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Trading By The Numbers

The Privateer
By The Privateer / February 19, 2012

The first thing about modern markets, the thing that must never be forgotten, is that most of the “trading” which goes on in them is untouched by human hands – or brains. To an overwhelming extent, modern markets are “automated”. By “automated” we mean that at least eight out of ten (some estimates put the ratio higher) of all transactions are controlled exclusively by means of computers and the programs built into them. The numbers – sourced from government departments or from the central bank – are plugged into the programs and the programmed “actions” are taken.

As many people have pointed out, the process of “reporting” in the mainstream media these days consists largely of taking press releases from various government departments, printing them all but verbatim and calling the result “news”. This is bad enough. The process of trading on mainstream markets today is even worse. A well known quote from the “econometrics” profession goes as follows: “Truth is that which fits economic equations.” This is a perfect description of computer trading. The equations or “algorithms” are written and incorporated into the trading program. It is the only way that modern trading can function since the complexity and the speed of the calculations necessary are beyond any human brain to process. The problem is this: The human brain thinks – the computer does not.

There are two ways in which human reason enters the picture. The computer programs and algorithms have to be written in the first place. Then, when an event which was NOT taken into account when the program was written hits – and it always does – the programs have to be overridden. The more pervasive that programmed trading becomes, the more disastrous become the instances when the trading equivalent of the “blue screen of death” appears on the monitors.

The Market Assumptions:

First and foremost, whether it is computerised or not, pretty well all trading taking place today is based on the underlying assumption that the debt-based global monetary and financial system is a viable one. No matter how much evidence for a contrary conclusion piles up, the idea that money based on a promise to pay will EVER prove unviable as a medium of exchange is never allowed to enter the picture.

Once that is established, the next assumption is that “risk” is something that can be negated. In the first place, systems can be set up which will yield positive returns no matter what the market does. The assumption here is that the only way not to make money on the market is to be trapped in a market which does not move at all – either up or down. This assumption has taken some hefty hits over the past two decades, none bigger than the 2008-09 collapse, but while it has been shaken, it still remains. That is because of a further assumption. This one is that no matter what happens, the markets like the banks which feed them are “too big to fail”. In any imaginable extremity, they will be bailed out and put right by governments and central banks feeding enough debt-based fuel into them to keep them functioning.

Lastly, there is a convenient assumption upon which debt-based markets have been feeding throughout the fiat money era. This is the assumption that no matter how much inflation there is, it will not be recognised as inflation as long as its effects can be confined to the financial markets and prevented from leaking out into the wider economy. Almost everybody equates inflation with rising prices, but very few equate inflation with market booms. The doubling of the cost of a litre of milk is seen as being inflation. The doubling of a stock or bond or futures or commodity or derivatives index is not. And because it is not, the assumption goes, it will not affect that bane of all money managers and central bankers – “inflationary expectations”. The sad fact is that this is true. Booming markets do not fuel inflationary expectations. That is why so many people are taken completely by surprise when they collapse.

Right now, the assumption is that the paltry 14.5 Billion Euros which Greece must roll over next month will be forthcoming. And after that? The assumption is that there is no limit to the debt-based fuel upon which the markets feed. Just like all its predecessors, 2008-09 was just one more “buying opportunity”.

About the author

The Privateer

The Privateer is an essential, must-read journal published and edited by Australian William "Bill" Buckler:

"We are fundamentally concerned with the underlying ideas which shape the way nations interact, the way economies and markets work, and the way individuals prosper or decline on the basis of their ability to choose and act.

We hold that the fundamental reason behind the present chaos in global relations, in trade, in financial interactions, and in markets themselves is an "absence". What is absent, or missing, is the freedom to choose and act, the security of private property, and the use of sound money. That is the fundamental premise on which The Privateer bases all its analysis."

Every issue of the Privateer is 12 pages of unequaled geopolitical, historical and economic acumen from which the above excerpt was used.

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1 comment
Jay - August 28, 2012

Really only the forex markets are left.. But those will soon as well..
Two JPY charts:

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