Rule 48

...Or Catch-22 as I come to call it. Click the pic and see Catch-22 explained. If you don't get it, look at the buttons below. 

Rule 48

I've spoken about how I watch the markets like regular people watch sports. It's an addiction especially when the action is hotter than hell like it was the past few days. This is real drama involving billions by the minute and not whether someone can throw a curve.

On Monday's open, I had my stock screen on and 30 seconds later all data I was receiving went blank. I laughed. “Hmm, that figures.” I thought. It didn't come back up until a half an hour later and it was flying like a raging Chinese dragon. That's the scoreboard I was watching and it was all over the place.

People couldn't sell fast enough and when they did, their orders were so back-ordered that it took longer to execute them. Each second delayed is a loss in profit.

The NYSE Gods knew this was going to happen so they invoked Rule 48. On calm days, all orders have to be approved by a floor manager so there's an orderly process of buying and selling. Everyone knows what the price is of an actual stock. Rule 48 retracts this. In short:

“When the market is turbulent, setting approved prices before the market opens would slow the entire show down and cause even more chaos — which is the last thing needed right now. But if they don't have to approve the price, then the market won't be delayed. Kristina Peterson of the Dow Jones explains that market makers "will not have to disseminate price indications before the bell.”

“Don't disseminate prices before the bell.” Which means you have NO idea what the price of a stock is, even if your screen is saying it's worth XX amount. The real price isn't known.

I've heard many loudmouths bray about how they “made a killing on the market today.” What you'll never hear is someone proudly boasting how they lost $50,000 in less than 60 seconds on the very same market. No one boasts of their losses. Though I came across a blog in which the guy lamented his butt hurt this past Monday due to the way the market operates on days like that.

Most traders use a “stop-loss” order on any stock they buy. It's an automatic insurance policy that stays in effect for as long as you want it. Say you buy stock for $20.00 a share and you then can set a lower price, the price you aren't willing to go past should the market puke and automatically sell it. You don't have to be there to execute it.

You get out with some of your skin instead of staying in and watching your stock drop to $10 a share, wiping out half of your investment should you panic then and sell it.

The problem with stop-loss orders is that when activated, it becomes a market order. Market orders force you to bend over and take it. Market orders are executed at the “best” possible price. This means ANY price. If the market is having seizures, the price where the market order is eventually executed can be much lower than you think. No joke.

If your smart, you use a limit order to buy or sell. You will ONLY buy a stock if it hits $20. No higher or lower. If your still smart, you sell it using another limit order which says you'll sell the stock at $15.00 and that's it

Stop-loss orders, when activated, like is said, become market orders. High frequency traders just LOVE market orders. They can manipulate them down and down before your order is actually filled. Final tally? You lose money. Add to that if a market is volatile like it was Monday, the bid/ask spread is wide as shit and fluctuating like hell. You don't really know where your stock will sell as the quote is all over the fucking place. You might think you set a stop loss at $15 only to find out it was executed at $12. It's legal. Enjoy sucking on your loss!

There are over 1,000 NYSE “rules” that are supposedly designed to stabilize markets. The problem is that they can be arbitrary as shit and easily abused. The ones who set the rules are the rich. Get the drift? They can invoke or revoke any rule at any time. Those in the know play with them like kid's toys.

I came away from watching Monday's action realizing they can do any goddamn thing they want if the shit hits the fan.

Here's another piece of info you may not know. Your deposits at the bank are insured via FDIC. FDIC backs up your saving with the “full faith and credit of the United States” to the tune of $250,000 per account. Sounds nice? It is and generally it has been upheld and if a bank goes tits up you can get your money back fairly quick.

Want to know what happens to FDIC if there is a real, Mother of God collapse in banks? By law, they can take 99 years to pay you back. It's on the books.

Like the old Italian woman said, “Catch-a 22.”