary population, the result has been much civil unrest and violence in the streets.

There have been several deaths, property has been destroyed and no compromise has been reached to temper the rage of the population.

No end in sight

The EU is in a panicked state.  There isn’t any meaningful resolution within reach as they frantically create more debt in a naive attempt to solve a debt crisis.  When other member countries begin to falter the volatility of their bonds, stock markets and currencies may increase dramatically.

Such a significant disruption will spread beyond the EU to the US and Asia.  These headwinds are blowing strong now and could jeopardize the very fragile global economic recovery.

That is, if you believe there was a recovery in the first place.  So much for the Euro being the next world reserve currency.

High frequency trading, or more specifically flash orders, are practice of allowing certain market participants to pay a premium for access to order data (before it is placed on exchanges) and feeding that data to computers, allowing them to front run the trades of other market participants.

In effect, it is theft by using what should be privileged information.  Most of the time institutions are targeted, but institutions often manage the retirements and pensions of Americans.

The great fabrication

We’re told by these high frequency trading companies that they’re providing liquidity to the market, enhancing price discovery and reducing slippage.  The level of naivety necessary to believe these claims is unheard of.

First of all, to provide liquidity to the market these companies would have to provide a bid and ask that are not far apart.  That is to say, if I’m buying a stock for $10.00 a share, I should expect a bid of $9.99 and an ask of $10.01.  Anything more and the slippage potential is too great.

On Black Thursday, May 6th, 2010, we saw instead that the market makers ran for the hills, even their high frequency trading computers only knew how to offer the ask.  Hence, the programs were selling anywhere they could and forcing the markets much lower.

To enhance price discovery high frequency traders would have to play fair instead of front running trades.  When they front run a trade that there’s a lot of buyers on, the way they make money is to artificially raise the price.  Instead of helping the market discover the actual value of a security, they are manipulating it for profit.

Incredible risk

Black Thursday illustrated what can happen when computers run the markets without restraint.  If high frequency trading lived up to its own hype it would have saved us from having such an event.  Instead, it helped to cause massive losses and instability in stocks and other peripheral markets.

Theft is wrong

The only way to stop this unfair activity is to make it illegal.  Anything short of a law that explicitly forbids high frequency trading will give the wiggle room that Wall Street can use to escape regulation and prosecution.

There’s no reason for a company to be able to pay for inside information on trades they can exploit to make a buck at someone else’s expense or claim to be a pillar of stability in the markets and fail completely right when we need it.

This activity is immoral and not a productive mechanism in a free market.  Instead it is an alarming moral hazard and must be stopped before it brings down the market again.