Let me ask you a question â I promise itâs not a trick question, but it is a bit technical (frankly, I couldnât think of a simpler way to ask it).
Would you place a market order, either a âbuyâ or a âsellâ order, if you didnât know at what price a security was trading?
Before you answer, consider whatâs at stake.
I have been banging on about how prices are signals. Buying or selling a stock without a price is like driving blind through an intersection without knowing whether the light is red or green. You could sail right through safely. Or you could be Hulk-smashed to smithereens.
Why, then, does the New York Stock Exchange (NYSE) have a rule â Rule 48 â that allows individual market makers to temporarily suspend the opening or trading of shares and to open the shares without quoting a price to bidders?
The exchange created the rule in December 2007. Itâs been invoked 77 times since then. In the latest episode of volatility, itâs been invoked at least four times. The letter of the rule explains that it should only come into effect if there are “extreme market volatility conditions”. And thatâs the goal â to cut off a stockmarket panic caused by an unexpected event or market âturbulenceâ.
To prevent low prices from leading to lower prices, in other words.
Pay careful attention. Itâs not the suspension of normal trading thatâs the threat here, although that itself is part of the gradual encroachment on your financial freedom of action. Itâs the removal of the price altogether. When Rule 48 is invoked, the individual investor is trading blind.
Now, I know what youâre thinking: if youâre trading blind, the first thing you should do is stop trading. And itâs a fair point â in the absence of reliable pricing information, taking no action is probably the best course of action.
But you can bet that there were plenty of investors and traders who submitted market orders during the wild swings in the market last week. A market order is an instruction to sell or buy at the âmarket priceâ. It gets filed wherever the price is.
If youâre following along at home, then by now you see the potential for manipulation with Rule 48. Private investors can be arbitrarily stopped out of a position by a market maker opening trading in a share below where all the stops are. Then, the market maker and his high-frequency trading buddies can buy the same shares as normal trading resumes and prices rise.
Cynical? Far-fetched? Or just how business is done these days? You decide.
If youâre not at least a little suspicious that market price signals are rigged (or at least manipulated to the advantage of the manipulators) you should probably stop reading now. It will be a waste of your time to keep on. Do us both a favour.
But you donât even have to agree that centrally planned interest rates are a form of manipulation to see that free markets are anything but free right now. And thatâs the investment challenge. How can you invest in a market when price signals are bogus? Should you even try?
And while Iâm on the subject of false market signals, what about false news? An Egyptian court has sentenced three journalists to three years in prison for airing what it called âfalse newsâ. The courtâs ruling concluded that:
âIt has been proven beyond reasonable doubt that the al-Jazeera media channel has dedicated its broadcasting to the service and support of the Muslim Brotherhood faction and that they have permanently sided with them at the expense of their media ethicsâŚThis provides enough ground for a conviction of belonging to a group based on violations of the law.â
Who do you believe? On the one hand, this looks like people in power trying to silence dissent by using the law to punish reporters. If youâre an advocate for free speech and a free press, it should concern you.
On the other hand, the reputation of the press â especially the financial press â has taken quite a battering in the last ten years. Deservedly so. And mostly because of the financial mediaâs colossal failure to alert investors that the financial system was dangerously unstable.
There were such signals by the way. Credit default swaps on residential mortgage backed securities. The volatility index (VIX). Junk bonds and high-yield hybrid securities. Anything that benefited from low interest rates, rapid credit expansion, and less-than-rigorous risk management was at risk.
But who was ringing the bell? Who was sounding the alarm?
Speaking of alarming, letâs take another example of silencing dissent to prevent perfectly rational panic. Authorities from the Communist Party of China arrested a journalist from Caijing Magazine last week. State-owned media reported that the journalist in question had been âfabricating and spreading fake information on securities and futures marketsâ.
He was, by the way, writing about a stock market crash, an indisputable objective fact evidenced by the 40% fall in the Shanghai Composite Index. Can a fact also be a rumour? For all its economic liberalising, this shows that China is still a one-party state that doesnât tolerate dissent.
In a strange way, you have to admire the triumph of Chinese central planners. They believe they can bend the stock market to their policy wishes. If anyone â a journalist for example â points out that markets are falling, they charge him with a crime. This is coercion and intimidation at its worst.
Thatâs the world we live in, though, isnât it? Every country has a Ministry of Truth. Sometimes itâs in cahoots with the government, sometimes it serves other interests (yes, weâre talking to you CNBC, your advertisers, and the banks).
What information can you trust? Is anyone objective anymore? Is there such a thing as âjust the factsâ? If basic price signals in the market canât be trusted, what signals can?
All of this reminds me of why I own gold. I suspect a lot of investors will come to learn the value of hard assets in the coming years. The hard way â via more overt price manipulation by the authorities and tighter control of your financial choices.
On that cheerful note, Iâm going to lunch, which Iâll pay for with cash.
Category: Market updates