Nanex: Investors Need to Realize The Machines Have Taken Over

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From Chris Martenson's Peak Prosperity.


The blink of an eye is a lifetime for HFT algosby Adam TaggartSaturday, October 6, 2012, 2:24 PM

High Frequency Trading (HFT) deeply concerns Eric Hunsader, founder of Nanex. He worries that today's investors, our regulators, -- heck, even the HFT algorithms themselves -- don't fully understand the risks market prices face in the brave new era of bot-dominated trading.For instance, Hunsader estimates that HFT algorithms are responsible for 70%(!) of all completed transactions on our exchanges, and for 99.9%(!!!) of all exchange quotes.The pictures of trading floors you see on TV, where the people in bright jackets appear frantically busy in making their trades, have no bearing -- claims Hunsader -- on the actual trading action. The real action happens across fiber-optic cables, on racks of servers in cooled rooms; where an arms race defined by cable length and switching speeds is being wagedThe reality is that the machines have taken over. When you buy or sell a security, the odds are extremely high the other side of the trade is being placed by an algorithm -- one that cares nothing for the fundamentals of the underlying instrument. It simply is looking to make a quick profit, oftentimes measured in fractions of pennies. And this has vast repercussions for the stability and the fairness of our financial markets.Because of speed advantages, HFT algos can see and react to prices faster than you can. Ridiculously faster. A second on the clock, to an HFT algo, is an eternity. The deep pockets of the firms emplying HFT algos combine with this speed to move asset prices around, sometimes wildly so, faster than most of us can comprehend. In the time it takes for your "real-time" quote system to refresh, an individual stock could have traded many percetages up and/or down -- and you would have no idea. This unfair advantage, along with the short-term profit outlook of the algos, creates the potential for deadly market price downdrafts. Algorithms prefer predictability. If something spooks them (e.g., unexpected breaking news, a delay in the market's opening), they simply stop trading. And  -- poof! -- 70% of the market has just disappeared. With no support and no bids, prices can drop dizzyingly fast. Making matters worse, the "smarter" algos can recognize a downdraft in process, and begin piling back into the market on the short side, exacerbating the price declines.The Facebook IPO provides a recent example of the vulnerability of our system:For more follow the linky: http://www.peakprosperity.com/podcast/79804/nanex-investors-realize-machines-taken-over

The Pursuit of Happiness

Putting prosperity in contextby Charles Hugh SmithWednesday, October 10, 2012, 7:21 AM
What is the point of prosperity?Though few people ever voice this question openly, the general assumption is that prosperity and wealth increase happiness.  The pursuit of happiness (famously grouped with “life” and “liberty” in the Declaration of Independence as an inalienable right) has become the pursuit of prosperity and wealth.That physical comfort and security grease the skids of happiness is self-evident; living a hand-to-mouth existence inside a cardboard box is not as conducive to human happiness as having a comfortable home and secure income.But it is equally self-evident that a secure dwelling and income do not guarantee happiness; rather, they provide the physical foundation for the much more elusive qualities of happiness.  We can make the same distinction between the civil liberties that underpin the pursuit of happiness and the actual pursuit of happiness.  The first is a political system devoted to safeguarding liberty; the second is a messy, dynamic process that continues through all of life.If the basic political and material foundations for the pursuit of happiness are in place, we might anticipate a broadly happy society.  If prosperity and wealth are causally linked to greater happiness, we might expect to find that prosperous people are generally happy.America has great material wealth, but is happiness as abundant as wealth? And if not, why not?Numerous psychologists have made a career of studying happiness, and as with all social sciences, the field is wide open for cherry-picking data to support a prepackaged view.  But data from studies of happiness is suspect for the usual reasons.  People tend to report what they sense is expected of them; they tend to make themselves appear more successful (i.e., “happier”) than they really are, and the results can be skewed by the questions and procedures of the study. The vast majority of such studies of happiness are conducted within a specific cultural mindset.  Happiness is an individual issue.  Fundamentally, “it’s all in your head” and “the system enables happiness, so unhappiness is your fault alone.” The “fix” for unhappiness in this paradigm is a carefully apolitical network of pressure relief valves – counseling, therapy, motivational speakers, and so on – all focused on “fixing” the flaws within individuals that are assumed to be the exclusive cause of their unhappiness.As a result of my work writing Resistance, Revolution, Liberation: A Model for Positive Change, I now question the assumption that our happiness is disconnected from the society and economy that we live in. What if unhappiness is not only just an individual failure, but also the consequence of a deeply distorted society? If this is the case, prosperity in the sense of material wealth cannot possibly yield anything but the fleeting pleasure of consumption.

A Radical Critique of Happiness

Though we think of happiness as a private pursuit, in aggregate the pursuit of happiness becomes what we might call a “public happiness.” As author Garry Wills observed, public happiness is the test and justification of any government. If individual happiness is made difficult by the State, then that State must be judged a failure.Public happiness is not just the aggregation of individual happiness; it is a reflection of the social and political orders' success in enabling the common good, one expression of which is the potential for individual fulfillment.In our carefully cultivated cultural atmosphere of individuality, it feels like heresy to question the assumption that individual fulfillment is apolitical.  This Status Quo breaks the causal connection between private alienation and the political order so that the atomized individual doesn’t connect his own unhappiness with the sociopathologies of the consumerist-State social order.The isolated “consumer” doesn’t look at the social order as a potential contributor to his unhappiness, but instead looks to religion, psychotherapy, or medications as private solutions to the sociopathology he inhabits.The spiritual and psychological traditions of religion and psychotherapy serve as coping mechanisms for individuals as they navigate the many challenges of human existence.  Intended to provide insight and solace for the voyage through life, these traditions were not designed to analyze pathological social orders. They are apolitical because they address problems from the point of view of faith and inner understanding.That we have no field exclusively devoted to understanding systemic sociopathologies is not surprising once we understand the politics of self-interest.  How many mortals would place their own prosperity at risk by undermining the intellectual foundations of the Status Quo to which they belong?  History suggests that few individuals have the courage to risk status and wealth by undermining the social order that bestows their perquisites.Social orders that excel in creating and distributing what I term social defeat will necessarily be populated with unhappy, depressed, anxious, and frustrated people, regardless of the material prosperity they possess.In my lexicon, 'social defeat' is a spectrum of anxiety, insecurity, chronic stress, powerlessness, and fear of declining social status.One aspect of social defeat is the emptiness we experience when prosperity does not deliver the promised sense of fulfillment.  Here is one example:  A recent sociological study compared wealthy Hong Kong residents’ sense of contentment with those of the immigrant maids who serve the moneyed Elites. The study found that the maids were much happier than their wealthy masters, who were not infrequently suicidal and depressed.  The maids, on the other hand, had a trustworthy group – other maids they met with on their one day off – and the coherent purpose provided by their support of their families back home.The “American Dream” (as well as the “Chinese Dream”) presumes the opposite would be true, and this explains why reaching material abundance is not the promised fount of fulfillment: It fails to recognize the other necessary conditions of human happiness. It is a monoculture of the spirit, as brittle and prone to collapse as any other monoculture.For more go here:http://www.peakprosperity.com/blog/79635/pursuit-happiness