HOW THE STOCK MARKET REALLY WORKS IN 2018 -A Primer, in Six Easy Steps



Photo by Rafael Matsunaga | CC BY 2.0

What is the stock market?

1) It’s not real economic activity—it’s a form of mass hysteria or mass psychosis.

2) Stock prices reflect a mass-hysteria impression of the worth of a piece of paper you hold—a stock certificate. The worth of that piece of paper is sometimes tethered to some economic reality of some corporation—at least partially—but sometimes not. Often a stock price bears little relation to the economic health of a company, as illustrated in the wildly gyrating stock price-to-earnings ratios through the decades. Hence the stock price is often a matter of caprice, covert manipulation, and/or unfathomable crowd psychology, not necessarily real economic “health” or productivity.

If, say, you are fortunate enough to own a stock that has doubled or tripled in price, this does not mean that you have accrued new wealth—that stock valuation is meaningless as long as you still own the piece of paper (the stock certificate); you realize that wealth only by selling the stock. And if you do cash out—sell the piece of paper—to someone else, you are transferring to another person the hazard of seeing that valuation drop or evaporate—an opportune fobbing off of risk to someone else, a transfer of cash to you, but no real creation of wealth—just the passing on of a piece of paper in exchange for currency. Eventually, down the road, your gain will be someone else’s loss when the music stops playing and the last holder of the piece of paper finds there is no chair for him to land on—the stock market as Ponzi scheme.

If everyone or most people decide to sell their pieces of paper—to take their profits—all at once, then the stock prices tumble, so the idea that everyone can cash out and realize this imaginary wealth equally and universally is a mirage: if everyone tried to access it at once, it would evaporate. Hence the common notion that rising stock prices indicate a general increase in wealth or national prosperity is delusional. A stock crash does not erase billions or trillions in “wealth” overnight, as we are commonly told. There was never any “wealth” there to begin with, in the sense that a stock price rationally or measurably reflects the worth of tangible goods or services; that price is just a mass fever dream, a collective, chaotic, bidding war about the worth of pieces of paper.

3) The stock market is a swindle.

Much of the movement of these equities markets originates in the decisions of large funds or high-speed traders who have access to esoteric information, advanced algorithms, or trading networks from which Joe Trader, playing the market at home on his laptop, is excluded. Hence Joe Trader inevitably gets screwed. The author Michael Lewis draws the veil from this complicated high-tech rigging in a 2014 interview with CBS’s 60 Minutes:

Steve Kroft: What’s the headline here?

Michael Lewis: Stock market’s rigged. The United States stock market, the most iconic market in global capitalism is rigged.

Steve Kroft: By whom?

Michael Lewis: By a combination of these stock exchanges, the big Wall Street banks and high-frequency traders.

Steve Kroft: Who are the victims?

Michael Lewis: Everybody who has an investment in the stock market. . . .

Steve Kroft: And this is all being done by computers?

Michael Lewis: All being done by computers. It’s too fast to be done by humans. Humans have been completely removed from the marketplace. “Fast” is the operative word. Machines with secret programs are now trading stocks in tiny fractions of a second, way too fast to be seen or recorded on a stock ticker or computer screen. Faster than the market itself. High-frequency traders, big Wall Street firms and stock exchanges have spent billions to gain an advantage of a millisecond for themselves and their customers, just to get a peek at stock market prices and orders a flash before everyone else, along with the opportunity to act on it. . . . The insiders are able to move faster than you. They’re able to see your order and play it against other orders in ways that you don’t understand. They’re able to front run your order.

Steve Kroft: What do you mean front run?

Michael Lewis: Means they’re able to identify your desire to, to buy shares in Microsoft and buy ‘em in front of you and sell ‘em back to you at a higher price. It all happens in infinitesimally small periods of time. There’s speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds. But it’s enough for them to identify what you’re gonna do and do it before you do it at your expense.

4) The MSM commentators on the markets are all industry touts.

