After finally covering massive retail outflows, the NYT also “discloses” the Nanex Crop Circle Mystery

by Tyler Durden
Posted August 22, 2010 on Zero Hedge
See previous post: the original New York Times article

READING THE NYT THESE DAYS SURE IS ENLIGHTENING: first, one gets news about some odd phenomenon, previously unheard of, that for 15 straight weeks retail investors have been pulling money out of retail funds (hmm, where has one seen this before), and now, with much fanfare, the NYT brings the Nanex Crop Circles to the center stage. At least unlike the former story’s 15 week delay, it took the NYT a mere three weeks to rehash what Zero Hedge readers had known since July (how is that whole “value added content” paywall idea going?). Nonetheless, it is satisfying that the criminal stock churning activity reported on first by us, has finally gone mainstream. Of course, the NYT conclusion is typical: “The idea that shadowy computer masterminds were trying to disrupt the nation’s stock trading struck many people as ridiculous. Wall Street experts generally characterize it as a conspiracy theory with little basis in fact.” Interesting: yet a mere four minutes ago we pointed out that Finra is starting to ferret out illicit HFT trading practices… Maybe the NYT can put two and two together (in real-time this time).

More from the article:
The stock market mysteriously plunges 600 points — and then, more mysteriously, recovers within minutes. Over the next few weeks, analysts at Nanex, an obscure data company in the suburbs of Chicago, examine trading charts from the day and are stunned to find some oddly compelling shapes and patterns in the data.
To the Nanex analysts, these are crop circles of the financial kind, containing clues to the mystery of what happened in the markets on May 6 and what might have caused the still-unexplained flash crash.
The charts — which are visual representations of bid prices, ask prices, order sizes and other trading activity — are inspiring many theories on Wall Street, some of them based on hard-nosed financial analysis and others of the black-helicopter variety.

To some people, like Eric Scott Hunsader, the founder of Nanex, they suggest that the specialized computers responsible for so much of today’s stock trading simply overloaded the exchanges.
He and others are tempted to go further, hypothesizing that the bizarre patterns might have been the result of a Wall Street version of cyberwarfare. They say high-speed traders could have been trying to outwit one another’s computers with blizzards of buy and sell orders that were never meant to be filled. These superfast traders might even have been trying to clog exchanges to outflank other investors.
Jeffrey Donovan, a Nanex developer, first noticed the apparent anomalies. “Something is not right,” he said as he reviewed the charts.

Here is what Donovan believes happened, and no black helicopters or anything: Mr. Donovan, a man with a runaway chuckle who works alone out of the company’s office in Santa Barbara, Calif., poses a theory that a small group of high-frequency traders was trying to introduce delays into the nation’s fractured stock-market trading system to profit at the expense of others. Clogging exchanges or otherwise disrupting markets to gain an advantage may be illegal.

In Striking Shift, Small Investors Flee Stock Market

by Graham Bowley
Originally published: August 21, 2010

Please bear in mind that this article, published by The New York Times, expounds a mainstream media viewpoint. I would like to believe that the readers of QP will be well aware of the multiple events around us that are drawing us into an unprecedented crisis. This article is really a softly-softly “message to sheep”, and would normally be discarded by QP as being absurdly disingenuous. Of course, there is now a paradigm shift occurring in all perspectives, and people are now waking up in droves to the recognition that the world can never be “normal” again… The New York Times does not care to use words like ‘crisis’… Ho hum…

RENEWED ECONOMIC ACTIVITY IS TESTING AMERICANS’ GENERATION-LONG love affair with the stock market. Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.

If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked. Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.

One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking. And so is the timing. After past recessions, ordinary investors have typically regained their enthusiasm for stocks, hoping to profit as the economy recovered. This time, even as corporate earnings have improved, Americans have become more guarded with their investments.

“At this stage in the economic cycle, $10 to $20 billion would normally be flowing into domestic equity funds” rather than the billions that are flowing out, said Brian K. Reid, chief economist of the investment institute. He added, “This is very unusual.” The notion that stocks tend to be safe and profitable investments over time seems to have been dented in much the same way that a decline in home values and in job stability the last few years has altered Americans’ sense of financial security.

It may take many years before it is clear whether this becomes a long-term shift in psychology. After technology and dot-com shares crashed in the early 2000s, for example, investors were quick to re-enter the stock market. Yet bigger economic calamities like the Great Depression affected people’s attitudes toward money for decades. For now, though, mixed economic data is presenting a picture of an economy that is recovering feebly from recession.

“For a lot of ordinary people, the economic recovery does not feel real,” said Loren Fox, a senior analyst at Strategic Insight, a New York research and data firm. “People are not going to rush toward the stock market on a sustained basis until they feel more confident of employment growth and the sustainability of the economic recovery.”