I guess the good news is everything changes Dec 7th. That is when we will embark on another 20 Week Bull Cycle... we just have to get there.
Here are some thoughts:
>Some worry that today's improved and sophisticated hedging techniques have created a false sense of security among investors.
Although there is a "richer menu" of tools for investors to hedge their portfolios, there remains the possibility of "the same cascading effect as the sellers of the hedge have to move to protect themselves from a falling market, and everyone runs for the door at the same time," says Robert Glauber, a former U.S. Treasury undersecretary for finance who led a probe of the stock-market crash of 1987 and now works as a senior adviser at Peter J. Solomon Co., a New York investment-banking firm.
In 1987, investors had relatively few tools to protect their stock portfolios, the market for futures and options was not as big at the time, and the idea of paying upfront to purchase stock-market insurance drew some resistance.
Pulitzer Prize winning Wall Street Journal editor Dan Hertzberg remembers the crash he reported on in 1987, its corresponding credit market crises, and the grimmer days that followed Monday's drama.
As stocks climbed leading up to the autumn of 1987, a growing number of pension plans turned to a computerized hedging strategy known as portfolio insurance. It usually entailed selling futures contracts on stock indexes when the market tumbled, to try to protect the value of a portfolio by scoring profits from the futures contracts. This strategy is referred to as "dynamic hedging" because it requires portfolio adjustments on-the-go, or rapid selling even as the market falls.
But as the market headed lower in the days BEFORE Oct. 19, 1987, traders began to anticipate selling by portfolio insurers, and moved to get out ahead of them, pushing stocks lower. As futures prices collapsed on Black Monday, the futures-selling programs of the portfolio insurers kicked in, accelerating the crash, doing little to help those who relied on this hedge and helping to discredit the value of this insurance.
Many of the hedging products are new and relatively opaque, raising questions about how they will hold up in a market crisis. For instance, over-the-counter derivatives trades are worked out between two parties and not widely reported, and have been embraced only in recent years.
The new strategies also have created dangers in often-obscure markets that feature little transparency, usually in the credit markets. For example, recent difficulties in structured investment vehicles, or SIVs, forced a group of big banks to band together this week to try to form a new fund to help avoid potential big losses from a part of the market that remains largely frozen since this summer's debt-market turmoil.
"People have been lulled," says Nassim Nicholas Taleb, a former trader who made big money in 1987 and is the author of "The Black Swan." He argues that investors underestimate the risks of a big crash.
>> Yes Yes & Yes. Great points here! I HAD PORTFOLIO INSURANCE in the 80's you could buy it like hot chocolate from Smith Barny. It didn't help at all.....
What of dark pools???
>'Dark Pools' Threaten Wall Street
One of the fastest moving trends on Wall Street has flown under the radar of individual investors and, seemingly, the Securities and Exchange Commission: the rapid rise of "dark pools" stock trading arenas.
As the name suggests, dark pools lack transparency: They are used by institutional investors seeking to trade large blocks of stocks without creating the price wobbles that routinely accompany such moves. The trading is done away from the traditional exchanges, offering unprecedented anonymity.
Recently, more than 20% of all trades in New York Stock Exchange-listed stocks have been funneled through these dark pools, up from just 3% to 5% two years ago, according to NYSE figures.
Asked about the SEC's view of dark pools, a spokesman cited a recent speech by the head of the Division of Market Regulation, Erik Sirri, who said that "while the increasing use of hidden orders may be troubling," the SEC believes the new venues are available to all market participants. He suggested that the SEC is not in the position of favoring one market model over another. It would appear that until the trend toward dark pools has a measurable impact on investors, the SEC is willing to be simply an observer.
An increasing number of these dark pools are popping up â more than 35, it is estimated â that seek to match large buy and sell orders without recourse to the traditional trading discourse on stock exchange floors. This is not to be confused with electronic trading, which is not new. The electronic communication networks such as Archipelago and Instinet that started up in the 1990s changed trading forever by essentially replacing the matching efforts of the specialist with computers. The ECNs report trading data in a traditional manner â publicly.
Dark pools, by contrast, do not alert the market makers that a sizeable order has been placed. Instead, by breaking the orders into smaller pieces, computer programs match and execute the different segments of the order in hundreds of separate transactions. This slicing and dicing is very similar to the complex structures banks used to divide up subprime mortgage debt.
All the major investment banks have dark pools operations, such as Block Alert, owned by Merrill Lynch, and ACE, which is part of Citigroup. There are also independent firms such as Liquidnet, which now ranks as one of the top 10 brokers. None comes close to Sigma X, which is owned by Goldman Sachs, some say.
"Goldman is a leader in the area. They're way ahead of everyone else," a financial services analyst with Punk, Ziegel & Company, Richard Bove, said. "They have spent hundreds of millions of dollars on systems. They have more people in IT than they have traders or investment bankers. They want to drive the price of trading to a level that will drive most firms out of business."
The attraction of these dark pools is clear. If an insurance company, for instance, wants to unload 1 million shares of Deere & Co., it traditionally would have to phone its broker, who would then have to contact the floor of the New York Stock Exchange, and in the process information about the institution's intent to sell would begin to leak out to other traders. Presumably, the shares would come under pressure, and the seller would end up receiving less money for his stock.
The problem is that in using the dark pools, there is little way for sellers to assess whether they have received the best possible execution on the order.
This is especially the case if the broker has "internalized" the order. This popular activity allows brokers to match the order within their own shops, operating beyond the vision of other dealers and outside the spotlight of the SEC. Though internalization has always taken place, the development of crossing networks has greatly expanded the in-house opportunities.
This has an impact on the average investor by shrinking the amount of trading that is being funneled through traditional channels, and which is available for filling the orders that such small investors place through their brokers. That is, it reduces liquidity and transparency in the marketplace for the small investor, while enhancing it for the big players. Less liquidity means less opportunity for "price improvement," wider spreads, and, ultimately, more costly executions!!
Also, over time, internalization will mean a continued consolidation in the brokerage industry. Those firms such as Goldman Sachs that have giant order flows already are obviously best positioned to fill orders in-house. They profit off a spread between the price they paid for a stock and the price they charge the buyer.
>>> Ahem Mr SEC. Talk about letting the little guy fend for himself! GS is basically the Devil, more and more will come out about them. Yea they were the only ones who made their number- wonder how? Skimming, cheating, in house, behind the scenes dark pools, derivatives, dirty pool. It always amazes me how slim the margin is between White collar and Ankle monitoring device. I'm embarrassed I spend so much time in near proximity to all you have read above. ~ SI
