In case you missed it, there was another "flash crash" on the markets, this time in US Treasuries, according to this article from Zero Hedge shared by K.M. (to whom a big thank you for drawing it to our attention):
The article, as you'll note, is relatively short, nor is there much speculation on what happened and what the implications might be, which I hope to remedy with today's high octane speculation. That said, however, the implications are clear if one indulges in a bit of "reading between the lines". From the very beginning of the article:
While traders are preoccupied by the accelerating meltdown in equities and especially tech stocks which just can't catch a bid, the real action this morning was in the US Treasury market, where just after 10am ET, a burst of selling in Treasury ultra-long bond futures on massive volume sparked a mini flash crash.
According to Bloomberg's Edward Bollingbroke, 10,000 of the June 2021 ultras contract were liquidated taking out all bids, and prompting more activity which eventually led to around 20,000 contracts trading over a 10-minute period. (Boldface emphasis added)
I suspect that I do not need to rehearse for the readership of this website that has been here for several years what I suspect about these flash crashes, for I've blogged about them before, primarily in connection to their occurrences in equities markets. I've pointed out the dangers of algorithmic (computerized) trading before, which may be comprehended under three heads: (1) to the extent that trades are automatically executed by computer algorithms in response to changing "market" conditions, to that extent "markets" no longer represent real life human assessments of risks and rewards for specific trades or investment planning. In a word, markets are increasingly non-reflective of real human trading and thus artificial, since the mechanism of price as a means of assessing risks and rewards is being badly obfuscated; (2) Similarly, to the extent that trades are increasingly placed and executed by computer algorithms, to the same or similar extent those trades can be used to cloak actual hidden human actors and agendas; and finally, (3) no cyber-system is ever completely secure, and hence, buy and sell and options legitimately placed are vulnerable to hacking, and subject to amendments of trades in any number of forms, from "adjustments" to the amounts bought or sold, adjustments to the timing of trades, and so on. As a simplistic example, a typical trade would follow the old adage, "buy low, sell high," and thus the algorithm might place a "buy order for US Widgets (do we honestly make anything other than widgets these days?) at price X, and sell US Widgets when the price rises to X+N." Now imagine someone hacking into that order, and changing it to "buy at X+N, and sell at X." That's a simplistic model, but it illustrates the directed chaos that would ensue on the buyer if such a hack were successfully executed. Of course, we're assured that there are "safeguards" in place to prevent such things, but I remain rather skeptical at how successful they would be. Those electronic blips are every bit as likely to be transferred into some offshore account, thence to disappear, before the authorities can act or are even aware of the problem. After all, these trades are executed in mere nanoseconds, and a transfer of blips can similarly occur in mere nanoseconds, and be converted into cash and whisked away before anyone is the wiser. Lest anyone forget, we've already seen how Wall Street Hedge funds were blind-sided by some "little people" and "deplorables" who executed a number of small trades on GameStop stocks, driving its price up when the "big" investors were trying to short the company out of existence.
This brings me to my high octane speculation concerning this flash-crash sell-off of US Treasuries. When reading the article, what was immediately evident was not so much what the article was saying, but what it was not saying, namely, what entities were allegedly behind the sudden and rapid massive sell off? In the absence of that information, the field is - for the moment - wide open for speculation, which I fully intend to indulge. In a geopolitical world where the USA is increasingly - and in my opinion rightly - perceived as an unstable player, sell-offs should be expected. But when one adds into this mix other players on the global stage that want to reinforce that view, and additionally in a world where some of those players are talking increasingly openly about abandoning the dollar, there would be sufficient motivation to "play with the algorithms" precisely in such a way as to create such sell-offs, making the US securities market itself look much more unstable than it actually is.
Time will tell, of course, if such a speculation is warranted. But I think it safe to say that this probably won't be the last example of a flash crash in sovereign securities. If the pattern repeats, or is extended to the sovereign securities of American allies, then that's a profound hint that a large game may be afoot, especially in a world where the current US administration has promised to send a clear and unmistakable "cyber message" to Russia. Perhaps we have ourselves just received such a clear and unmistakable message.
See you on the flip side...