maximizer welcome to the kaiser report more algo bops and so those suits in today's headlines wells fargo just been charged with civil mortgage fraud as opposed to the unfriendly or surly sort of mortgage fraud that mere mortals think agent while in matters of law civil of course means being charged with

a frickin crime according to the sorest dot com symbol is also synonymous with any a bolt benevolent benign club be cordial courteous cozy like minded neighborly sympathetic indeed. stay sarah burton tell me more civil oh great civil civil subtle not simple but civil well i did think this synonyms were great for these constant parade of civil suits against hard core financial criminals is very clubby in cozy and benevolent and they're helping each other out so the headline is from bloomberg u.s. file civil mortgage fraud against wells fargo now again with the that in mind of the amiable suits read what the u.s. attorney says as the complaint alleges yet another major bank has engaged in a longstanding and reckless trifecta of deficient training deficient underwriting and deficient disclosure all while relying on the convenient backstop of government

insurance. so it's a question of semantics to say they're engaged in civil wrongdoing the clubby atmosphere has been interrupted by the imposition of the rule of law and the natural law and the social contract oh golly gee how can we continue to underwrite this fraud if somebody keeps making a stink about our use of the word civil. i don't use the word terminal terminal would employ they were doing something illegal all and you know here in london they changed the financial services authority to the financial conduct authority and again it fits in with that this is deficient training deficient underwriting so we're moving further and further away from that justice that most people in the world are seeking at this moment oh this this is a crisis of justice for sure this is a huge problem around the world people are seeking social justice it's not so much

as ninety nine percent versus the one percent is not so much that the wealth is being confiscated by the top criminal the elite in the city of london and wall street it's more about the problem of there being a complete lack of justice the law for some is something that they write for their benefit and then when others try to go to the courts with the same type of standard they are immediately put into a straight jacket and beaten to within an inch of their life by the goons and thought. well now with this in mind again you know these crimes that wells fargo is alleged to have committed very civilly perhaps they were committed many many years ago so let's look at some of the suspicious the mysterious and crazy activity going on in the markets today that in ten years' time might result in a civil lawsuit mysterious algorithm was four percent of trading activity last

week a single mysterious computer program that placed orders and then subsequently counseled them made up four percent of all quote traffic in the u.s. stock market last week max they say that the motive of the algorithm was on clear yes understand saager of them was doubling up the new york stock exchange and making a few people fabulously wealthy a mysterious parasite called jamie does. i meant was swimming in the entrails of the lower intestines of the new york stock exchange and he was getting fat and stealing money along with goldman sachs and barclays and who is this new guy in town martin schlumpf long on. foreign shillings longer martin wheatley martin we played here in the u.k. he's a parasite crawling up on the alimentary canal of the banking system in gorging himself

on a fraud he's getting fat martin wally on the fraud he's a parasite martin wavelength well again max the motive of the algorithm remains unclear there is other stuff you don't clear about the motive of the other or that much about stealing money doesn't always design those ways right and they get all those sharpies down there in the city in the wall street at mit and stanford university to create algorithms to steal money that's not us it's how do you say oh we just accidentally make money again every single day for ninety days in a row we're reporting this is the main whatever you call it is or accidentally you know accidentally found his wallet full of money in the same spot every single day for the last ninety days that's not an accident that's called stealing so again the motive of the algorithm remains unclear so i'm saying that in ten years time when it's put before a jury of its peers this algorithm is going to be a whole bunch of computers. you know there in that jury selection to judge this

algorithm whether it's motives were criminal or just normal high frequency trading at enron or was employed by goldman sachs to them i mean i am an algorithmic robot i do not know why i had to do what i did my brain has been programmed by lloyd blankfein m.d.m.e. and i meant to still let me please your honor do not put me what the other robots in the robotic jail plans plans i am going to send your honor i'm innocent. the program placed orders in twenty five millisecond bursts involving about five hundred stocks according to next a market data for the algorithm never executed a single tree and it abruptly ended at about ten thirty am friday which is probably when maddox first made this information public and it just immediately shut off to disappear its any trace of its crime but amazingly the crash of ninety day seven was caused by algorithmic trading gone amok so their response they made it through

