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Jim’s Mailbox – January 5, 2013

by Jim Sinclair

Dear CIGAs,

Markets are from day to day only exercises in human behavior. The gold market is a supreme exercise in how even a professional public works.

Last week someone yelled, “Fire in Gold’s theater,” and then in the middle of the stampede, someone looked back saying, “There is no fire.” His words were drowned out in the din of the panic to all get out through two little doors. All the big high frequency trading computers were ablaze with the cry of “Front run the sellers in stampede, front run the sellers in stampede.” The major HFTs known as the Squid was reported to have screamed, “Screw it that this is an illegal act, front run the sellers,” (Front running is a criminal act by someone with a defined advantage from or on the floor, in or on the computer trading system acting in front of a legitimate buy or legitimate sell order for profit as the doer of the illegal act. The intent of front running is to force the legitimate buyer or seller to pay more on the buy and get less on the sell. Front running makes no investment decision, but only in micro seconds sets up a trade to block the buyer from buying or the seller from selling. The mechanical premise is that the legitimate investor “muppet” will execute a buy or sell that then is offered to them at a slightly higher for the buy or lower price for the sale thereby making profit for the HFT. The thesis within the algorithm is that the stupid “muppet” will pay a few cents more or sell it a few cents cheaper because there now is a bid or offer made by the high frequency trading machine in the volume that the legitimate order desires).

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