August 15, 2008
Below are transcripts of a CNBC Interview yesterday with a seasoned trader on Wall Street. Of particular note is the emphasis placed on algorithmic trading and the cause and effect of such trading on the market. Mr. Najarian speaks to the exact issues I have spoken of regarding trade analysis when investigating the effectiveness of present short sale policies. Analysis that has not yet been presented, if even conducted, by the OEA in reference to the short sale process.
It is not enough to look at the net settlement figures and the duration of a failed trade to rationalize whether the short sale policies are effective. Too many short sales are executed and closed within the time span of the settlement process and will therefore never create a mark in such a high level analysis. These rapid trading short sales will however have a direct impact on price discovery as Mr. Najarian points out ("So as they sense that pressure, these algorithms back off"). These are the trade tickets that are being pulled from the market due to the onslaught of short selling. This scenario likewise points out the flaws in the market making process when trades such as these are enacted and market makers do not step in for price discovery protection.
How is it that a market maker can step in and sell naked what they do not hold in inventory to stave off upside volatility due to an anomaly in demand yet they are not there to step in went a similar anomaly takes place on the sell side? Could it be that it is cheaper to represent the sell side first than to represent the buy side first?
Without the mandatory pre-borrow the trades being executed that drive the bids lower can be done in a manner that games the locate system. Algorithms sense this attack and lower the bids and not investor sentiment on what a valued price is for a market. In this method of trading, the locate is used multiple times to generate a higher volume than what would otherwise be legally obtained overwhelming the demands and manipulating the markets.
The information is there, the people are finally coming forward to talk about this abuse. Why has the SEC not recognized the damage being cause and take the appropriate actions once and for all?
Copyrighted material redacted. Author reference the following article: CNBC Interview, August 14, 2008