Behind the Crash: The Truth Behind the NASDAQ Glitch and the Gold Market
It’s been another week of mysterious price actions and “mistakes” in the market.
While the S&P scrambled late in the day to close above its 50-day moving average, the Dow couldn’t find it’s footing and closed down for the third week in a row – the first time in 9 months.
Of course, the week wouldn’t be complete without a weekly dose of manipulation, scandal, or conspiracy theory.
We’ve seen everything from energy manipulation to price fixing in the past weeks.
This week it’s all about trading “glitches.”
Earlier in the week, Goldman Sachs encountered “a programming error” that caused the firm to send unintentional stock options orders in the first minutes of trading with inaccurate price limits.
The error could cost the firm as much as $100 million dollars.
Just a couple of days later, we were presented with a front stage show to an all out trading halt, courtesy of one of the largest stock exchanges in the world, the NASDAQ.
NASDAQ Trading Halt
I have been talking about High Frequency Trading (HFT) issues and the dramatic consequences that may take place as a result of their use.
On Thursday, trading on the NASDAQ was halted for 3 hours as a result of a “connectivity” problem with competing electronic exchange NYSE Arca.
“The operator of the Nasdaq Stock Exchange in a notice confirmed that “connectivity issues” caused a software glitch that disrupted the dissemination of stock quotes. The data feed first experienced “intermittent outages” at 11:48 a.m. Eastern Time. At 12:24 p.m., the problem was resolved, but that was 10 minutes after trade in all Nasdaq-listed stocks was stopped.
Nasdaq said it experienced connectivity issues with a “Participant,” but didn’t identify which one. Nasdaq officials late Thursday, though, were internally pointing to competing electronic exchange NYSE Arca, owned by NYSE Euronext, according to people with knowledge of the discussions.
In the notice, Nasdaq said it spent three hours testing its systems and coordinating with other market participants and regulators after the technical issue was resolved. Echoing televised comments made by Nasdaq OMX Chief Executive Robert Greifeld on Friday morning, Nasdaq in its notice also said it found no evidence of any “attempted intrusion” into its data system, or an “unusual burst” of stock quotes on Thursday.”
However, the guys over at Nanex Research – the same group who also uncovered the real quote-bursting reason behind the May 2010 flash crash – might’ve noticed something: An unusual burst of stock quotes from one stock, Apple (AAPL).
Take a look at this data chart from Nanex, that shows the chaos in AAPL stock during the “glitch”:
Now let’s zero-in.
Notice how the notional best ask has gone stagnant?
Now this could have happened on many different stocks, and hence the reason why they had to halt trading.
However, Nanex has shown us that the Nasdaq was already demonstrating explicit “glitches” in the trading of Apple well ahead of the 12:21 pm trading halt, and well ahead of when NASDAQ officials noticed “intermittent outages”:
Translating this chart into plain English:
The green represents Best Bid; the red represents Best Ask; the blue represents NASDAQ’s bid; orange represents NASDAQ’s ask.
Nanex shows us two periods of NASDAQ silence (represented by no blue or orange lines/dots) between 11:01 am and 11:04 am, and then a second block of silence a few seconds later – that’s 47 minutes prior to the overall and intermittent outages on the NASDAQ.
The chart also shows that while the Best Bid (green) was locked during the first “radio silent” period, allowing the Best Ask to run wild, both the Best Bid and Best Ask were locked in the seconds just following 11:04 am when NASDAQ was once again “offline” in AAPL trading.
Remember, a locked market occurs when a stock’s bid and ask prices are identical. In a locked market, there is no bid-ask spread. Locked markets are rare and are typically short-lived.
However, in a locked market, it may be necessary for exchanges to halt automatic order execution and implement manual order execution because executing orders in a locked market is prohibited.
Securities and Exchange Commission regulations require national exchanges to not even display quotes that indicate a locked market. The SEC considers a locked market to violate fair and orderly market rules, which requires that buyers and sellers receive the next and best available prices when trading securities.
This chaos all happened as AAPL once again fell below the $500 psychological barrier, potentially forcing a mass exodus or influx of orders.
If AAPL was indeed the culprit of NASDAQ’s halt, then that means it only took one stock to take down one of the world’s largest stock exchanges. What happens when other big name stocks drop below “psychological” barriers?
Moreover what happens when this occurs simultaneously on other big name stocks?
