But, but Liquidity


But, but Liquidity

Monday August 24th, was quite a day.  It was a good old fashioned flash crash. Liquidity disappeared from the market and some of the largest companies in the world saw their stock prices down over 20% at the open.



The role of computers and high frequency traders cannot be overlooked in this situation – they claim they provide liquidity, but when they glitch -Wow.

Currently there are 11 exchanges, 42 dark pools and other brokers internalizing trades as well.  Why do we need so many different places for a trade to be executed?

Perhaps its the amount of money involved – the CEO of ICE(who owns the NYSE) has ~$21m of compensation for 2014.  The CEO of NASDAQ OMX Group has ~$12m of compensation for 2014. Virtu a large high frequency trading firm has only had one day of losses in six years…

How do traditional investment advice providers claim that markets are efficient and that you should be a long term investor, when they very markets and exchanges they invest in trade on a micro to micro second basis!  The exchanges now receive billions and billions of quotes a day, most of which have a life of less than a second and are routinely cancelled.  The time frames of investors and markets are severely out of whack.

The more complexity that is added to a system increases it’s fragility and makes it more likely to fail or at a minimum not perform as expected.  Its almost time for a “once in a generation” event to occur yet again.

As investors how do we need to behave in an environment like this?

Cant use stops or limits – you might get an execution you don’t expect, know that you are getting ripped off with a market order, but only a little bit so its the preferred method.  If you need to hedge do so in the options market.

Know what you own – price volatility is going to be a part of the future – focus on cashflow from the investment not necessarily it’s price,

Explore private investments – the value to be had in illiquid investments may be superior to the returns available in the public and liquid markets.

Bye for Now.

Damien Lanyon

Damien is the founder and owner of Lanyon Advisory Services and has a extensive knowledge and experience in financial planning and wealth management.

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