Editor's Note: You can take down extraordinary gains when you understand how Wall Street really works. Shah's been on the inside, and in his free, twice-weekly Wall Street Insights & Indictments, he reveals how to trade the bigger picture for maximum returns. To get his insight and start beating the Street, just click here.
If you think the Dow crashing 1,600 points intraday is unprecedented, you're wrong.
If you think the Dow trading 5,000 points up and down in a single day was an aberration, you're wrong.
If you think the wild swings equity markets are experiencing will eventually pass, you're wrong.
Everything you've heard on TV and everything you've read about the stock market's violent moves this past week is wrong.
What's really wrong is how hardly anyone knows what's wrong, and the handful of people who do know aren't being honest.
I'm going to tell you something you aren't going to hear or read anywhere else: the truth about what's wrong with stock markets, how they got to be so dangerous, and how to trade this new reality.
What I Didn't Say on National Television, I'm Saying Here
As a regular guest on FOX Business Network's "Varney & Co." and "Making Money with Charles Payne," I was asked to appear several times this week.
I was asked to help make sense of crashing markets, the wild swings, and was asked, as a long-term bull, if I was buying this "dip." I'm not.
On Tuesday I was on "Varney & Co." and appeared with the president of the NYSE Group, Thomas Farley.
When host Stuart Varney asked Mr. Farley if there were any problems at the exchange, he replied, things were "working well," and that, despite how wild Monday was, it was an "orderly day" because no limit up or limit down circuit breakers were triggered. It's true that the limit circuit breakers weren't triggered, but that's only because they kick in on a huge 7% down move in the S&P 500.
Then Stuart Varney asked Mr. Farley if the 1,000-point drop on Monday was program trading or algorithm-driven. Mr. Farley completely punted, saying, "The last day I recall with volatility that looked like that was actually the election night… If you look back to the election night and you look at where we are now, the Dow's up 40%, unemployment is down 1%, GDP is up 1%… Markets go up, markets go down. "
So, he didn't answer the question. For good reasons.
It was only out of respect that I didn't dispute Mr. Farley's contention that the sell-off was orderly on live television or his stance that program and algorithmic trading wasn't a huge part of the sell-off and was feeding volatility.
BIG, FAST PROFITS: This one pick paid 100% in seven days, then 205% the next day, and 410% by the next week. You've got to see how it's done…
What I wanted to do was ask him to tell "Varney & Co." viewers why the venerable NYSE lets high-frequency traders co-locate their servers next to the exchange's servers. I know that it's so they can front-run investors' orders by reading them before they get constructed into the national best bid and offer (NBBO), but the NYSE doesn't want the public to know that. I also wanted to ask him what the exchange was going to do to prevent 1,000-point swings tomorrow, or any day in the future they're possible. And what about 2,000-point swings, or 5,000-point swings?
Instead, I started to explain what I'm fully explaining here, only to be "frozen" when the feed from the Sarasota, Fla., studio I was broadcasting from was interrupted by a cable issue in my studio.
The truth is that volatility isn't causing markets to drop a thousand points in a matter of minutes, or causing the wild swings back up and then down again.
Far more frighteningly, the wild swings are a function of the market's mechanics.
Call It the Rise of the Machines
The New York Stock Exchange isn't solely to blame. All the exchanges and all trading venues – which are all electronic, despite the human traders in colorful jackets you see on TV – are to blame.
The rise of the machines is a function of competing exchanges and trading venues vying for orders, employing better-faster computers and new technologies. And the lack of honest liquidity is a function of "decimalization," which feeds the machines like blue whales feed on krill.
I'll get to that. First, about those "exchanges."
About the Author
Shah Gilani is Chief Financial Strategist for Money Map Press and boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker. He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk and established that company's "listed" and OTC trading desks. Shah founded a second hedge fund in 1999, which he ran until 2003. Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see. On top of the free newsletter, as editor of The 10X Trader, Money Map Report and Straight Line Profits, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade using a little-known strategy. Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on FOX Business' "Varney & Co."