Their unvarying counsel, under all circumstances, is this: Get into the market.Get in if you’re not in already. Stay in if you’re already in. A plunge is a buying opportunity. A surge is a buying opportunity. A buying opportunity is that which puts a commission in their pockets. A mass exit from the stock market is the end of their livelihood. I don’t know the Latin term for the logical fallacy at work here, but I think the English translation is something like this: bullshit being slung by greedy con artists. These are people with no more conscience or expertise than the barking guy with the Australian accent on the three a.m. informercial raving about a miracle degreaser or stain remover.

5) This market, more than most, is a big fat bubble, ready to pop.

This bubble is a cloistered biosphere of Teslas and beach houses, of con artists, kleptocrats, and financial sorcerers. It is rigorously insulated from the dolorous real economy inhabited by the 99 percent: declining living standards; stagnant real hourly wages; lousy service-industry jobs; debilitating consumer and student debt peonage; soaring medical insurance premiums and deductibles that render many people’s swiss-cheese policies unusable; crumbling cities and infrastructure; climate disasters of biblical proportions; and toxic food, water, and air. This stock-market bubble has been artificially inflated by historically low interest rates (so the suckers have to go into the market to get a return on their money) and Fed “quantitative easing,” a technocratic euphemism for a novel form of welfare for the one percent that has left untold trillions of “liquidity” sloshing around among the financial elites with which to play Monopoly with one another and pad their net worth by buying back shares of their own companies to inflate stock prices. Moreover, this bubble is even more perilous and tenuous than previous ones because the “air” inside is being pumped by unprecedented levels of consumer and institutional debt that will cause a deafening “pop” when some of the key players start to lose their shirts, and suddenly all the Peters start calling in the debts of all the Pauls who can’t pay.

6) The end game is near. We can console ourselves that these latest innovations in financial prestidigitation and fraud are stretched about as far as they can go. The financial elites are out of three-card monte scams to suck the wealth out of the economy. The heroic productivist heyday of capitalism, celebrated by Marx himself, is over in this country—no more driven visionary builders of railroads, factories, skyscrapers, and highways to a better tomorrow: just endless financial skullduggery and hoarding at the top, and for the rest of us the cold comforts of cell phones, smart televisions, and the endless streams of plastic consumer junk circulating through Amazon and Walmart. What Baudrillard called “the mirror of production” is a prison for the planet earth and every species on it. All that is left for the bipartisan predator class of the United States is scavenging: massive tax breaks for the rich today and tomorrow, perhaps, no more Medicare, no more Social Security, no more public schools—if they have their way, and they probably will. Pop goes the stock market, the illusion of prosperity, the whole unsustainable carbon-poison “economy,” and pop goes the planet and the human race. But look at it this way: it’s a buying opportunity.

William Kaufman is a writer and editor who lives in New York City. He can be reached at


How Wall Street’s ‘fear gauge’ is being rigged, according to one whistleblower

By Mark DeCambre and Francine McKenna

Published: Feb 13, 2018 4:53 p.m. ET





Cboe says whistleblower letter is filled with ‘inaccurate statements’

Getty Images

Cboe’s VIX products is the target of a whistleblower

One of the most popular measures of volatility is being manipulated, charges one individual who submitted a letter anonymously to the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The letter makes the claim to regulators that fake quotes for the S&P 500 index SPX, +0.26% are skewing levels of the Cboe Volatility Index VIX, -2.50% which reflects bearish and bullish options bets 30-days in the future on the S&P 500 to gauge implied stock-market volatility (see excerpt from the letter below).

The flaw allows trading firms with sophisticated algorithms to move the VIX up or down by simply posting quotes on S&P options and without needing to physically engage in any trading or deploying any capital. This market manipulation has led to multiple billions in profits effectively taken away from institutional and retail investors and cashed in by unethical electronic option market makers.

The whistleblower’s claims are consistent with those documented by John Griffin, professor of finance at the University of Texas and Ph.D. candidate Amin Shams in May 2017 in research that says the cost of manipulating less-liquid SPX options would be more than paid for by a successful bet on the direction of the VIX. The paper is consistent with the whistleblower’s conclusion—that manipulators are moving prices of the SPX options by spoofing at settlement—entering quotes for trades that are never executed—to “paint the tape” and, therefore, influence the value of expiring VIX derivatives.

