Gaming Wall Street

You remember the "flash crash" back in May? Well, one trader believes the crash was created on purpose, and that it is only a matter of time before it happens again.

He gives Forbes 3 reasons why the next flash crash will be caused on purpose:

1. Because the last one was caused on purpose. The average quote volume on the NYSE is 10,000 per second. At one point on May 6, somebody launched 5,000 quotes at the NYSE for the ticker of Public Storage inside of one second. None of those quotes led to a trade—but that traffic by itself took the NYSE to 25% of its stable CQS capacity. So it’s clear that one trader or perhaps more discovered that by blasting the NYSE, they could introduce added latency in the CQS feed. Knowing that most players were looking at a delayed NYSE feed, anybody in the know could make easy arbitrage plays between the NYSE and other exchanges.

2. Because mini flash crashes have happened before. On April 28, for instance, the share prices of Wal-Mart and Procter dipped 50 cents for less than a second. If algorithms had been programmed knowing the dip was coming, profits are fat and easy.

3. The system has shown big delays more than once since then. It seems that whenever the NYSE receives more than 20,000 quotes per second, its CQS feed, which determines where many equity orders get routed, falls behind.

My advice? Keep your money in something safer than the stock market, or get to know one of these financial hackers very well.

Stock Market: Reality (Finally) Sets In

I've been saying the stock market is grossly overpriced for quite some time now, but the market stayed bullish after government bailouts, stimulus, and plain irrational exuberence, despite our economy being in the toilet. But finally, reality has set in, and the Great Correction has begun.

In one month, the Dow has lost 1,190 points, or 10.6% of its value. That is a boatload of money evaporating, and I doubt we have seen the worst of it.

So there's your sunny optimism for the day.

[graph from Marketwatch]

Goldman Sachs, JPMorgan Have a Perfect Quarter

Goldman Sachs made money on trades every single day this past quarter.

Goldman posted no less than $25 million in net trading revenue every day during the quarter, according to its 10-Q regulatory filing. For the first time in its history, it reported no net loss on any day.

“This is the first time we have reported zero trading loss days in a quarter,” Samuel Robinson, a Goldman Sachs spokesman, told Bloomberg via e-mail. “We believe it shows the strength of our customer franchise and risk management.”

Goldman Sachs 10-Q filing
The breakdown, on page 121 of the 10-Q, is as follows:

7 days at $25 million to $50 million
50 days at $50 million to $75 million
16 days at $75 million to $100 million
35 days at more than $100 million

Goldman's successes were matched by JPMorgan, who averaged $118 million PER DAY in the previous quarter.

At least we know our government's economic policies are working out for someone. But this kind of success doesn't come free. Since 1990, Goldman Sachs has given over $31 million to political candidates, with Democrats receiving the lion's share of the booty (64%). Obama leads the pack as the largest receiver of Goldman donations, with a little over $1 million.

Talk about a great investment by Goldman: $31 million donated over 20 years, and now they're making well over $31 million per day.

Now you know how to do it. You too can be successful in America, all it takes is $31 million to buy senators, congressmen, and a president or two.

It's really a bargain, when you think about it.

Wall Street: ‘Machines just took over’ [Robot Apocalypse]

The war has expanded to the financial front, and the machines have come for our money.

No one was sure what happened, other than automated orders were activated by erroneous trades. One possibilility being investigated was that a trader accidentally placed an order to sell $16 billion, instead of $16 million, worth of futures, and that was enough to trigger widespread sell orders across the market.

"I think the machines just took over. There’s not a lot of human interaction,” said Charlie Smith, chief investment officer at Fort Pitt Capital Group. "We’ve known that automated trading can run away from you, and I think that’s what we saw happen today.”

We gave the machines control of all our money, and now we're paying for it.

[via Cam]

Treasury to Sell 7.7 Billion Shares of Citi

Remember when all the banks fell apart, and our government gave them a bunch of our money? Well, in the process we bought 7.7 billion shares (a 27% stake) of Citigroup, Inc., that the Treasury is now planning on selling back to the market.

SAN FRANCISCO (MarketWatch) -- Citigroup Inc. shares fell 2.4% Monday as investors unloaded the stock following news that the Treasury Department will begin to unwind its sizeable stake in the banking giant this year.

The Treasury said it plans to sell 7.7 billion shares of Citi (C 4.16, -0.02, -0.48%) it owns as a result of the financial bailout over the course of 2010 subject to market conditions.

"Treasury intends to sell its Citigroup common shares into the market through various means in an orderly and measured fashion," it said in a statement.

Treasury said it intends to initiate its disposal of the common shares pursuant to a pre-arranged written trading plan.

The Treasury bought the shares when the stock was at $3.25. Many analysts say we should have begun the sell off in October, when the stock was around $5 per share. Today, it is at $4.17, still a nice $7 billion profit if we sell now.

My only question is: what are they waiting for?

Seven Questions to Ask When Picking a Financial Adviser

Great article on how to choose someone to shepherd your wealth.

For example, you might ask: How many clients beat their benchmarks or are in line with their goals? How have clients similar to me fared during recessions? Can you combine all of your clients into a single portfolio and tell me how the overall portfolio did? Remember to ask about both short-term (one year) and long-term (10 years or more) records, and ask if your adviser is using absolute returns or returns relative to the performance of the market.

Next, use the advisers' record to understand how they make decisions. "You can ask about performance, but what you're really after is how the adviser processes decisions," says Mr. Rogers of RayLign Advisory.

He suggests asking advisers to dissect a specific situation that has occurred to them. For instance, you could say, " 'Take your worst investment and evaluate how you made the investment, monitored it and the decisions you made along the way to stick with it or get out,' " he says.

"If you feel they are dodging the question or putting a positive spin on everything, it's a red flag," Mr. Rogers says. "It could mean they're not going to deal with or handle the tough decisions."

If I ever need a financial advisor, I will definitely refer back to this.

It's Bubble Time

Here we go again:

In the last eight months, the Dow Jones Industrial Average has risen from its March 6 low of 6470 to over 10290 today, a gain of roughly 59%. The Nasdaq Composite Index and the S&P 500 Index have likewise increased about 71% and 65%, respectively, since early March. Are we looking at the restoration of legitimate values or the emergence of disastrous new asset price bubbles?

The answer would seem to lie in whether the Fed's money machine is fueling an illusory recovery that is only manifested in financial markets as opposed to the general economy. The FOMC's own report acknowledges that economic activity remains weak, household spending is constrained, and businesses are still cutting back on fixed investment and staffing.

The Fed's 0% interest loans to banks are contributing to yet another massive bubble, though instead of real estate, this time its the stock market.

The game is rigged to blow, get out while you can.

[via WSJ]