The sharp fragmentation of markets and their reliance on independent trading firms took centerstage on Friday, with exchanges sniping at each other a day after a steep and mysterious market drop rattled investors worldwide. The cause of Thursday afternoon's unprecedented plunge in the Dow Jones industrial average – the DJIA lost 600 points in five minutes before markets eventually recovered most of those losses – was still unclear. But traders and exchanges said the reason it all unfolded so quickly was a lack of market-wide circuit-breaker standards that would halt trading, along with rule changes in the last decade that made the U.S. stock marketplace the fastest on earth. William O'Brien, CEO of Direct Edge, which handles some 10 percent of all trading volumes, said: "The systems should have been closed down for a period of time, market-wide." "It doesn't help that different markets operated differently," said Joe Ratterman, chief executive of BATS Global Markets, the third-largest exchange group. – Reuters
Dominant Social Theme: One ring to bind them, one market to rule them.
Free-Market Analysis: Again, the hypnotic clarion call for more centralization is launched. Being as sensitive to these sorts of promotions as a certain kind of princess is to a pea under a stack of mattresses, we notice when rhetoric resembling a promotion is presented. We were startled when we read (we can't remember where) that it was lack of a centralized market that caused the recent trillion-dollar drop in the NYSE's share values last week. But when we read the Reuters article excerpted above there was no doubt in our modest-sized collective mind that once again a crisis was being used for the benefit of an underlying dominant social theme: (Centralization good, separate power centers bad.)
We have within our ranks a strange breed of market-structure enthusiasts, so we understand something (a little) about how securities markets evolve. In the US especially (where consumer securities markets really evolved) the industry began with myriad municipal and regional markets. In New York itself there were literally dozens of small securities markets before the NYSE began buying them up and merging them.
When the NYSE couldn't buy up an exchange (and most of the merging took place AFTER the Civil War, naturally) it attempted to generate a merger via a bribe. This was in fact, to the best of our understanding, the way the NYSE specialist system got its start.
The uptown boys with their continuous trading refused for the longest time to join forces with the NYSE because its auction-style of trading didn't provide enough revenue. Finally, the NYSE made a proposal. If the uptown boys would agree to a merger, various uptown traders and brokers would receive specialist posts – a kind of monopoly over certain securities that allowed the specialist to basically control trading in a given instrument under the guise of creating an orderly market. In the 20th century for decades, this system held sway on the floor of the NYSE. The gratuity – the bribe – of specialist's posts spawned a thousand ridiculous doctorial theses and a million uninformed articles in major publications of the day.
And, boy, there were certainly a lot of theories floated about those famous specialists. We remember vividly an Economist article reciting as fact the hoary tale that a floor trader broke his leg early in the late 19th or 20th century – and since he couldn't move, the trading eventually came to him, and thus the specialist system was born. The wonders of competitive capitalism! Only it wasn't true and a half hour's research would probably have shown it was false. Of course research was harder to carry out in those pre-Internet days.
Anyway, the idea that the specialist could somehow stabilize the market by trading only a couple of stocks and committing his capital to make sure the market traded up or down gradually – this overlay of fiction was floated to justify the system and the inordinate riches it brought to a few firms and traders. Early in the morning was apparently an especially good time for specialists because they could supposedly see the indications of interest and set the market a little too high or too low and make a killing on the opening, day-in and day-out (or so we were told by hush-hush NYSE informants). Alas, the specialist system is no more. A few mourn it. A very few remember it for what it actually was.
And now we have the rising calls, for more market centralization, like the baying of unstable, wild creatures. Another metaphor: It is like driving by a car accident and suggesting that those vehicles involved would be more stable on one wheel than four. Gee, what kind of mind, seeing the instability of a system calls for a further deepening and widening of the instability? A modern one?
It is like the economy itself. Before central banking, especially in the United States with its quasi-free banking, regions participated in downturns rather than the entire country. If one state was depressed another might be booming. Even interest rates were regional. Not anymore. Now a single slump in a single industry can cause a chain reaction in the desperately delicate systems that have been created in the name of more "robust" instruments of last resort and, of course, the ubiquitous central bank clearing house.
But the centralization is not supposed to stop there. Having centralized money flows through intensive regulation of mutual funds etc. – driving all the money to certain trading systems in certain easily detected and increasingly fragile patterns, the powers-that-be are renewing the call, it would seem, for increased market centralization. It is not enough that massive manipulation can occur at the NYSE, etc., especially because of electronic trading. No markets must be further linked and centralized into one GIGANTIC worldwide market. It is not enough to manipulate the markets of nation-states. The manipulation must be generated WORLDWIDE. Such unscrupulous and insatiable greed has no boundaries.
Regulation, of course, will be the weapon of choice to further consolidate markets. Powerful computers will be the weapon of choice to manipulate them. The dominant social theme: "Disparate markets around the world don't allow for the necessary coordinated action to stop ruinous crashes." Oh, please … the whole idea of consolidating securities markets through regulation is yet one more money scam that will empower the powerful (Wall Street, the City – they have the biggest computers) while shearing the sheep of what is left of their tattered, pathetic portfolios. Market consolidation indeed!