One thing is clear: These aren’t your daddy’s markets anymore.
Why? Because about 10 years ago the Rise of the Machines (aka high frequency trading algorithms) completely altered the terrain of what we call the ‘capital markets.’
Let’s look at this as a before and after story.
Before the machines, markets were a place that humans with roughly equal information and reflexes set the prices of financial assets by buying and selling. Fundamentals mattered.
After the machines took over, markets became dominated — in terms of volume, liquidity and pricing — by machines that operate in time frames of a millionth of a second. The machines and their algorithms use remorseless routines and trickery — quote stuffing, spoofing, price manipulations — to ‘get their way.’
Fundamentals no longer matter; only endless central bank-supplied liquidity does. Because such machines and their coders are very expensive and require a lot of funding.
The various financial markets are so distorted that I first resorted to putting that word in quotes – ‘markets’ – to signify that they are not at all the same as in the past. In recent years I’ve taken to putting double quote marks – ”markets” – in attempt to drive home their gross distortion. Not only are todays ”markets” something the human traders of a generation ago would fail to recognize, they’re no longer a place where human actions of any sort have much of a remaining role.
This post was published at PeakProsperity on Friday, July 28, 2017.