July 13, 2017 By Joseph P. Farrell

Earlier this week I blogged about the unusual climb in the number of "glichtes" being reported in our markets as more and more, stocks seem to be sent tumbling until the "circuit breakers" kick in and trading is halted. I'm referring, of course, to the NASDAQ "flash crash" earlier this month. But, in case you missed it, there was also a "flash crash" in silver on July 7, in this story shared by Mr. G.B.:

Once again, we're told it's a "glitch", and the "glitches" seem to be marrying, and propagating their species, faster than humans can keep up with them. Now, when Mr. G.B. shared this article, he very kindly highlighted a couple of sentences, but he needn't have for they leapt off the page at me and I suspect they did for the reader as well.

However, just in case they didn't, for those regular readers who have been following my high octane speculations about the inhumanity of algorithmicly-driven trades and markets, I've been speculating for sometime that the increasing frequency of flash crashes due to "glitches" might be telling us one of two things (possibly both), namely, that (1) someone is using these events to probe the architecture of cyber-markets and dark pool networks; or that (2) these events are manifestations, perhaps, of an artificial intelligence that has "woken up". As I pointed out in my blog about the NASDAQ crash, these events increasingly raise difficult questions not only about market activity, but about whether or not the markets are reflecting anything really human.

With that in mind, contemplate Zero Hedge's speculations on the silver flash crash:

Was it a predatory algo(s) that sold faster than CME's own servers could react by putting up bids on its own electronic book? That would be a predatory entity that is now expanding its abilities to overload the very servers that update order books. Perhaps inadvertantly(sic), but there you have it. If that were the case, then the weapon is now bigger than the market.

And further on:

Imagine a Citadel, DeShaw and Six Sigma algo fest where one triggered the others own sell signals. The  resultant race to the bottom could be  enough to make any exchange order book struggle to update itself to absorb the nanosecond deluge of selling.

What we do know is that CME announced it was adjusting all trades below $15.54 to be raised to that price. This is an admission of either an electronic glitch likely exposed by a predatory algo or algos  intentionally stop fishing, a new algo that was tested and failed miserably, or a human who typed in the wrong price, ignored repeated terminal safeguards and sold down to $1434.

In 2 of the above possibilities, the glitch would be  the result of prices being distorted  faster than CME's own servers could rebalance. And raising the flow of the selloff would seem  to indicate that is likely. This would  be the right thing to do especially if resting orders did not get filled between the low of $14.34 and the new adjusted  low of $15.54. We applaud  CME for doing this.

But equally troubling is what that in turn implies. Specifically, that predatory algos are either indifferent to the collateral damage they do the very bourse that supports them, gives them a way to make a living, and likely rebates them for volumes. Or something worse we do not speculate on here.

Assuming it is the former, then CME  must protect its franchise. For this type of increasing activity is undermining the integrity of its markets. And while the physical is good, paper is bad crowd would rejoice at this as further confirmation of the lack of claim futures has on the  pricing mechanism of metals, it would be tragic; for the integrity of all markets in precious metals  would then be in trouble as all transparency would be suspect.  (All emphases added)

It's interesting to note that all these comments are from someone who views all this from the standpoint that all this technology is good and that those of us, like me, who speculate on "something worse" are just luddites, and that market confidence has been restored:

Otherwise you may be a luddite hoping for fat middle aged men on the LME with flags and cigars determining prices for your Gold. it is a capitalistic and a moral imperative for this to be addressed and stopped. This is a war of escalating arms. And when there is no one left to spoof on exchanges because people are afraid to leave resting orders because those orders will get filled surreptitiously or traded through unfilled, then the exchanges are at risk of being destroyed from the inside out.

From a zerohedge commenter who is obviously experienced in the way of the Algo.  He may not be right in this case, but he is spot on in how the mechanism works.

No one "dumped" 450mm notional. When a large stop was triggered the algos immediately went to work and ran the weak handed bids and overnight stops..... they sold it and bought it the whole way down, fighting each other the entire way. Citadel, two sigma, and deshaw etc... it's not a level playing field.... look at CL tonight! Two stop hunts triggered but not enough

And there you have it. in a matter of seconds thousands of contracts traded electronically, much of the price action was removed, and  there may have been a glitch somewhere but with whom we do not know. Confidence restored.

In any event we cannot know what happened. This  is because we are not privy to facts. And that encourages  speculation. So, if one wants rumours to stop,  one must give unvarnished truth as to what happens. To not do so is to risk market integrity.

Well, fair enough, because I just made the same point about market integrity a couple of days ago in respect to the NASDAQ flash crash. I would simply add the point made so often by former Housing and Urban Development Assistant Secretary Catherine Austin Fitts: the systems themselves have no integrity; that's the fundamental problem.

The problem here, from my goat's perch on the end of the twig of high octane speculation, is that two such events happening within mere days of each other, in very different types of markets - equities vs. commodities - cannot, in my opinion, be merely coincidental. It appears to me, rather, to be a signal, perhaps, that vulnerabilities are being probed and tested, by whom - or, even worse, by what - we do not know. My bet is, however, that we'll see more and more such incidents, and that, as we do, a pattern will become more evident. In any case, these two events have all the disturbing feel of a certain episode from the fourth season of the CBS television series Person of Interest, and that's what is so disconcerting about the latest rounds of flash crashes.

As I said a couple of days ago, we're not being told the whole story here; but now, apparently, I'm not the only one sensing this, for to recall the words I highlighted above, "...predatory (algorithms) are either indifferent to the collateral damage they do to the very bourse that supports them, gives them a way to make a living, and likely rebates them for volumes. Or something worse we do not speculate on here." (Emphasis added, again).

That's about as close as anyone else has come to saying it, especially someone in the business, so I won't say any more.

See you on the flip side...