Dan Norcini is my friend, and one of the quieter but more savvy people I know in the markets. He has made his living as an off-exchange trader for many years. The concerns he has about he viability of the markets is genuine, and of great importance.

People forget the reasons why some markets exist, what their function in support of the real economy is fundamentally all about.

The responsibility for this distortion of the markets, and their taxing effects on the real economy, are the responsibility of the Congress and the regulators. Unfortunately they have been bought by unenlightened, short term, self-interest in a variety of ways. And the same people who bought them have sold the public a bill of goods, and appealed to the worst of their emotions to keep them from thinking.

And the public bears some responsibility in this for their long standing willingness to see themselves and their fellows duped, abused, and ill-used for the sake of some outlandishly misguided idealism or a craven selfishness.

There is nothing new or unique in this. As long as there have been markets there have been those who would tip the scales, cheat and defraud, buy the judges, and take what belongs to others, often hiding their misdeeds under sanctimonious camouflage of slogans like freed and the flag.

The difference is that this time it is not our fathers and grandfathers and great grandfathers that stand the watch on the wall, but ourselves.

This is just another nail in the coffin on the efficient markets hypothesis and the magical power of deregulation. Order in society is the result of hard work, sacrifice, integrity and a devotion to principles of justice. The natural result of unbridled greed and fear is crime, injustice, and anarchy.

Algorithms Gone Wild - AGAIN, and AGAIN, and AGAIN
By Dan Norcini
April 13, 2012

What more is left to say at this point other than the fact that the hedge fund computers and their damnable algorithms have destroyed the integrity of the US futures markets. The sheer size, extent, ferocity and volatility of the moves that these pestilential computers are creating have rendered these markets basically useless for what they originally came into being for, namely, risk management for commercial entities.

Price swings of this magnitude are blowing up hedged positions put on by commercials and other end users/merchants/processors, etc. While margins are reduced for legitimate hedgers, they still must meet any and all margin calls on any hedged position, whether that is a long position or a short position. Some will say that all they need to do is to buy or sell the corresponding physical commodity and while simultaneously lifting the hedge. That might work fine on paper but in the real world it is a fabrication.

A cattle feedlot, a grain elevator owner/operator, a cocoa processor, a cotton mill, etc, may or may not have the actual product ready to sell as it is still maturing or growing in the field or may not be ready yet to actually buy the product but they might have hedges in place while they are waiting. So much for their hedges in this sort of idiotically insane trading environment. Their hedges are getting blasted to kingdom come but they must maintain the thing if it moves against them meaning that they need cash to meet any and all margin calls.

At some point, the cost of doing so, with hedge fund running prices all over the damn planet on a daily basis, is no longer feasible.

I am predicting here and now that unless something is done to corral these hedge funds, the futures market is going to become useless as a risk management tool for non-speculative entities...

Read the rest here.