I can calculate the movement of the stars, but not the madness of men. -Sir Isaac Newton

There are five zombie banks that control between 20%-40% of NYSE daily volume. It started earlier this year with Citigroup and Bank of America. They equaled 10% of NYSE total daily volume. Now the trend in High Frequency Trading (HFT) is on the rise. This begs several questions. If this is a healthy bull market, why are just five stocks running the exchange? Is it possible the bailout money is being funneled into just a few stocks? To get a really good answer we’re going to visit London England in the year 1720. Let’s explore how history is repeating itself with the new South Sea Bubble. The goal by the end of this article is to draw connections between the greatest financial bubble of all time and what’s happening today. Hopefully it will be so obvious you’ll feel sick.

One Chart to Rule Them All

There’s actually 315 years of stock market data available. People think DOW 4,000 is impossible, but look at this 315 year chart and how juicy DOW 1,000 is.

Here’s the theory. The country has nearly run out of credit forming the end of a Grand Supercycle. The money issue is obvious with state budget problems. So what is the most expedient way to generate credit in a corrupt system? A Ponzi scheme. Make it really big and complicated so no one can figure it out in time.

Here are some of the basics. The global financial markets, which are primarily run by New York banks, are being propped up by the Federal Reserve selling Treasuries. The money that is placed in Treasuries is then built out with leverage and funneled into the most wounded names in the banking system. These names get pumped up to create a cash machine that is used to cover debts of the United States of America. This is just a basic model, but understanding how this works will open windows into our corrupt financial system. A system designed to tax and steal without our knowledge.

Look at the stocks moving the market:

Volume continues to be concentrated in just a few names. Today, in a universe of over 5,000 stocks in the U.S. equity market, only 4 stocks contributed 20% of the volume.

Citigroup (C), Bank of America (BAC), Fannie Mae (FNM) and Freddie Mac (FRE) traded a total of 2.041 billion shares. Overall volume in the U.S equity market was only 10 billion shares. -Joseph Saluzzi

There is some variation to which names lead volume for the week. The PPT cash machine cycles through several names during the month. Read Themis Trading’s white paper, Toxic Equity Trading Order Flow on Wall Street: The Real Force Behind the Explosion in Volume and Volatility. This gives a concise explanation for current market mechanics. Here’s a section most of us don’t think about:

High frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don’t even know it.

What HFT Looks Like

The main HFT stocks are C ,BAC, FNM, FRE, AIG and CIT. During Fed POMO days, where they’ve recently been injecting $30B into the market on a weekly basis, these names will cycle through large cash inflows. This is the new PPT vehicle. Check out the chart of AIG during a heavy week where $197B in Treasuries were on auction.

Note the blue shaded area on the chart. This is classic HFT or program trading where a stock has shares churned within a very small range. There is liquidity rebates where dealers like Goldman Sachs earn a quarter penny on every share traded. Everyone gaming the stock makes out. Shareholders looking for organic growth get chopped to pieces. It’s a giant cash machine and the stock goes nowhere, much like the S&P500 intraday.

Then something happens… The PPT shows up. This move in AIG is a classic PPT push where a massive amount of capital is pumped in during the last hour of the market. HFT algorithms can see it coming and get out of the way. Here’s part of the reason why these moves come at the end of the day:

The directives of the FOMC are carried out in the context of two week maintenance periods. The Manager of the System Open Market Account is charged with achieving those objectives via the daily operations.