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Today's Commentary
Tuesday, January 15, 2019

Treasury Secretary Steven Mnuchin just shined a very bright light on a very dark corner of Wall Street.

Last week in a Bloomberg interview, Mnuchin said, “In my opinion, market structure has led to a lot more volatility. Part of this is a combination of the market presence of high-frequency traders combined with the Volcker rule.”

While the Treasury Secretary got a lot of flack for not pinning the stock market’s recent woes on President Trump’s trade war with China, the President’s threat to shut down the government, the President’s tweets about the Federal Reserve raising rates, he at least got the real narrative right.

Of course, rising rates are weighing on the stock market. Fears that a trade tiff with China will turn into a full-blown war is definitely weighing on the stock market. So were fears that there might be a partial government shutdown. And, that global growth is slowing is a heavy weight on stocks.

But those weights have nothing to do with the market moving 500 points one way or another in a day.

Instead, they have everything to do with today’s “market structure,” which is nothing more than a vacuum-sealed bubble, ready to pop. And when it does, you’re not going to want to be on the wrong side of the implosion…

Selling – or Lack Thereof – In a Down Market
They have nothing to do with the reality that there have been several days just since October when the Dow Jones Industrial Average moved more than 1,500 points up and down in the same day.

Or, that since the market’s highs in October, just counting the first move down from its highs, then back up, then back down, back up and down to these new lows, the Dow’s travelled more than 12,500 points.

That’s crazy volatility.

Those kinds of moves have everything to do with “market structure” and the “market presence of high-frequency traders.”

The jury’s out on the Volcker Rule. It’s been pegged as having an effect on the bond market, but not on the stock market. So, there’s no reason to dwell on the Volcker Rule at this juncture.

Besides, attacking the Volcker Rule is what we should expect from a Republican administration.

What’s music to my ears is the Treasury Secretary unexpectedly fingering the true black hats riding roughshod over our capital markets, high-frequency traders.

But not everyone agrees with me.

According to James Angel, an associate professor at Georgetown University, “The notion that high-frequency trading and the Volcker Rule are causing the current volatility is absurd.” He says, “We’ve had them around for years and they’ve coincided with some of the quietest times in market history.”

Just because Professor Angel has done yeoman’s work on this exact subject on behalf of stock exchanges and high-frequency traders, doesn’t mean he’s a shill, he has a point about the calm markets.

The CBOE’s Volatility Index, the VIX, saw the calmest year last year since 1990. And indeed, volatility, as measured by the VIX, has been historically low for nine years since 2008.

But that’s because markets have been moving up steadily since 2009.

Volatility is always subdued in steadily rising markets, that’s the nature of rising markets and volatility.

It’s when markets convulse that we see the effects of HFT actors. Volatility spikes inordinately precisely because of the lack of liquidity facing our equity markets, because of “market structure.”

That’s only evident in down markets.

In rising markets, minor selling is met with HFT bids that arrest selling momentum. Because of the bull market psychology, HFT pinging brings buyers back when they see selling subside and bids returning.

Remember, it’s been “buy the dips” for years, since 2009.

Now, with so many things actually weighing on equity markets, selling on down days isn’t met with HFT bids, because it’s too dangerous for them to try and buy stocks in a falling market. 

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