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9/30/2011

Designing a bank run!

The most feared situation in any financial system is a run on the banks. Banks are exceptionally sensitive and careful in taking in big deposits for fear of such an incident. Big money is good, everyone wants to have a bite of the cherry. But knowing banks, and the danger of big money, they will take all precautions to spread the risk. They will not put themselves in such a precarious situation to facilitate a run on the bank. No banks, however big or rock solid, can withstand a run, as they generally lend out more than they have. There is always not enough cash to feed a run.

The govt and banking authority will not allow such a situation to develop. Allowing it is criminal negligence, as it will lead to the collapse of a country’s financial system and the country itself.

The beauty of it all is that while the govt and banking authority are guarding the front door with triple layers of barb wires, they have left the back door wide open without knowing it, and thinking that all is safe.

Greed is good, but greed is also dangerous. The world is flooded with liquidity. And liquidity can flow anywhere anytime with the high speed and high tech communication and information system. Big funds, private and sovereign funds, are caretakers of big money which they can wield and move around with the flick of a few fingers.

When the funds flow in concert, it is worst than a tsunami. When the cash flows in, everyone opens his arms widely to welcome them. The danger of the cash going out at double quick time can wipe out everything along the way.

Big funds, high speed machines, deregulations, allow money to move in and out of a stock market at will. Many stock markets have experienced the destructiveness of funds moving in and out, sometimes for a few hours or a few days. The full impact of the funds clearing their holdings in concert and getting out of a stock market is as good as a run on the banks. All they need to do is a big sell down.

Not possible? The way the stockmarkets are gearing themselves for the big funds to play havoc to their stocks is extremely idiotic. They have done everything possible to allow it to happen. No need to ask me how. It is only waiting to happen. Even the temporary trading halt on limit down can only be for a moment. When the dam is broken, the trading halt cannot save the destruction. It will be too little too late.

There is no need to run on the banks. Just run on the stockmarket is equally destructive and damaging. The big funds with their big cash hoards and high speed machine are ready to do what they are capable of. It is only a matter of when. Are there enough safeguards to prevent it from happening, or allowing it to happen up to a certain level, that is just as serious in consequences?

Below is a REUTER article dated 29 Aug 2011

Beat high-frequency trading machines by not playing their game
The days of you trying to make a buck actively trading in the stock market are over.

Individuals don’t stand a chance anymore because they are largely competing against rational machines often guided by herd-like irrational forces. The robots can rule in the blink of an eye….

I knew it was over for human traders when I heard that high-frequency trading firms were hooking up their data lines directly to exchange computers to gain an extra hundredth of a second in execution time.
High-speed programs are designed to move millions of shares in a fraction of a second to take advantage of small movements in securities prices….

There’s no way to beat the machines, unless of course, you have a faster machine, better programs or the ability to predict the future. Your odds are better in Vegas, which never had great odds for a palooka pulling a one-armed bandit….

Some 60 percent of the volume of the New York Stock Exchange is attributed to high-speed trading, maybe more.

Although many market observers blamed machine traders for a flash crash last year, regulators have done little to slow down these speed demons....

That’s why will see even more flash crashes and huge price swings called “mini-flash crashes.”…

Don’t even try to time the purchase of your stocks, because Washington will do nothing to protect you against huge market swings.

Wall Street is spreading plenty of money around in lobbying efforts to make sure that their trading desks don’t get regulated in any meaningful way. Sated with financial services industry contributions, House Republicans have already spent most of the year trying to kill Dodd-Frank financial reforms, so high-speed trading isn’t even near the top of their agenda.

So my advice couldn’t be more succinct. The best way to beat the machines is pretty simple: Don’t even play them. Game over.

7 comments:

notanotherspinstory said...

That's why the PAP is damn smart arse for inventing and tweaking the CPF. The most bankrun-proof bank in the world. All our money is trapped in that black hole, light also cannot escape.

Anonymous said...

sure, more not ran away oredy liao?

Anonymous said...

Too much worrying is damaging to ones' soul and health.
Take it easy, in Japan and in the US, their governments bailed out all the financial institutions. In Europe Germany is bailing out its' neighbours.
And in Sin, CPF can be used; ERP, entertainment, tobacco, liquers, fuel taxes and GST can always help.

Sin is Tsunami proof from natural and man-made disasters, as we are in the good hands of men of integrity!

patriot

Chua Chin Leng aka redbean said...

Hi Patriot,

High speed computers and high frequency trading are as dangerous as toxic bonds. The Americans and Europeans are worried of the damages they could cause to their stock markets. It is unfair trading.

The Americans wanted to put restrictions on them but could not push it through as the congress men and law makers were paid by the bankers to stop the bills to regulate them.

Just like the toxic notes, they are very destructive. Hope it will not need any financial crisis or investors suffering big losses before they admit that the practices are harmful and made it illegal.

Anonymous said...

Yeah lor! Why worry until cannot sleep.

Singapore no tsunami one. No earthquake one also, no terrorist dare ka-chao ka-chao, no rebellious beans left outside of Changi Prison, floods happening only once in 50 years, and the bestest, talentest and whitest people on earth running paradise. How can anything bad happen in God's land.

Anonymous said...

Redbean Sir;

there certainly need to have losers, big losers and plenty of them to make the crooks fat. But hor, no one force anyone to gamble mah!
Btw, not only the US Authority is not made up of talents, the politicians there are almost all beholden to business people. Since rulers are lesser talent than business folks, Americans will have to live with it.
Likewise, we live in sin because justice is dead or non-existence. Okay, it maybe more accurate to say that conscience has vanished to don't know where lah. Having said the above, me will still say there won't be Tsunami in Sin. Our leaders are of the most honourable type.

Me very patriotic, so don't want Sin to have problem, natural or man-made.

patriot

Chua Chin Leng aka redbean said...

Agree, even when the dice is loaded, they said you play with eyes open. So it is your fault.

But never mind, it will end naturally.