Why The Markets Crashed Thursday: Outright Deceit

Bill Cara, with over 40 years experience trading this markets, explains in his weekly review his opinion on why and how the markets tanked last Thursday.

It makes a lot of sense... unfortunately.

"There are people who say that once these momentum-based programs start selling, they cannot stop. I say hog-wash. Why would any banker write software that would destroy the bank under certain conditions? Even an over-rotating windmill in a storm is programmed to cut out. The problem, as I say, was erroneous trades, which happen at times when emotions are running red hot. To compensate, bankers have risk managers in place to save the computer programmers from killing the bank. Life isn’t perfect, so erroneous trades are reversed by the exchanges frequently. I don’t think anybody will be going to jail for such mistakes, although it wouldn’t be a bad suggestion to line up the media who ranted on this subject.

What bothers me most by what happened Thursday, and something the regulators must look into, is that when prices were collapsing there were traders who tried to enter buy orders but couldn’t. Why were sell orders being accepted?

If anybody’s listening, I am going to throw out a challenge. I say, these broker-dealers trading desks, using proprietary capital plus their own, purposefully delayed those orders in order to help push the prices lower, and then went in as principals to make the buys at stunningly low prices.

Yes, I am accusing the industry of outright deceit, which is to say that maybe people like Lloyd Blankfein were not directly involved, but they know the game, and they are responsible for the actions of their traders. I hold them all accountable.

Following the worst market sell-offs in 1981-2 and 1987, the SEC instituted direct electronic trading rules that permitted the public to have small order access directly to the order flow on NASDAQ and NYSE. Computer technology today is infinitely superior and capable of delivering a seamless service under conditions that occurred this week. I hold the operators responsible, and as an old Big Four auditor from Toronto, I was taught to follow the money, which in this case passed through the hands of the broker-dealer trading desks at the bottleneck. Then I was taught to look for motive. Found money was the motive. Theft was the result.

Prove me wrong. I doubt you can."