Saturday, November 6, 2010

Are We Due For Another Flash Crash?

The second round of "quantitative easing" (QE2) is now underway, ie. the artificial propping up of the stock market by printing more money - about $75 billion per month for the next six months (the estimated total is $600 billion).  This is an attempt by the U.S. Federal Reserve to stimulate a little inflation and prevent the economy from slipping into a Japan-style stagflation or worse - a deflationary recession.  (Essentially what the U.S. government is doing is issuing debt instruments and then printing the money to buy them back.)  Asset inflation is the result, and the hope is, of course, that cash-rich companies will then hire workers and decrease unemployment.  I doubt it.  U.S. companies are already flush with cash and haven't hired anybody, precisely because there are so many uncertainties out there - like the actions of the U.S. government.  And "finreg" (the new regulations governing Wall Street) don't go far enough for me as a trader.  What with dark pools, high-frequency trading and the absent retail investor, anything can happen.  Even the reasons behind the "flash crash" of May 6th remain murky, despite a lengthy (read "expensive") inquiry that came up with zero recommendations to prevent it from happening again.  And then there's that little matter of not one, but two sell orders of 10 million shares each that hit the NYSE on Thursday afternoon.  That's not supposed to happen either.  (Trading programs and brokers are supposed to catch orders that big to prevent an inadvertently steep drop in share price.)  Hang on to your seats folks, the next couple of months could be a wild ride!