more faster so they're putting even greater risk into this is systemic risk and causing more problems that's been lost and so far during the crisis which actually goes back to that i think it's i'm starting to question lessons of men make it faster make it more dangerous and less still more money. speaking of stealing money now this algorithm was four percent of all quotes on the market but it was ten percent of the bandwidth available to the market so c. a b. c. reckons that the ultimate goal of many of these programs is to gum up the system so it slows down the quote feed to others and allows the computer traders with their kool-aid located servers at the exchanges to gain a moneymaking arbitrage opportunity again max look at the phraseology here to gain a moneymaking arbitrage opportunity usually that would be a criminal activity to steal something then i'm deeming an arbitrage opportunity they're creating one that they engineered might deny gaining their gaming

difference or talk about semantics but you know it's like time of this thing if you recall at the end of the movie there's a scene where they run a horse scam where the. results are reported in a different information then everyone is available in the parlor there to make the best you say and that's exactly what they're told by their they're affecting the speed of which the trains are being reported. and then cash in hand on the market's inability to get real time data so this is just another it's just an old classic scam the tapes from morse racing days applied to start markets in milliseconds but it's the same crime committed but just faster with more money now erik hunt sader the head of now nick says that this trading activity this suspicious mysterious algorithm with no motive clear motive he says it just goes to show you how just one

person can have such an outsized impact on the market exchanges are just not monitoring it well we cover a few weeks ago that the new york stock exchange was actually engaged in that remember they had a fee that was fed at two milliseconds to their preferred clients during the flash crash while the normal every day market participant was receiving information at five point three seconds so way behind the insiders get well absolutely correct the next stock exchange as of the permanent seat. on the exchange they also have allowed firms to co-locate put servers next to the new york stock exchange to get an advantage in what's called high frequency trading which is just like siphoning off cash for free well actually max is not siphoning off cash that language is far too surly for this is to gain a moneymaking arbitrage opportunity right exactly. so

now speaking of all is insider trading rigging indices rigging markets we have this headline lie borg eight comes to crude total exposes price fixing in the energy market or i guess you should say to well there's a whistleblower at hotel in switzerland apparently the i.o.'s c.e.o. of the international organization of securities commissions had sent out a letter rick. questing advice from all the participants in these oil markets and what happened is that this whistleblower from totalis said that basically they have warned over in accuracy in price benchmarks and that the inaccurate pricing provided by these benchmarks plats in our guest for example don't represent the reality on the ground i.e. there is rigging as we've covered here with leader mcgrath goodman and also chris cook they both suggested the same exact thing on different sort of ends of this

market chris cook with the london end of it and liam mcgrath goodman with the us and. benchmarks that they used to trade. exactly in a analogous to the light bar rigging scandal where the benchmarks and indexes are rigged and then all the trades that surround the benchmarks in the index are privileged information on the inside to capitalize on the arbitrage of having an asymmetric market of having the vast population of people in the markets totally deaf to what is actually the true price signal and then you have a few insiders who are capitalizing on this huge gap of market distribution and then they take that money and they go buy themselves a mitt romney. insiders who were very happy with our b.p. saudi aramco the very people that chris cook says could be involved in this he's told us on the kaiser report many times over the past two or three years now the whistleblower from tut's house says it is not simply an issue regarding the pricing

of o.t.c. contracts margins for refiners and retailers as well as prices for end users are directly impacted by iranian prices so again if martin we sort of guy is the one that going it is going to come in now we see what they've done with live war they're going to say in the future this sort of oil rig might be illegal most other major point to make here is that oil companies make more money rigging the system in trading on inside information than they do in. in selling and drilling and processing oil the same thing as banks banks make city of london make more money raiding lie bore than they do in making loans and doing the normal functions of a bank and this is the problem in this economy and in the city in new york around the world is that the crime wave that is the core of the global economy as contributing now the majority of profits to these g. twenty nations so if you start to really his mental these criminal syndicates you

are going to suffer an enormous economic crash but you know the problem is when you have infestation of these parasites you need to flush them out otherwise the parasites will eventually completely consume the host and that's what's happening in the u.k. in the u.s. around the world the parasites on wall street and in the city are consuming the hose that's me that's you that's you you're being consumed by the parasites in the banking industry yes and for this information to emerge we relied on this whistleblower who came out and regarding this you know the financial times says about this whistleblower the unusually candid public comments by trading arm of total have broken the omerta of the energy physical trading industry a close knit community in london geneva singapore and houston where disputes are usually settled in private the very symbol of a gentleman's agreement rick the markets thank you for being on the kaiser report

