Thursday, August 22, 2013 - Nasdaq Freezes, Goldman Expresses Interest

Nasdaq Freezes, Goldman Expresses Interest

by Sinclair Noe

DOW + 66 = 14,963
SPX + 14 = 1656
NAS + 38 = 3638
10 YR YLD + .07 = 105.10
OIL + .04 = 2.90%
GOLD + 9.30 = 1377.10
SILV + .30 = 23.29

A few weeks ago, I told you that August has a tendency to be a volatile month in the markets. Volatility can be positive or negative. So far it's been rough sledding. And even when the markets have an up day, it was a mess, a big frozen mess. The Nasdaq shut down for about 3 hours today; trading was halted. More on that in a moment.

The volatility has been largely tied to the Federal Reserve and the idea that they will taper off the $85 billion a month securities purchases known as QE. Probably. The best bet now is that they will start to trim purchases by $15 billion a month in September, and by the middle of 2014, they will try to stop the QE purchases. Once, we thought it would be tied to the unemployment rate or the inflation rate, but now that's just a technicality. Of course, the Fed might not actually stick to this course, but that's the betting for now.

Nasdaq said trading was halted in shares it lists because of problems at its Securities Information Processor, the feed that disseminates quotes and prices. So they stopped all transactions. Boom, a little after Noon Eastern. Buying and selling in some of the most heavily traded shares in the country ground to a standstill. During the halt, nearly every trading firm on Wall Street scrambled to determine what to do with orders for Nasdaq-listed stocks. Under normal conditions, if an exchange has problems, traders can direct their orders to other public exchanges. But because the problems involved the data feed from which prices are derived, all exchanges stopped trading Nasdaq stocks

Options markets were bombarded with erroneous orders two days ago when an internal computer at Goldman Sachs malfunctioned. Options officials at Nasdaq as well as NYSE Amex and CBOE Holdings spent almost a day reviewing orders for cancellation. Some kind of programming error triggered unintended option orders. And within 17 minutes after the markets opened, the damage was done. By some estimates, Goldman could lose up to $100 million.

Goldman’s computers sent “expressions of interest” down to the exchanges; that's what they called it - “expressions of interest”. However, the expressions of interest weren’t what was transmitted. What got fired instead were real orders. The orders were to buy and sell options. Of the estimated 400,000 contracts on 51 different stocks that got executed, and of the 500 biggest orders, 405 orders were sent down on targeted stocks whose tickers start with the letter H, I, J, K, or L. Of those 405 orders, some 130 orders were for 1,000 or more contract lots each. In other words, this was some type of “program.”

The options prices at which Goldman ended up buying and selling were so far outside where the options were actually trading that they lost maybe $100 million. Very un-Goldman-like trading. Goldman has gone a whole quarter without a single day of trading losses. They just don't lose $100 million in a day. And indeed they won't. They are canceling most of the bad trades; not all the bad trades, just most of them.

Now, about that “Expression of interest” thing. Maybe you have bought or sold stocks or even options. Did you ever send out an expression of interest? Nope. What Goldman really did was try to rig the market. They sent out ridiculously low sell orders, for example an order to sell for $1.00, when the current trade was $3.35. They never meant to send a real order though. They were pinging the market, sending fake bids and offers to get market-makers and traders to move their quotes to trigger trades. And ...ooops, somebody hit the trades. It's all part of the high frequency trading game played by the institutional investors and it has nothing to do with legitimate trading, just trying to fleece the unsuspecting sucker that wonders into the casino known as Wall Street.

When things don’t go your way it is really a learning experience – life is like that sometimes. We all have to accept that life isn’t fair and sometimes we lose despite what we think should happen, except for Goldman Sachs, which just goes in and cancels the trades, unwinding the position. And if Goldman was losing on that position, someone stood to profit, except now Goldman is canceling that guys profit, because Goldmann doesn't like to lose. The person who made the opposite bet of Goldman should give them the money back because Goldman was supposed to win. The market is never wrong, never.

