Wednesday, August 28, 2013

Nasdaq freeze

An anonymous correspondent explained last week's Nasdaq freeze thus.
The truth about what happened Aug 22 to the Nasdaq is that new limit-up/limit-down rules took effect in derivatives (exchange-traded products) listed at Arca at the same time that new options began trading marketwide that day. Since the market is full of complex, multi-leg trades, bad data propagated, affecting Goldman’s options-trading algorithms Tuesday, spawning hundreds of derivatives trading halts by VIX expirations Wednesday, and producing bad data in the consolidated tape by Thur, halting Nasdaq trading. So the real culprit was the SEC. But it’s bad form to say publicly that the regulator is responsible for jeopardizing the market.
I can't vouch for the story, or even for understanding it all. But I'm interested in several emerging stories that some trading pathologies are in part unintended consequences of SEC regulation. It's also not the first time I hear of financial market participants afraid to speak out and earn the disfavor of their regulator.

7 comments:

  1. Let's see: private speculators were running complex multi-leg trades through privately owned stock trading platforms and the trading platforms started reporting bad data and so the speculators' computer programs did a classic GIGO and THEREFOR it must be the fault of the regulators because of limit up limit down rules announced two years ago (which may not even have kicked in)?

    Sounds more like bad computer programming.





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    1. Sounds like software/hardware issues at the exchanges:

      http://www.nasdaq.com/press-release/nasdaq-omx-provides-updates-on-events-of-august-22-2013-20130829-00686

      Delete
  2. On QE,


    You never explained why you would be against something that Milton Friedman was for:
    Re-posted

    " I cannot believe that a Chicago Academic (!) Is against something that Milton Friedman favored. The reason QE hasn't done enough good is that not enough of it has been tried.

    And before you start talking about the definition of insanity, let me say that we have a natural experiment, between Europe and America. Europe has tried fiscal austerity and monetary austerity. It has been a horrific disaster.
    America is trying fiscal austerity, but with very small (relative to what is needed!) monetary stimulus. The result has been very weak economic growth.

    Oh and dont get me started on the market. How do you explain the markets' reaction to the end of QE?

    QE is monetarist.
    Its pro-market
    It can be rules based if implemented with an NGDP target.

    You should be all in favor

    Why are you not?"

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    1. Milton Friedman was not in favor of QE, nor did he ever support a massive redistribution in wealth from the poor to the banks and landowners (which is exactly what QE is). Friedman believed that an expansion of the money supply is appropriate when there is a risk of a deflationary spiral--but even under the best of circumstances, he didn't believe that the Fed was capable of identifying the appropriate times and amounts by which to do so. In this case they are expanding the money supply in a particularly harmful (and certainly not "pro-market" way (by redirecting scarce resources into an already over expanded sector)).

      Europe has responded to the fiscal crisis with repeated bailouts, expansive new regulation, and punitive taxation. European governments control and even larger portion of their economies than the US, and spend an even higher percentage of GDP (which is why they have done so poorly).

      It is also an unusual claim that the US is trying "fiscal austerity." Even after the sequester and adjusted for inflation, the government in 2013 is spending more than it did in any year under Bush, and 30% more than it did in any year under Clinton.

      In light of the largest monetary stimulus program in any history, and the largest monetary expansion in US history, and a record of almost unprecedented failure, what makes you think that the problem is "not enough" stimulus?

      The market's reaction to no more free money for you is exactly what you would expect. But what's good for the market is not always to create a massive bubble.

      Delete
  3. Read Milton Friedman on Japan in the late 1990's. Then you'll see how wrong you are.

    ". In this case they are expanding the money supply in a particularly harmful (and certainly not "pro-market" way (by redirecting scarce resources into an already over expanded sector)). "

    What over expanded sector are you talking about? Finance or Real Estate?.
    Real Estate has experienced a modest recovery that might be threatened by the end of QE.

    "Europe has responded to the fiscal crisis with repeated bailouts, expansive new regulation, and punitive taxation. "

    Punitive taxation to balance their budgets to comply with the idiotic "austerity" religion. They have to pick one part of conservative dogma and they pick the ABSOLUTE WORST, balancing the governments budgets in the midst of a recession.

