The Benefits of Flash Trading, Dexia Officially Nationalized, and the Occupy Crowd Is Starting to Scare Me

(This is a draft of a new Mises Daily I am currently composing)

The Benefits of Flash Trading

“While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable.” – Frederick Hayek The Pretense of Knowledge 1974 Nobel Prize lecture.

Frederick Hayek dedicated much of life’s work to showing us how knowledge and expertise is dispersed around society and can never reside in a single mind.  That is to say, while individuals may use their own expertise and labor to create, they will never be in full possession of all available knowledge to account for  the nuances of market and societal demands.  The same concept applies to a government composed of fallible men; much to the dismay of statist ideologues such as Elizabeth Warren.

The limit of individual knowledge is what provided the initial need for social cooperation.  Primitive man banded together with others not under the auspices of creating one great state but as a desire to utilize more resources and raise their own standard of living.  Out of this grew the division of labor and increased sharing of knowledge and information. As Mises said, “one must never forget that the characteristic feature of human society is purposeful cooperation; society is an outcome of human action.”

When it comes to the disbursement of information, none is more controversial than high speed “flash” trading.  A recent New York Times article documented the trend:

Regulators in the United States and overseas are cracking down on computerized high-speed trading that crowds today’s stock exchanges, worried that as it spreads around the globe it is making market swings worse.

The cost of these high-frequency traders, critics say, is the confidence of ordinary investors in the markets, and ultimately their belief in the fairness of the financial system.

“There is something unholy about them,” said Guy P. Wyser-Pratte, a prominent longtime Wall Street trader and investor. “That is what caused this tremendous volatility. They make a fortune whereas the public gets so whipsawed by this trading.”

The public gets whipsawed by this trading?  Funny how those on Wall Street no longer classify as the "public" when making a populist argument.  

What this demonization of flash trading really comes down to is the inability of regulators to monitor and control the phenomena of high speed trading.  What the state can’t control, it exerts more power and authority to tame.  Like a vampire to blood, the state never gets its fill of supremacy.

The justification for regulating flash trading comes down to a brief market crash back on May 6, 2010.  In the course of just sixteen minutes, the Dow Jones Industrial Average dropped 1,000 points only to rebound to its original level.  It was the largest intraday decline in the history of the Down Jones.  Despite the market's quick correction to the crash, a joint panel was created and headed by the Security and Exchange Commission and Commodity Futures Trading Commission to investigate the matter.  Their report, which was released back in February, recommended that new rules and regulations be adopted to address flash trading.  Considering how successful the S.E.C. and C.F.T.C. were at recognizing the housing bubble, it's a wonder anyone still takes them seriously. 

While flash trading can lead to sudden dips in the market, the market has proven to be quick in correcting itself.  The rapid nature of the stock market becomes its own self-correcting mechanism.

As society and technology progress, the instantaneous sharing of information is not something to fear but to celebrate.  In a world where, to borrow a phrase from John Tamny, “capital moves at the speed of light,” flash trading insures that resources will continue to meet more deserving hands and be put to more efficient use.  Clamping down on such a practice doesn’t just limit capital flow, it limits the markets mechanism by which to progress.  Like all government regulation, it will put the brakes on productivity and achieving a better standard of living. Attempting to level the field in the name of "fairness" is nothing but a power grab by a government already heavily involved with the banking sector.

Knowledge is best utilized when it reaches as many people as possible.  Hayek's lesson must not be forgotten because it not only shows the fallacy of central planning but the incredible benefit of social cooperation through instantaneous communication.

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Enough about flash trading, let's look at the real problem with the financial system:

Earlier today, Reuters reported that the final solution for Dexia is imminent. "The governments of France, Belgium and Luxembourg reached agreement on Sunday on a rescue package for Dexia , which will be put to the stricken Franco-Belgian bank's board later in the day for approval. "The governments... have reaffirmed their solidarity in finding a solution to secure the future of Dexia," said a statement from the office of Belgium's caretaker Prime Minister Yves Leterme. "The suggested solution, which is also the result of intense consultations with all partners involved, will be submitted to Dexia's Board of Directors for approval." Sure enough, from Dow Jones:

• GOVERNMENTS AGREE TO NATIONALIZE 100% OF DEXIA'S BELGIAN BANK

Of course this was expected, here are more details:

The Belgian government will buy Dexia Bank Belgium for $ 4 billion. In a second step, the regions could rise in the capital of the bank. The group will also lose his wing French, DMA, bought by the French State at a price of 650 to 700 million. The rest of Dexia becomes a bank or residual bad bank. Its liquidity needs, estimated at 90 billion euros, are guaranteed by Belgium to the tune of 54 billion. The Belgian government will buy Dexia Bank Belgium for 4 billion , has taught the writing of several government sources. A price located in the lower range mentioned by Yves Leterme. Initially, the state then own 100% of the capital."

Bankers and investors f*ck up, the government comes to the rescue with taxpayer money.  The vicious cycle continues and no one bats an eyebrow.  What is indeed worrisome however is the effect of "Operation Twist."  While 30 year fixed mortgage rates have gone below 4% for the first time ever:

(Great time to refinance and lock in the new rate by the way) it looks like the Twist is providing the perfect opportunity for foreign central banks to dump their Treasuries, via Wall Street Examiner:

Foreign central bank dumping of Treasuries and Agencies reached record levels this week, far beyond anything seen in the 9 years since I started tracking this data. The last time anything remotely similar happened was at the top of the bull market in the summer of 2007, and those levels pale by comparison with what is going on today. Furthermore, this is no flash in the pan. This has been going on for 4 weeks, and has been growing for the past 3. Over the past 9 years, there has never been a time when FCBs were sellers of their Treasury and Agency debt for 4 weeks in a row. I do not believe that the bull market in bonds can survive under these conditions, regardless of what the Fed does. If the runs on European banks, bank paper, and sovereign debt subside, by even a little, it’s over.
Furthermore, this withdrawal of FCB liquidity from the US market, combined with no net new liquidity from the Fed, should keep stock prices under pressure. For months falling stock prices have gone hand in hand with rising bond prices and falling yields. Any reversal in the trend of bond yields may not be accompanied by a similar reversal in stock prices, or at least not to the same degree.

Bernanke isn't going to like this, not one bit.  And I doubt any of the central banks are going to be going back into the treasury market anytime soon.  Bernanke just bailed out foreign banks again, what a great guy.  Santa Claus isn't coming this year, he is outsourcing the elves to the Fed to work the printing machines.  That way the whole world is going to get its stocking stuffed with dollars this Christmas.

I have talked a lot about Occupy Wall Street on here, mainly on how their anger is understandable but misdirected.  This takes the cake however and is astonishing to watch:

John Lewis may suck as a politician but even he didn't deserve to put up with this crap.  I mean what in God's green Earth was that?  How in the world is one guy standing up there preaching egalitarianism while "leading" the crowd?  There must be something in the water at Atlanta.
Though Occupy Wall Street is becoming a joke, the great William Banzai strikes again:

This is a masterpiece:

Fantastic job again Banzai.  I will end with this great quote that sums up the whole movement and greatly reflects my current situation, via Wall Street Journal:

We have an entire generation of young people who were promised good jobs if they worked hard, played by the rules and attended college. They kept their end of the bargain and when they graduated they were left with no job prospects and a record amount of debt.

Though I would like to think I worked a hell of a lot harder than many of my peers, this is completely on point.

Update- Fantastic Tom Woods interview, if you got 45 minutes to spare check it out: