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Posted on 15 April 2012 | 3,131 views

High Frequency Trading now Turning Bearish and Looking for a Summer 2012 Stock Market Crash

The six month surging stock market rally has nothing to do with any signs of a economic turnaround on Main Street analysts say — the disconnect in the number of shares being traded proves this.

The volume of New York Stock Exchange listed shares in all markets averaged 3.8 billion in the last quarter — a sharp drop of 14 percent from the same period in 2011. In Standard & Poor’s 500 stocks, it’s averaging about 5.8 million shares this year, a steep 27.5 percent decline from 8 million in 2009.

The market’s overall rise since October is on sharply lower volume, as many hedge funds have disbanded, and skittish investors have rushed to exit equity mutual funds for bonds and other asset classes.

These lower volumes indicate that there are now more professional traders than retail investors as a proportion of the market.

High Frequency Trading firms are who is propping up the new lower volumes and are who is turning bearish. They account for the majority of US stock volume — as much as 70 percent on some individual stocks and more than 50 percent in the overall market, according to researchers.

These Silicon Valley inspired computerized trading machines flip stocks back and forth all day at lightning speed — faster than the blink of an eye — making money off price anomalies and they pocket nice rebates on their orders to the NYSE, NASDAQ and other markets.

That flipping is magnifying volume and moving stock prices up and down intra-day. The US markets have seen a 14.23 percent surge in the Dow Jones Industrial Average since October and a corresponding 20.05 percent rise in the NASDAQ. But much of the activity is phantom and phony, some pros say.

The stock market’s recent rise defies the old Wall Street axiom that “volume confirms price” — and that puts the October to present stock rally in some doubt, as total shares traded continue to decline with the same velocity that equity prices maintain their ascent.

Some traders are shaking their heads — when people are trading 300 million shares in Bank of America (Ticker Symbol: BAC), just flipping it back and forth for a rebate, that’s garbage volume. That doesn’t do anything for anybody and yet, day after day, BofA is number 1 in volume of shares traded.

Many of these high-frequency players have scaled back their trading lately. That’s because the volatility that benefits their strategies has subsided on the lower volume — and because there are fewer “real” orders for them to play with from mutual funds and hedge funds that have left the market.

The only way these high frequency trading firms can operate is by kind of feeding off the real orders, the traditional institutions — they are not stock picking like others were in the past.

The average retail investors have run from the stock market. They’ve been bashed too often, from the famous “Dot-Com Bust” to the financial crisis that erupted in 2007 and memories are fresh of the May 6, 2010, “Flash Crash” that temporarily erased 1,000 points from the Dow.

Money has moved into bonds — bond inflows are out-pacing equities 5-to-1, according to a recent Lipper report.

We’ve had a great stock market performance, but it hasn’t really been on any kind of conviction.

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2 Comments »

  • Jessica Johnson said:


    High Frequency Trading now Turning Bearish and Looking for a Summer 2012 Stock Market Crash http://t.co/fj9uTayE

  • ichi said:


    Very true, the chances that we experience a flash crash are increasing. Just put together these faccts: 1) low volumes, 2) same people making decisions, 3) companies margins at the top (check nipa profits) 4) fiscal issues ahead for the US, and 5) increasing possibility of experiencing a global slowdown after factoring in recession in Europe and higher energy costs. This all boils down to a flash crash around the 3rd quarter in 2012. I have been checking pages like http://quantforcapitalpreservation.blogspot.com.es/2012/03/whats-this-all-about-this-is-about.html, since it seems some of it may be useful for pinning down flash crashes more closely

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