i think you know it much more coming your way stay right there. more news today. these are the images. from the streets of kandahar. today. you know sometimes you see a story and it seems so you think you understand it and then you glimpse something else you hear or see some other part of it and realized everything you thought you don't know i'm tom harkin or compose a big picture. welcome

back to the kaiser report i max kaiser time now to go to paris and talk with john gerry and option monster dot com john a giant for those who don't know what is option trading what role is the play in the overall markets and welcome to the kaiser report first of all max delight to be here enjoyed your reports for years and now i get to actually be on with you so i'm flattered what role does it play options of course are a derivative that lets people use leverage in their favor or unfortunately for some

people use it like fire and they burn themselves but overall options trading in particular in the u.s. has really exploded lately and i think some of that max is because of stocks like apple and google and amazon that are so expensive to trade people can take just a much smaller piece of that by trading with options and now they have options that not only expire on a monthly or quarterly basis but weekly basis and that has also really sparked a lot of enthusiasm and interest in the product well i actually know i did you know i was a big office trainer at sears and during the eighty's i was their third or fourth biggest options producer in. entire ten thousand brecker system and that's amazing that now they have weak weekly options and i guess i understand tied to these very high price stocks like the google stock in the multi hundreds you can barely buy a shares of these stocks here first of my options and just to reiterate an option is kind of a bet on which way

a stock is going up or down now the guardian newspaper in london has recently wrote that the black shoals equation was the mathematical justification for the trading that plunged the world's banks into catastrophe in particular it says quote it was the black souls equation that opened up the world of derivatives ok so john going back to the late seventies and early eighties tell us about the black souls option pricing volatility formula sure well basically folks since as max said an option can give you the right to buy something or the right to sell something so a call option is the right to buy something people try to figure out what is that option on buying apple at six hundred fifty dollars a share worth so they basically plug it into a formula the black shoals model is the one max is talking about but there are five or six others that people developed over the last few years and it's a formula that basically calculates along

a bell shaped curve and figures out the possibilities of various outcomes and. there are known as of course like how much time until expiration if it's a weekly option there are seven days or two days or even just one day as you get into the final days the interest rates are pretty unknown the price of the stock and the price of the option those can move of course with volatility and so that that concept of volatility max which you saw in one thousand nine hundred seventy explode to record levels that is one of the key components of options the more fear there is in the the marketplace. greater the potential movement up or down for that particular asset and that influences the price of the options all right let's talk about for example a stock like google let's for an example let's say it's trading at seven hundred dollars a share now i think people can readily understand that if you want to make a bet that the price is going to go above seven hundred dollars

a share and that bet would be based on the current price seven hundred dollars a share and therefore you going to pay for option but what people might not really readily understand is that you also have the ability to buy an option based on the price going to one hundred five hundred ten one hundred fifteen and one hundred twenty so you're buying effectively an option on a theoretical price and that's where this formula or volatility formula comes in the black and shows this is what's so important is because it allows the market to give a price to something that is way out of the current price where only volatility exists there's no intrinsic value your thoughts yeah exactly max and that's why a lot of people look at it as some sort of science what we do every day in trading options what you did for years and years read shearson because if something isn't in the money in money is known as intrinsic value folks so in other words what max

described of course is out of the money either out of the money bets that the stock goes a lot higher or out of the money bets underneath the market that would be a bet that the stock is going to go down now people profit very very quickly on those panic bets to the downside you need look no further than apple recently as it fell from seven hundred dollars about two weeks ago all the way down to six hundred twenty dollars an eighty dollars price drop just in the last two weeks that was of course one of those events that isn't really a known event there was you know some talk about factory closures and things like that and maybe. the mapping function didn't work so well but basically when that snow ball gets rolling downhill it goes down faster then of course it goes up and that's why those put options the bet that the stock price will decline are so popular in bear markets right johnny mentioned that once the ball starts rolling it starts to gather velocity and speed quite quickly because there are more options

