Welcome to CrushTheStreet.com’s Weekly Market Wrap-Up!
Welcome to CrushTheStreet.com’s Weekly Market Wrapup! I’m Josh Enomoto, sitting in for this week’s episode. Our top story is the impact of high frequency trading on both the equities and commodities market, with the controversial issue again making headlines as major U.S. stock exchanges on late Monday asking a federal judge to dismiss a lawsuit accusing them of harm committed against ordinary investors by rigging the market in favor of elite firms employing high frequency algorithms.
The exchanges urging the dismissal include the NASDAQ, the New York Stock Exchange, BATS Global Markets, and the Chicago Stock Exchange. Their legal representatives claim that the entities regulate themselves and are thus entitled to “absolute immunity” and that only the Securities and Exchange Commission has any legal authority to review the plaintiffs’ claims.
As it turns out, on October 16th of this year, the SEC brought its first market manipulation case against a firm employing high-frequency tactics, fining New York-based Athena Capital Research $1 million dollars for using an algorithm called “Gravy” to send a blizzard of trades just before the market closed, according to a recent Reuters report by Jonathan Stempel.
Both professional analysts and casual observers alike will remember May 6, 2010, when the S&P 500 mysteriously evaporated 6% of valuation in mere minutes before just as cryptically rebounding within a similar time frame. The so-called Flash Crash was later attributed to a cascading reaction based on one firm’s massively dense sell orders. Fears that it could happen again and wrest retirement portfolios out of the hands of hard-working Americans have fueled outrage, with exposes on the subject, such as the book “Flash Boys,” serving to fan the flames.
Aside from threatening the stability of broad-based equity markets, Dr. Jeffrey Lewis, in an op-ed for Commodity Trade Mantra, argues that the resource sector may be particularly susceptible to price dynamic distortions, given that upwards of 70% of futures and equities trading volume is being executed by algorithmic trading programs that are often run by large fund managers and financial institutions. According to Dr. Lewis, some of the most predictable precious metal market movements may have been the result of high frequency trading, with rallies coinciding with the 9pm New York overnight open, and selling pressure initiated at the ringing of the regular market’s opening bell. Whether the accusations can carry further weight remains to be seen; however, there is no denying the unusual variance between risk/reward fundamentals and the often erratic technical fluctuations in both the metals market as well as the broader indices.
In financial news, the major indices had a relatively slow week following a robust recovery from last month’s volatility. The Dow Jones closed up at 17,554 while the S&P 500 gained nearly four-tenths of a percent to close at 2031. The precious metals complex was hit hard as the strengthening dollar heavily pressured the sector, with gold absorbing a 2.41-percent loss mid-week, while silver gave up four-and-a-half percent of valuation on the same day. Palladium also took some heavy losses, closing Thursday at 754 after failing to rally above 800. Finally, bitcoin appears to have found support at 320, with consecutive rallies pushing the price above 350 dollars.
And that will do it for this edition. Thanks for watching and we’ll see you next week!