Opinion: How S&P 500 options may be used to manipulate VIX ‘fear gauge’

The VIX has underpinned a number of strategies described as so-called short-volatility, which imploded dramatically last Monday when VIX, also known as Wall Street’s fear gauge, registered its largest percentage change in its history, cratering bets that volatility measures would fall, if not remain muted.

Short volatility products, notably, VelocityShares Daily Inverse VIX Short Term ETNXIV, -0.75% tumbled 90% in after-hours trade Feb. 5 as the Dow Jones Industrial Averaged DJIA, +0.16% plunged 1,175 points, or 4.6%, marking its sharpest point drop in the blue-chip gauge’s 121-year history. Another product, the exchange-traded fund ProShares Short VIX Short-Term Futures ETF SVXY, -0.44% known by its ticker SVXY, also tanked last week.

Credit Suisse, the sponsor, of VelocityShares Daily, or XIV, said it planned to liquidate the product on Feb. 21.

The spectacularly wrongway short bets had become one of the most popular trades on Wall Street because volatility had gone eerily absent for a protracted period, encouraging investors, who were lamenting the narrow trading ranges present during that period of placidity, to make more aggressive wagers to generate richer returns. Those moves also came amid ultralow rates for government bonds, particularly the 10-year Treasury note TMUBMUSD10Y, -1.11%

Jason Zuckerman, attorney at law firm, Zuckerman Law, who is representing the anonymous whistleblower, told MarketWatch that his client is concerned about unfair markets.

“My client is concerned about VIX manipulation that has already caused investors to incur massive losses and is eager to prevent further harm from investors,” Zuckerman said.

The whistleblower would also like the market regulates to play a more active role in preventing further harm to investors including requiring more accurate and comprehensive disclosures about the various risks that are associated with products linked to VIX,” he said.

The letter urges “the SEC and CFTC to promptly investigate the matter before investors suffer additional losses due to this fraud.”

Zuckerman’s whistleblower further charges that the average retail investor isn’t aware of how exchange-traded products like XIV are rebalanced daily and that a “mismatch” in the nature of short-volatility products means “a larger move in spot-volatility in either direction requires excessive buying or selling pressure whenever short volatility assets are dominant.”

Source: Zuckerman Law


One error that market participants have pointed out is that Zuckerman and his client in the letter refer to the CME Group Inc., at one point rather than the Cboe Global Markets Inc., which oversees the VIX product.

“This letter is replete with inaccurate statements, misconceptions and factual errors, including a fundamental misunderstanding of the relationship between the VIX Index, VIX futures and volatility exchange traded products, among other things,” a Cboe spokeswoman said in a statement.

Messages to the SEC and the CFTC weren’t immediately returned.

The whistleblower claim also comes amid heightened regulatory scrutiny around short-VIX products, including former CFTC Commissioner Bart Chilton, who told MarketWatch that warnings about products like XIV should be written in “big, bold 24-point font and in red letters.”

A CBOE press release said that Feb. 5-Feb. 9 was the busiest week in the exchange’s history with a record weekly high of 48.29 million contracts traded. However, shares of CBOE, which merged with merged with Bats Global Markets last year, lost 20% last week when after the market mayhem cast doubt on whether these products would remain viable choices for traders.

CBOE executives are confident its VIX product will continue to do well in all market conditions. On its earnings call, John Deters, CBOE’s chief strategy officer, told analysts, “It’s really an exceptional event when the level of VIX increases and doubles in a matter of just a handful of days. That’s occurred, and now we’re at a point where — and professionals know this — we’re at a point where the short VIX strategy tends to work quite well.”

CBOE Chairman and CEO Edward Tilly refuted concerns about the impact of the problems at some exchange-traded products and added that the exchange saw record trading volume in VIX futures and options in 2017. “The activity we see from issuers of XIV and SVXY is less than 5% of all VIX futures trading, representing average daily volume of about 12,000 contracts,” Trilly said. Non-institutional holders of these ETPs were approximately 21% of total holdings in the last reported period, he said, with the remainder consisting of “sophisticated institutional users who employ inverse VIX ETPs as part of a diverse mix of trading and investing strategies.”