I actually think the volatility were seeing now is a great thing as the market is processing lots of information as it rolls in and as consequence prices adjust. We often reading about the high level of volatility were seeing these days and how bad it is.

Jumping at a rumor is still “processing information”, some rumors start as overheard conversation putting a few pieces together, others are just fanciful inventions, others are deliberate market manipulation. The US government seems to have stopped bothering to hide their “Plunge Protection Team” who happily manipulate markets with legal sanction, apparently for the good of all of us. We have seen the market cap of BHP swing by 40% twice in the last 12 months. Could anyone possibly believe that the true value of a massive company like BHP is actually changing at this rate?

When it comes down to it, there is no way to actually prevent either insider trading, or market manipulation, or large numbers of uninformed people moving in herd formation. We are better off admitting this fact, and looking for ways to move forward rather than living a lie and inventing a well supervised market has never existed, and never will exist. Lack of stability has always been a feature in Capitalist markets with documented bubbles and crashes going back centuries. The best we can do is just force companies to reveal as much information as possible, and as regularly as possible so at least the truth gets out there.

On the issue of instability… we use our Capitalist markets as a control system for our economy. The markets make real-world decisions about resource distribution and commodity valuation. There is a massive body of theory (and practice) regarding what makes a good control system, including lots of work on stability. A tennis player waiting to return serve will hop lightly from foot to foot because the slight instability actually speeds up the human mind/body response time. Rally car drivers do a similar thing by tossing the car from side to side as a corner approaches. Nyquist studied both stability criteria and the concept of a Nyquist Pulse, which is the fastest way to change the state of a system that has a limited frequency response (i.e. any system with inertia, and all real-world systems). Thai boxers stamp the floor with their right foot before kicking out with their left foot. You would think that this gives their opponent more time to defend, but actually the kick comes through faster (and harder) — Nyquist did the maths behind this result.

While low levels of instability improve the response time of a control system, high levels of instability tend to rapidly swamp any useful signal into horrible oscillations (usually escalating in size until they reach the physical limits of the system in question).

Economists traditionally don’t bother to study any of this working man’s math, preferring their own lofty theorems (which have been demonstrated ineffective by much better than the likes of myself). A basic financial system essentially boils down to a pure integral controller (pretty much guaranteed to be unstable). A financial system with tax and interest rates is more like an integral controller with a damping factor. On top of that, the whole thing is nonlinear and has a spectrum of time constants. Needless to say, the traditional economic theorems feel a lot safer than sailing out into those waters.

Economists have also seemingly become the official keepers of the chicken giblets when it comes to convincing the public that the economy is on the right track and in good hands. God knows we can’t trust physicists, because physicists gave us the atom bomb, and nobody likes atom bombs. Conveniently, while economists may be fuzzy on a lot of concepts, they have a very sharp understanding of the idea of being bought — an area of study where the scientists are still catching up. Best not to see any insider trading, until it becomes so obvious that a slap on the wrist and seriously stern words are required. Then we can all rest easy.

When do you think “instability” isn’t good if you consider that the stock market say is an aggregated view on future cash flows.

The point you make is perfectly valid – and trivial at the same time. Unless you want to try to imagine circumstances in which instability might not be such a good thing, we’re just going through our paces here.

No doubt there are times it can become a threat to market stability and integrity (like long selling).

Funny you mention instability………. as I have been thinking about this.

Why is stability such a adverse thing though? (not suggesting you see it that way) “Instability” is actually a good thing in my mind as it means the discounting function of the market is working.

I actually think the volatility we’re seeing now is a great thing as the market is processing lots of information as it rolls in and as consequence prices adjust. We often reading about the high level of volatility we’re seeing these days and how bad it is.

However people are also failing to see that there is an enormous amount of new and significant information hitting the market requiring digestion so the ” instability” is actually a good thing in terms of allowing the adjustment process do its thing.

Japan tried to conceal this sort of thing all through the 90′s and only prolonged their agony and possibly permanently damaged their economy.

This piece was written by someone else. Though I agree with it, I would have written it differently. Short selling – like long selling (ie buying) is generally a healthy thing. It’s called a market. No doubt there are times it can become a threat to market stability and integrity (like long selling). Anyway the guy who wrote the piece wrote in that breathless style that is becoming more and more tediously the norm in Crikey. But I was referring to the guts of the article, and not endorsing its every mannerism.

But why this:

Its more dangerous to market integrity than the activities of hedge funds and short sellers.

You actually think that short selling is a problem? Were you saying that in the 20 year bull market when short sellers had their heads handed to them with a result that their shorts caused the market to move artificially higher.

You understand that a large portion of short selling is done through trade pairing which actually provides a great deal of liquidity to the market than it would otherwise. Trade pairing is relative value trading where say you sell a bank and buy a resource company or buy say one bank and sell another with a view that the spread will move profitabilly.

There is absolutely no integrity issues with this type of trading.

Ask yourself this question. Every trade has a buyer and a seller. Why do you assume the seller (the short) has an advantage over the buyer (the long)?