    And Europe has always had supply side problems and over-regulation. But what must be answered is why they were growing (albeit weakly) before the financial crisis, and why the recession has hit all sectors.

    "It is also an unusual claim that the US is trying "fiscal austerity." Even after the sequester and adjusted for inflation, the government in 2013 is spending more than it did in any year under Bush, and 30% more than it did in any year under Clinton."

    Haven't you heard? The deficit is coming down (not counting entitlements) The sequester is a 10-year program. Its full effects haven't kicked in yet. And the Fed is doing more than the ECB in Europe. You have a situation of Europe= Monetary and fiscal austerity plus new regulation, versus U.S.= Modest fiscal austerity and very modest, (relative to what is needed to restore the U.S. back to its pre 2008 NGDP growth path) monetary stimulus. The result is what you would expect , very weak NGDP growth, versus outright recession for many European countries. Thats the natural experiment at work.

    "In light of the largest monetary stimulus program in any history, and the largest monetary expansion in US history, and a record of almost unprecedented failure, what makes you think that the problem is "not enough" stimulus?"

    World war II? The fed bought trillions more adjusted for inflation. We have been hit by A SEVERE negative DEMAND shock, comparable to the Great Contraction of 1929-1933. Bernanke did more than the Fed back then but he still didn't do enough, else we-d be growing at 5% NGDP instead of 1.5%, and unemployment would have come down more, and labor force participation would have gone up.

    "The market's reaction to no more free money for you is exactly what you would expect. But what's good for the market is not always to create a massive bubble."

    Ah yes, the old false, tired, "druggie" analogy. Give me something new, would you?

    Anyway, Dr. Cochrane believes in the EMH. Shouldn't he have noted the reaction to QE's possible end? I don't think markets are perfect, but I do think they're smarter than regulators and the Fed.

    I know you hate Keynes Dr. Cochrane, and wont pay attention to him and thats fine. But have you completely abandoned Milton Friedman too? (the one who wrote the Monetary history, not the 1970's one who crusaded against inflation)

    It's like you're not even aware of Market Monetarism and Scott Sumner

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    1. Eh, we're sort of off topic, no?

      Chicago is not about preserving every statement Friedman said, any more that Princeton shouldn't be about preserving every statement Keynes ever said. I try to follow in Friedman's steps by taking the same tough approach; go where the facts and coherent theory tell you. In this case, two trillion dollars of QE with nothing to show for it pretty much dooms MV=PY, at least while interest rates are zero. Sorry, Milton, it just ain't so.

      As for austerity, European austerity consists of raising taxes and regulations on anyone who might have the temerity to start a business and hire someone. France's government spending is still 56% of GDP. When that's below 40% or so, let's talk about austerity.

      Back to the topic, please. I'll have all sorts of posts on the ineffectiveness of QEX, forward guidance, and so on for you to pick apart soon.

      Delete
  4. "In this case, two trillion dollars of QE with nothing to show for it pretty much dooms MV=PY, at least while interest rates are zero. Sorry, Milton, it just ain't so. "

    Milton Friedman never regarded interest rates as much of anything Dr. Cochrane. And two trillion dollars has a recovery to show for it, albeit a weak one. Anyway two trillion dollars is peanuts compared to the size and depth of our capital market.

    "Chicago is not about preserving every statement Friedman said, any more that Princeton shouldn't be about preserving every statement Keynes ever said. I try to follow in Friedman's steps by taking the same tough approach; go where the facts and coherent theory tell you."

    In this case, the facts and coherent theory tell you that Milton Friedman was right.

    "Back to the topic, please."

    I'll be happy to stay on topic if you don't ignore the evidence that contradicts your worldview, Professor. I had to re-post this from the Jackson Hole post

    "I'll have all sorts of posts on the ineffectiveness of QEX, forward guidance, and so on for you to pick apart soon."

    Looking forward to it! :-)


    ReplyDelete

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