Nasdaq has a long history of trading glitches, including squirrels touching off power failures and computer bugs crashing trades; and yes, they've been hacked, and flash crashed. In May, Nasdaq agreed to pay $10 million to settle Securities and Exchange Commission charges related to the initial public offering of Facebook. Regulators cited it for its “poor systems and decision-making” during the IPO in May 2012 that was delayed when software the collects orders fell into a loop. Nasdaq agreed to the settlement without admitting or denying the SEC’s findings. Part of the deal though was to shore up systems and try to avoid further problems. Yea, that didn't happen.

So, now the speculation begins. We've seen a bunch of websites going down over the past couple of weeks: NYTime, Washington Post, CNN. A security flaw is not out of the question. A hardware problem doesn't really make sense because of the redundant nature of the hardware systems.

So, August is normally a volatile month in the markets and this month the blue chips are getting shredded. Many stocks have dropped since the market peak a few weeks ago, but the Dow has managed to lead the drop. While the S&P 500 is down about 3.75% since the beginning of August, the Dow has dropped nearly 4.7%; that's more than 700 points, in case you're keeping track. After this month's hiccup, the Dow is now trailing the S&P on the year. Now the Dow is just 30 stocks, but they are big stocks and they are all down; all 30; every single Dow component has traded lower since August 2^nd.

That doesn't qualify as a catastrophe or a crash or anything nearly so dramatic; just some downside volatility.

So, I'm preparing for today's broadcast and I'm looking at all this nonsense about Nasdaq freeze up and Goldman Sachs trying to rig the markets and then refusing to pay when they screw up, and it hits me that most people really don't care about this. We just let the institutional traders play their games on Wall Street, and maybe this is why more and more people are moving away from the stock market; or getting squeezed out of the markets. It's a rigged game.

And there is a slow and steady movement away from the Wall Street casinos, toward what is sometimes referred to as alternative investments; things we can touch; things that are more local; things we can control. And then it strikes me that most people are just trying to get along from day to day, from paycheck to paycheck, and that's a tough job and getting tougher all the time.

The average American household is earning less than four years ago, which marks the official end of the recession. Based upon Census Bureau data, median household income, once adjusted for inflation, has fallen 4.4 percent in that time. The median, or midpoint, income in June 2013 was $52,098. That's down from $54,478 in June 2009, and it's below the $55,480 that the median household took in when the recession began in December 2007. Nearly every group is worse off than four years ago, except for those 65 to 74. Some groups have experienced larger-than-average declines, including blacks, young and upper-middle-aged people and the unemployed.

Of course, some groups have been extraordinarily fortunate during hard times, the CEOs. It may not be long before companies finally have to disclose the ratio of how much their average worker makes in comparison to their CEO. Reportsin recent weeks have said the long-delayed rule proposal, which was part of the Dodd-Frank law that passed three years ago, could finally arrive this summer. And speaking at a Senate Banking Committee hearing in late July, Securities and Exchange Commission Chairwoman Mary Jo White said she hoped the rule would be completed in the next month or two.

The rule in question is expected to require companies to report CEO compensation as a multiple of median worker pay, revealing the actual ratio between CEO pay and employee pay at individual companies. It is a number that has long been told in the aggregate.

The Economic Policy Institute released a report in June showing that CEOs recently made 273 times the typical 20-to-1 ratio that existed in 1965. (Those numbers are calculated using realized options rather than granted options to calculate executive pay.)

The AFL-CIO puts the multiple at 354 for what the average U.S. CEO makes compared to U.S. workers, and compares that number to other countries around the world. The ratio in France, for instance, is 104; in Japan, it’s just 67.

Some people claim our CEOs are worth it, but actual research proves that is not the case; it really boils down to the idea that they can get paid disproportionately more because the tax laws allow it, and they have set it up that way.