trading based on a company's stock then there is stock in existence so if apple or google might have one hundred are half a billion shares outstanding there are five ten fifteen twenty times that number of shares in the options market trading in the derivatives market so you've got this enormous leverage don't you but i want to just bring in another point quickly which is that you mentioned out of the money options let's talk about an ad of the money put in that is a bet that the stock's going to go a lot lower and if it's ten or twenty bucks below the current price you might only pay ten cents twenty cents or thirty cents for that option talk to me what happens when a flask crash happens and in other words a flash crash happened which is again caused by this extreme volatility by the presence of this extreme leverage and these extreme derivatives isn't it not in the interest of somebody who's has an ad of the money put a bet to cause

a flash crash and is there in your knowledge john any indication that we have instances where traders who are positioned ahead of these flash crashes are actually helping to contribute to them to profit from them your thoughts absolutely max in fact i've heard you rail about high frequency trading and flash crash into reports before and kudos to you for doing it high frequency trading is one of those things that can promote or create a flash crash because all the sudden a bunch of machines lower their bid simultaneously and we're talking nano. seconds here folks and since they've taken so many people out of the market there aren't the thousands of market makers that there used to be and when max was talking about the eighty's gosh max there were five or six thousand option market makers on the floor in the united states now there are probably i'll guess eight hundred collectively across all of the exchanges in the united states that are on the floor

now it's all just run by algorithms so when you get a flash crash there are certainly some people who could buy those out of the money puts betting that the market could decline and then try to get that snowball rolling downhill very quickly by creating volatility and that fear in the marketplace knowing that all the other algorithms will react to it by lowering their offers and lowering their bids and since they do this virtually simultaneously in nanoseconds you can see stocks fall very very quickly so that bet could pay off and that leverage bet could make somebody a lot of money. and celia have a few minutes left and we're talking about options i could go on and have this conversation last an hour or two but let's get to some quick points here speaking of equations high frequency trading see n.b.c. just reported that mysterious algorithms was four percent of trading activity last week they also said the motive for the algorithm is still unclear so your thoughts

on high frequency trading and is it fair to say that the motives are unclear that seems remarkably vegan. yeah and it seems rather not very educated either and clearly you and i aren't talking about it valet i think the motives are very clear max i think when somebody creates an algorithm that seems to be the intention of that algorithm to seek out bids and offers we would call it back in the old days of futures trading looking for stops stop orders that are placed below the market where somebody is looking to trigger that star order and cause a waterfall. was that stock or that future to roll over i think many of these algorithms are created very much with that in mind in other words it's very transparent to me not opaque that the people creating many of these algorithms are doing so to create mayhem in the markets. believe of course it should be

investigated very thoroughly but unfortunately in many cases the regulators were asleep at the wheel in the economist magazine reported a couple of months ago a report that was leaked or made visible all accidentally from lawyers representing goldman sachs and this report has said that the company was in fact engaged in naked short selling that that is the say that they were selling contracts that did not exist the more shares for example lehman brothers or lehman brothers collapse more shares were sold short than actually existed in the float i see it kind of smiling about this is the first time this information went public because many people deny the naked short selling ever even existed your thoughts what's your thinking on this i've seen it for years max i believe you have two naked short selling folks instead of acquiring because one of the short seller sells the stock they have to go borrow that stock from somebody else to satisfy the delivery

because there's supposed to be a fixed amount of stock whether it's one hundred million shares or a billion shares and you're not supposed to be able to sell more than exists in the case of the stock and in some cases lehman brothers being one of those if you had a very strong feeling that the stock was going to be going to zero and you said well but it's trading at twenty five dollars if i can sell you know two billion shares worth of it at twenty dollars when it goes to zero i'm going to make an awful lot of money i think that does happen max i'm sorry and sad when the like i say the regulators aren't paying enough attention because their job is really to protect us. whether i'm a professional trader or whether i'm investing as a casual retail investor the regulators job is to protect us and when they fall down and that responsibility their fiduciary responsibility it hurts all of us so the credibility of goldman sachs obviously is in question because of that report in

the economist and obviously the credibility of the regulators who should have been on top of it should have made sure that these guys had a good borrow before they sold that much stock that is one of the problems with the markets today. and again soon thanks for being on the kaiser report. my pleasure max thank you and that's going to do it for this edition of the kaiser report with me max kaiser and stacey her but i want to thank my guests john and gerry and is going to send me an email please do ties are reported on g t v dot ru and the like timex guys are saying by all. admission free cretaceous free in-store charges free. free. free. free.

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