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Michael Santoli Presents: Speed Matters More Than Price


The metabolism of markets changes, often due to technology or regulation, in ways that render some earlier tools and rules of thumb - which might have worked for years on end - ineffective.

It was quite a coincidence (if there's any such thing as a coincidence). Just as I was reading some of the commentary on Minyanville about the seemingly unorthodox rhythm and flow of the market lately - the elevated TICK readings, the late-day program bid and the related hypotheses about who or what invisible force was behind them - I came across a copy of an old document I keep in my desk. It's a journal entry from an unidentified stock operator from the early part of the 19th century, who is bemoaning the way the game had changed.

An excerpt, dated October of 1818:

"In all my 30 years of trading stocks, I've never witnessed a market such as we see these days. It used to be quite evident who the players were and what their clear intentions were. Back when I started, in the first decade of the Republic, before the formal New York Stock Exchange was formed, men bought, sold and brokered stocks in a forthright fashion in the taverns and tea houses of Wall, Pearl and William Streets. At the corner table at Fraunces was the gentleman who knew all about the canal-company stocks, and could be counted on as a buyer on difficult days and a seller when smiles were everywhere. The fellow who dealt in merchant shipping bonds was a fixture at the Spotted Horse Tavern, and despite his heroic consumption of the hard cider he always gave a fair price on his paper. Over at Beckett's, the more adventuresome speculators gathered, and you could always find a taker for some shares in a land developer in the Northwest Territory, or a chap who had gotten over his head in gambling losses and needed to unload some bits of a risky Western stagecoach insurer on the cheap.

"In those times, it was men looking you in the eye and shaking your hand as genuine pieces of real-world companies were traded in a deliberate fashion at a fair and clear price. Of course, this was before the 1792 Buttonwood Tree agreement made exchange membership formal, and certainly before the members went indoors and rented that room last year at 40 Wall for the unthinkable sum of $200 a year.

"Since that point, as I sit in that trading room, I haven't any idea who's trading what, or why. Buyers' and sellers' agents and runners scurry in and out of the crowd, whispering in corners, attempting to disguise their intentions and the depths of their interest in a trade. Having all securities trade in a single room also leaves the assembled traders and clerks subject to periodic manias of the spirit, buying everything or selling it all based on some rumor or scrap of news from the midday tout sheets or nothing at all. Lately, it's been straight buying, often after the trading room reopens after lunch. Why should canal stocks and stagecoach sponsors and the merchant shippers all move in unison? It's as if some anonymous buyer lies in wait and then dispatches a dozen brokers and runners into the room at once to mark up prices, as if all that was being traded were pieces of paper rather than shares in individual enterprises.

"I've become convinced that the Monroe administration must be ultimately behind this. With all the debt the government took on to fund the War of 1812, the government needs to maintain confidence in the system and keep the banks afloat. I've no proof, but I likewise have no other plausible explanation for why a market behaves as it does today."

Note: Yes, I made this up, for illustrative purposes. There was, indeed, a financial panic the ensuing year, in 1819, which led to the country's first depression. But among all the rival theories for what sparked the panic, no historian or theorist suggests financial-market manipulation. My point is that the metabolism of markets changes, often due to technology or regulation, in ways that render some earlier tools and rules of thumb - which might have worked for years on end - ineffective.

I don't mean to take on the role here of always pooh-poohing outlier ideas for what's happening in the markets. And I certainly am not here to claim there are no ulterior motives or manipulative practices at work here and there. Let me emphasize, too, that if the U.S. stock market were being lifted by waves of indiscriminate program buying from a government, central bank, the Sultan of Brunei or the heads of the five Cosa Nostra families, I and every other journalist would love to crack the story. It would mean a Pulitzer, six-figure speaking fees and a cushy gig on a cable talk show or Columbia Journalism School. (Check out a good piece in this week's New Yorker magazine by Nick Lemann, "Paranoid Style: How Conspiracy Theories Become News.")

But before I start believing something nefarious is going on, I need someone to show me how all these high TICK readings and the late-day bids and the market's refusal to go down is incompatible with this:

Under-invested hedge funds and defensively positioned long-only managers subsumed in stubbornly negative sentiment since mid-summer watch the market defy calls for a tough October and a pre-election selloff. They are massively underperforming. They are brutally wrong-footed, too, with too much energy and not enough tech, too many small-caps and not enough OEX names. They need to get invested fast to catch a presumed fourth-quarter rally. For the past three years, investment banks have been loading them with algorithmic trading platforms, allowing instant portfolio trades, and ETFs have become the favored way for hedge funds to modulate their equity exposure. They feel they need to buy. Speed matters more than price. When they see the market is hanging in by early afternoon, they press the button. Hello to the four-figure positive TICK?
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