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Bitcoin's Quixotic Search for Legality -- My Daily Caller Op-ed -- Part 10 Algorithmic Markets Series

If you are interested in understanding serious emerging problems with algorithmic markets, please don’t miss my Daily Caller op-ed “Bitcoin’s Quixotic Search for Legality” – here.

  • It is Part 10 of my Algorithmic Markets research series.

Algorithmic Markets Research Series

Part 1: Who's Looking Out for Investors? [6-14-01]

Systemic Flash Crash Vulnerability: Financial Crisis Root Causes: Part IV

The SEC/CFTC report on the May 6th "Flash Crash" helps confirm that automated index trading technology was a contributing cause of the 2008 Financial Crisis and why recent financial reforms are not enough to address the ongoing destructive systemic vulnerability that automated index trading technology increasingly poses for financial markets going forward.

 

The Father of Indexing Calls My Indexing Thesis "Nuts!"

When Investment News asked John Bogle, Vanguard's founder and the father of indexing, about my "Indexing into the Ditch" thesis (that indexing is one of the root causes of the financial crisis) he said: it “is nuts! Last time I looked, index funds accounted for about 0.4% of all stock trading ... Just perhaps the other 99.6% might bear a teeny-weeny bit of the responsibility.

Let me first respond to Mr. Bogle's points in order.

The thesis "is nuts! "I must admit I smiled at the ad hominum implication that my thesis was "nuts" and not worth listening to; I remembered that Bernie Ebbers called me the "idiot Washington analyst" because my research was the first to charge that WorldCom's business simply did not add up.

Challenging Mr. Bogle's Claim Indexing is Investing

With all due respect to Mr. John Bogle, legendary founder of Vanguard and de facto leader of the American index fund movement that now manages ~$1.5 trillion, I must respectfully challenge, on the merits, Mr. Bogle's, and others, ongoing mischaracterization of indexing as "investing."

Indexing into the Ditch -- Financial Crisis Root Causes -- Part I

Despite the widely held view that indexing is the safest way to invest, indexing helped recklessly drive our financial system and economy into the ditch last fall.

  • While there’s consensus the financial crisis warrants “new rules of the road” and better policing to protect against systemic risk, all the rules and oversight in the world can’t keep us out of the ditch in the future if index vehicles continue to drive the wrong way against oncoming traffic.
  • And “stress testing” whether bank vehicles can survive head-on crashes, completely misses the point that indexers should not be driving the wrong way on the freeway.

A major reason the system has become so unstable and dangerous to financial security is that over ten percent of money management vehicles on the road today are indexers, which by design drive the wrong way against the oncoming traffic of a market economy that allocates capital based on economic merit.

Diagnosing the Financial Crisis' Root Causes

This is an introduction and background for my new multi-part research series on diagnosing the root causes of the Financial Crisis.

Q&A One Pager Debunking Net Neutrality Myths