YA THINK??????????????? THE NEVER ENDING RISE IN THE MARKETS ON NOTHING???? lol
http://feedproxy.google.com/~r/zerohedge/feed/~3/rPWklj8oQVE/unexpected-warning-goldman-sachs-something-not-quite-right
It was just over 9 years ago today when we wrote "The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans" in which we explained how as a result of the growing influence of HFT, quants and central banks, the market itself was breaking. We also highlighted what the culmination of the market's "breakage" could look like:
liquidity disruptions could and will lead to unexpected market aberrations, such as exorbitant bid/ask margins, inability to unwind large block positions, and last but not least, explosive volatility: in essence a recreation of the market conditions approximating the days of August 2007, and the days post the Lehman collapse...
We even laid out some possible catalysts for a possible market crash: "continued deleveraging in quant funds, significant pre-market volatility swings as quants rebalance their end of day positions, increasing program trading on decreasing relative overall trading volumes."
We saw all of the above elements briefly come together when on February 5 the market finally did break in one spam of exploding volatility, as its topology was torn apart by various, disparate elements, resulting in virtually all of the above materializing, if only for a short time, and blowing up the VIX, which soared by the most on record, rising from the lower teens to above 50 in the span of hours, while bankrupting countless vol sellers.
Since then, the same elements that coalesced in 2017 to pressure and keep the VIX at its lowest level in history reemerged, and the "selling of volatility" once again reappeared as a dominant trading strategy, but not before Goldman Sachs wrote a report in March in which it echoed everything that we warned about over 9 years ago, and which increasingly many have said in the past decade, namely that the advent of algo trading and HFTs have collapsed market liquidity to the point where the market itself has become precariously brittle, prompting increasingly frequent flash crashes, and leading Goldman to conclude that, when it comes to market risk factors, "liquidity is the new leverage" in a world in which HFTs are the marginal price setters:
One conspicuous consequence of post-crisis evolution is that trading volumes in many markets are now dominated by high-frequency traders (HFTs). While bid-ask spreads and other indicators of trading liquidity appear to indicate liquidity has improved in markets where HFT has grown, the quality of this liquidity has not yet been stress-tested by recession. The recent experience of the “VIX spike” suggests there is good reason to worry about how well liquidity will be provided during episodes of market distress, and this is only the latest example of a “flash crash”. Regulators and researchers increasingly warn that HFT strategies can contribute to breakdowns in market quality during periods of distress.
Ominously, Goldman repeated our conclusion from 2009, almost verbatim, and said that "along with the uncomfortably high number of flash crashes in most major markets, we think “markets themselves” belong on the short list of late-cycle risks to which markets are potentially complacent."
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Fast forward to today when Goldman strategist Charles Himmelberg is back with a new report, which picks up where his last piece left off, defining "Liquidity as the New Leverage", and asking - rhetorically - "Will Machines Amplify the Next Downturn?" **********WHAT I SAID LOL*********
The answer, of course, is "yes" as we have warned non-stop for almost 10 years now, but it is always gratifying to hear some non-tinfoil hat-wearing Goldmanite, i.e. FDIC-insured recipient of taxpayer bailouts, confirm it and that's just what Himmelberg has done, warning that "the rising frequency of “flash crashes” across many major markets may be an important early warning sign that something is not quite right with the current state of trading liquidity."
For those unaware, if and when Goldman says "something is not quite right", it's time to quietly exit, stage left.
These warning signs plus the rapid growth of high-frequency trading (HFT) and its near-total dominance in many of the largest and most widely traded markets prompt us to more carefully consider the possibility (not necessarily the probability) that the long expansion accompanied by relatively low market volatility may have helped disguise an under-appreciated rise in “market fragility.”
To be sure, the topic of rising market fragility is anything but new to regular readers, and we have been covering it extensively over the past two years, although Goldman's growing concern by what was painfully obvious to many traders gives hope that one day the Fed too may be able to grasp just how its actions have broken the market, although that realization will sadly take place just moments before a historic market-wide flash crash send the S&P plummeting by the most ever, resulting in a market that is indefinitely halted.
But how do we get there?
First, it is time for traders, economists and policymakers to realize that, as Goldman recently "discovered", liquidity and not leverage, is now a systemic risk; ironically, in a world in which traders think there is copious liquidity across all asset classes, the reality is that there is virtually no true providers of liquidity when one needs it. Here is Goldman, which confirms that "Liquidity poses a potential systemic risk."
more,,,,,,,,,,,,,,
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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