After my ladies who lunch lunch yesterday I know whom to blame for the Thursday sell-off last week, and it is not Goldman Sachs, Morgan Stanley, or Citigroup. It is the way specialists or marketmakers operate, according to one of my lunch partners, and ultimately because of how markets are organized.
Marketmakers post bid and ask prices for stocks they deal in. NYSE specialists use round lots, but some of the dark pool marketmakers use even smaller blocks, for example on Archipelago. If a stock is at $30 there is a bid-ask around that price, but the specialist will also have a couple of lower bids in place, at $29, $28 and change and so on. At lower prices the number of shares bid for goes up. The dark pools traders are doing the same thing but using very low numbers of shares to avoid being swamped.
They also offer to buy as many as a million shares at some ridiculously low price.
These offers are not about trading. They are about making the intermediary known to the market. They are “place-holders”, my lunch date explained. That means they are something like advertisements.
If there is a shutdown on the NYSE as last Thursday, brokers head for the dark pools. One by one the bids are taken down, but if there are large sell orders (probable), the final ridiculous price is triggered.
Now about circuit-breakers. The NYSE circuit breaker triggered on Thursday. That is what drove the trading to dark pools. But if there is no circuit breaker, the situation can be worse. Another experienced market participant, an old Asia hand, explained that in Singapore, before the circuit breakers were put up, during the so-called Asian Contagion, there was a panic sale and prices fell without any possibility of stopping the bleeding. The marketmakers there just stepped boldly to the trading floor and bought fast-dropping Singapore stocks for their own accounts. Then these fine upstanding citizens of the Island retired.
Another factor in the US contagion was the existence of index-linked Exchange Traded Funds, or ETFs. Among the largest of the busted trades last Thursday was shares of the equal-weighted Rydex S&P 500 ETF. ETFs have their own specialized marketmakers, and they also have mechanisms whereby institutional investors (authorized intermediaries) are supposed to support the price of the ETF by buying it when the price drops below the net asset value of the shares it holds. And the reverse. But in a chaotic situation the ability of the ETF intermediaries to act was limited.
Readers of my special report on ETFs will remember that even in normal times the arbitrage mechanism often fails. It should be noted that some ETFs did better than others, and that the focus of the horror show was the largest and most liquid shares and the least experienced most marginal ETF issuers.
Apart from Australia, where there had been another interest rate rise (which means bond prices go down), the contagion was relatively contained in the world outside the USA. Canada arbitrageurs seem to have limited the damage to Canadian stocks.
For my paid subscribers I published tables as of the close of trading Friday on the www.global-investing.com website last night. These are purely for the record as many of the stock prices are still not confirmed. Over the weekend when I normally do this, it was impossible to get prices at all using my brokerage accounts.
Another European-born reader says that the official who spoke in 1980 about how the bombing of the Rue Copernic synagogue also killed “innocent Frenchmen” was not Raymond Barre, but the then Mayor of Paris, Jacques Chirac. Success has many fathers; failure has none. I have been unable to confirm who the speaker was. But this reader says there were demonstrations against the Mayor by Jewish and civil rights groups at the time, which probably means he was the culprit. Later as president Chirac ended the silence about French officialdom’s helping hand to the Holocaust, perhaps making up for this lapse.
News about our companies from Britain, Israel, China, South Africa, Germany, Burkino Faso, Niger, and Canada follows along with a sale.
