When I was a kid I read Ray Bradbury’s novel, Something Wicked this Way Comes, which plays on our latent fear of caricature. It takes the entertaining thing, a traveling carnival, and turns it into 1962-style horror.
Not 2021-style of course. There’s decorum. It stars a couple 13-year-olds after all.
The stock market also plays on our latent fear of caricature. It’s a carnival at times. Clowns abound. As I said last week, companies can blow away expectations and stocks fall 20%. That’s a horror show.
Devilish winds have been teasing the corners of the tent for a time. We told our Insights Reports recipients Monday about some of those.
The Consolidated Tape Association, responsible for the data used by retail brokers and internet websites like Yahoo! Finance and many others last week lost two hours of market data. Gone. Poof.
Fortunately, about 24 hours later they were able to restore from a backup. But suppose you were using GPS navigation and for two hours Google lost all the maps.
So that was one sideshow, one little shop of horrors. I don’t recall it happening before.
Twice last week and six times this year so far, exchanges have “declared self-help” against other markets.
It’s something you should understand, investor-relations professionals and traders. It’s a provision under Regulation National Market System that permits stock exchanges to stop routing trades to a market that’s behaving anomalously, becoming a clown show.
Rules require all “marketable” trades — those wanting to be the best bid to buy or offer to sell — to be automated so they can zip over to wherever the best price resides. And exchanges must accept trades from other exchanges. No exceptions. It’s like being forced to share your prices, customers, and even your office space with your competitors.
The regulators call this “promoting competition.” Sounds to me like a carnival.
But I digress. Exchanges must by law be connected at high-speed, unless declaring self-help.
An aside, I’ll grant you it’s a strange name for a regulatory term. Self-help? Couldn’t they have come up with something else? Why not Regulatory Reroute? Data Detour?
Anyway, last week the trouble occurred in options markets. First the BOX options market went down. It’s primarily owned by TMX Group, which runs the Toronto Stock Exchange.
Then last Friday CBOE — Chicago Board Options Exchange, it used to be called — failed and the NYSE American and Arca options markets and the Nasdaq options markets (the Nasdaq is the largest options-market operator) declared self-help. They stopped routing trades there until the issue was fixed.
Now maybe it’s no big deal. But think about the effect on the algorithms designed to be everywhere at once. Could it introduce pricing anomalies?
I don’t know. But Monday the Nasdaq split the proverbial crotch of its jeans and yesterday the so-called “Value Trade” blew a gasket.
I’m not saying they’re related. The market is a complex ecosystem and becoming more so. Errors aren’t necessarily indicative of systemic trouble but they do reflect increasing volumes of data (we get it; we’re in the data business and it happens to us sometimes).
And we’d already been watching wickedness setting up in our index of short-term supply and demand, the ten-point Broad Market Sentiment gauge. It’s been mired between 5.8-6.1 for two weeks.
When supply and demand are stuck in the straddle, things start, to borrow a line from a great Band of Horses song, splitting at the seams and now the whole thing’s tumbling down.
And here’s a last one: Exchange Traded Funds (ETFs) have been more volatile than the underlying stocks for five straight weeks, during which time stocks had risen about 5% through last Friday. Since we’ve been measuring that data, it’s never happened before.
Doesn’t mean it’s a signal. It’s just another traveling freak show. Clowns and carnivals. ETFs are elastic and meant to absorb volatility. Stocks are generally of fixed supply while the supply of ETFs fluctuates constantly. You’d expect stocks most times to thus move more, not less.
I think this feature, and the trouble in options markets, speaks to the mounting concentration of money in SUBSTITUTES for stocks. It’s like mortgage-backed securities — substitutes for mortgages. Not saying the same trouble looms. We’re merely observing the possibility that something wicked this way is coming.
Our exact line Monday at five o’clock a.m. Mountain Time was: “There’s a lot of chaos in the data.”
Son of a gun.
I don’t know if we’re about to see a disaster amongst the trapezes, so to speak, a Flying Wallendas event under the Big Top of our high-flying equity market. The data tell me the probability still lies some weeks out, because the data show us historically what’s happened when Sentiment hits stasis like it’s done.
But. Something is lurking there in the shadows, shuffling and grunting.