Ironically, just days after noted analyst Ted Butler came on the show to explain how silver and other markets are manipulated through the use of high frequency trading, the real-time data feed company, Nanex, showed how the silver ETF (SLV) was forced downwards by a rapid number of machine-generated quotes exceeding a rate of 75,000 per second. Before you start to think that this was merely a bunch of people hitting the sell button all at once, consider this: They were all launched within the space of 25 milliseconds—ten times faster than you and I can blink!
Here’s a chart of the second by second market activity in SLV where you can see the massive lightning-quick spike occurring at 13:22:33.
Source: Nanex
Ted Butler Explains the Whole Process
"What's happening is that these commercials [or large traders], through HFT, can set the price suddenly down. It didn’t go down because there was massive selling from the commercials, they just set the price down. They know how to do it with their computers by putting in actual orders, and faking it, and spoofing, canceling them right away; but what happens is when the price moves down then the selling comes, which is the intended effect and result. Commercials basically put the price down in order to set off stops because everybody seems to be some type of technical trader in the market that reacts to prices."
"Why are they doing it? They're doing it basically to make some money—illegally, but they’re making money nevertheless. I can prove it to you because on every big down day, February 29th, today, any other day throughout the last 25 years in Comex gold or silver trading, the commercials—the ones who set this whole thing in motion—they are always tremendous net buyers that day."
Of course, this isn't just limited to the extremely emotional gold and silver markets. A new study released last month, Financial Black Swans Driven by Ultrafast Machine Ecology, looked at 600 different markets around the world and found that these sort of events happen routinely. Over the most recent five years of market data analyzed, 18,520 crashes and spikes occurred at a speed far exceeding human origin.
Making Money from Human Emotion
So what is going on here you might ask? Like the premise of Robert Harris' new fictional sci-fi thriller, The Fear Index, it appears that mathematicians have figured out a way to make money off human emotion. Then again, this really isn't anything new. One very old trick for doing this, as Ted Butler mentions, is by triggering sell-stops. As it turns out, millions of investors around the world reveal their emotional tolerance for how far a stock can vary before automatically buying or selling at a set price. With access to such highly valuable information, one could make a killing by simply preying on the emotional levels of human greed and fear revealed by investors tipping their hand, so to speak, to the market. Of course, analyzing such data with pattern recognition software has advanced light-years since stop-losses were born. That's kindergarten compared to what they're doing now.
As Robert Harris says regarding the technology he imagined, "What they've done in my book is developed an algorithm that can predict the markets by analyzing the incidence of fear related words on the internet—trends on Facebook, Twitter—a sense of the mood. I thought I was making this all up but, of course, I then discovered this is yesterday's news—they've been doing this for years! There's nothing you can invent that these guys, very clever, haven't thought up before you."
Whatever that is, let's just hope it hasn't read his book yet. Pretty frightening if you ask me...
