Who's selling?

In the past couple of weeks, market participants have witnessed extraordinary events. Monetary authorities and regulators have gone to extremes in order to prevent the total collapse in the financial system. However, stock markets continue their landslide. And despite the 20, 30 or 40% negative returns that many indexes already accumulate since the beginning of the year, there seems to be no end in sight.

Usually, market operators see this as a sign that markets are about to bottom. And, generally, households are the last to sell. But in this particular situation that may not be the case. After all the mini crash days we have had this year in worldwide markets. After the ban on short sales and the approval of the US government bailout plan. And in face of what's going on today in Europe where Germany has guaranteed all private bank deposits. After all this. Who's selling the markets to new lows?

I believe the answer is: Hedge Funds. These players are probably unwinding liquid trading positions - stocks and listed equity index futures - in order to cover for losses sustained in illiquid investments - OTC credit derivatives such as the Credit Default Swap market. Lehman's failure ignited a rampant firesale in this particular market populated by professionals and estimated at $60 trillion. That's 50 times larger than the market capitalisation lost in last week's Monday market rout.