“Analysts and experts say Thursday’s unprecedented meltdown at the second-biggest U.S. stock exchange by trading volume underscores the fragility of automated trading systems, many of which have evolved to cater more to high-speed traders than to long-term investors.”
Tell us something we don’t already know.
Welcome to the world of speed trading – where computers can’t even keep up with themselves.
Again, I want to stress this week that the market will eventually follow the 10-year yield and that the 10-year yield indicator is already playing an almost immediate role in the decline of economic activity in the U.S.; in particular housing.
US Home Sales
Over the last year, reports of a strong housing recovery splashed across the pages and screens of every newspaper and television set. And I have talked about how most of that news was gibberish, considering how they “estimated” housing data.
I recently wrote about how the recent rise of the 10-year yield would immediately impact housing and U.S. economic growth.
The proof is here.
Sales of new single-family homes in the United States fell sharply in July to their lowest level in nine months, casting a shadow over the country’s so-called housing recovery.
Those cheering the housing recovery were shocked to learn this week that in July, only 35k new houses were sold – of which 13k houses haven’t even begun construction.
This translates into a miniscule 394K seasonally adjusted annualized sales, missing expectations of 487K by nearly a 100K. That means sales have dropped 13.4 per cent.
Meanwhile, it seems that housing prices are now on a downtrend with median home sale price in July dropping to $257.2K down from $258.5.
If real estate continues to fall, along with the US dollar, what’s going to hedge us from deflating asset prices?
Not long ago, I said that gold would move to $1400 in short time:
“A few weeks ago, I mentioned that the gold market was about to turn. This has now been confirmed by the recent uptrend and strength in the gold market. Gold miners and gold stocks are finally seeing some volume to the upside, which shows promise.
We still have a month of summer left and I believe gold will climb pass $1400/oz. soon. If you believe the same, strong precious metal stocks, including all of those in our Equedia portfolio, could show some short-term gains and look to move higher between now and the end of the year.
If gold can reach above $1400 and stay there, many of the better gold stocks will likely not be here much longer – especially not after the summer.”
Not only have all of the Equedia Select portfolio companies rocketed in price over the last month, but gold has now once again crossed the psychological $1,400 level (up 18.5% from its 6/18 lows) and surged through its 100-day moving average, while short interest in COMEX gold futures have fallen around 40% in the last 5 weeks – exactly when I told you that the market was about to turn.
Remember when I told you that US banks – in particular JP Morgan – was once again loading up on gold?
Well it seems this hasn’t stopped.
Take a look at the net change in gold for JP Morgan, as compiled by the CME Group:
JP Morgan has been sequestering all available Comex gold it can get its hands on this month from HSBC and Scotia Mocatta. Don’t expect this to change soon – especially given all of the bank’s current investigations.
India to Lease Gold?
India has found itself in a full-blown monetary crisis. Its currency is falling to record lows every day, while its central bank is having trouble tightening its monetary policy while initiating QE at the same time.
India, being the world’s largest consumer of gold, has made front page of everything gold related month after month. The government has put strict import bans on gold because its citizens were protecting themselves from a falling rupee and buying gold instead of using their money to contribute to the economic growth of the country.
Just last week it once again made front-page news,.
Via the Hindu Business Line:
“In what appears at first glance a throwback to 1991, India will consider leasing out the 200 tonnes of gold it bought from the International Monetary Fund (IMF) in 2009.
The gold will be leased in the international market for dollars so as to shore up the sagging rupee, which plunged below Rs 64 against the US dollar in Tuesday’s trade.
A final decision may be taken next month, Finance Ministry sources said.
The move can fetch around $23 billion, David Gornall, Chairman of the London Bullion Market Association, has estimated.
This marks a tidy increase in the Reserve Bank of India’s investment. In November 2009, the RBI purchased 200 tonnes of gold from the IMF, under the Fund’s limited gold sales programme, for $6.7 billion, cash.”
In other words, gold may not be money – according to Bernanke – but it certainly can save you when you print too much money.
Keep Your Cool
While the majority of investors are away on vacation, those of us still playing the markets should have done extremely well.
Keep your cool as I believe there continues to be more upside in the precious metals sector, and that means select precious metals stocks should do well.
Until next time,
The Equedia Letter
I am long gold and silver, as well as many gold and silver stocks.