US equities were gripped by panic selling as the Dow plunged almost 1,000 points driven by a cascade of 100 share high frequency program trading, estimated to have been about 80% of volume. Gold rocketed higher to $1,210.
The stock exchange circuit breakers do not effectively apply after 2:30 PM NY time unless the market declines over 20% and they close the exchange for the day.
A bit of a detail perhaps, but it serves to enhance the convenient artificiality of today’s market break.
This is highly reminiscent of the 1987 crash driven by a flawed market structure based on automated trading and bad theories.
The entire stock market rally which we have seen this year off the February lows resembles a low volume Ponzi scheme, and formed a huge air pocket under prices.
This US equity rally was driven by technically oriented buying from the Banks and the hedge funds. There was and still is a lack of legitimate institutional buying at these price levels. This was machine driven speculation enabled by the lack of reform in a system riddled with corruption, from the bottom to the top.
This is yet another indication that the US regulatory and market oversight organizations, especially the SEC and CFTC, continue to be disconnected from and remarkably ineffective in their responsibilities in guarding the public against gross market abuse, price manipulation, and insiders playing games with cheap money supplied by the NY Fed.
And as you might expect, the anchors on financial television are trying to excuse and blame the sell off on a ‘fat finger’ order that caused Proctor and Gamble to drop 20 points in 45 seconds. Or a typist inputting an order to sell 16 million e-mini SP futures, and typing "B" instead of "M." Oops. Crashed the free world.
"Ordinarily, the financial risk in a market, and hence the risk to the economy at large, is limited because the assets traded are finite. There are only so many houses, mortgages, shares of stock, bushels of corn, [bars of silver], or barrels of oil in which to invest.
But a synthetic instrument has no real assets. It is simply a bet on the performance
It has been a while since we revisited Goldman’s domination of NYSE program trading courtesy of the SLP [supplemental liquidity providers]. For the past two months we have been waiting for additional information from the NYSE on what other firms are currently SLP vendors to the exchange. By the lack of any data from the NYSE we can only assume that Goldman is still the defacto monopolist in SLP, and in essence the primary privileged DMM on the NYSE. One wonders with liquidity "back to normal" when the NYSE, SEC and Goldman will agree to disassemble the SLP program so that the market can go back to its efficient old-school ways (this is rhetorical).
As the data suggests, Goldman Sachs & Co. now has a staggering 22-to-1 ratio of principal to agency transactions: in the last week Goldman traded 662 million shares in principal capacity (instead of blaming all of this on Goldman’s prop trading cash machine, we would love to be able to break down how much of this is attributable to SLP, but a reborn NYSE which believes in nothing but transparency will simply not provide that data). Taking into account GSEC adds another measly 10 million agency shares doesn’t change the big picture that out of the top 10 NYSE firms, Goldman trades the third lowest amount on an agency basis. Goldman’s casino is now not even pretending to trade on behalf of clients, as all of its money is made on FICC spreads and volumes (aka trading monopoly).
[click on chart to enlarge]
Maybe one of these days Goldman Sachs can do a philanthropic, non-profit seminar on how to ramp futures every single day in the 11pm-3am block. That, or how to use taxpayer money to pay for a trunk line straight into the Marriner Eccles buildling.
Is it the private client? Not really — stock funds actually had net outflows of $1.33 billion last week, while bond funds enjoyed an $8.2 billion net inflow.
Is it corporate insiders? Well, heck no — Robert Toll (CEO of Toll Brothers) just disclosed that he sold a total 1.6 million shares of his company’s stock yesterday.
Is it buybacks? Not at all — in fact, S&P 500 companies bought back a mere $24.4 billion on stock repurchases in 2Q, down 72% from a year ago and the lowest in recorded history, according to Howard Silverblatt of Standard & Poor’s.
So who’s doing the buying? Very likely it is still a combination of program trading, short coverings and portfolio managers desperately trying to make up for last year’s epic losses.
The permabid is the new riddle, wrapped in a mystery, inside an HFT market enema.
In case you’re wondering, does Robert Toll know something? Zero Hedge informs us on that too. Apparently, he’s out of the JP Morgan circle and is going to feel really silly if the stock hits $29 next year.
We’ve been following the HFT story since Zero Hedge first shed light on this unfair practice and noted that the market is increasingly dominated by program trading between investment banks. The article below from Money Morning shows that this issue has finally become well-known and market participants are seeking solutions.
Consider Phil’s example from Wednesday’s market update:
"The lack of a retrace was getting downright unhealthy. As I often complain – rapid rises in the market, especially when accomplished through what we call “stick saves” create virtual air pockets in stock prices and make investing more and more dangerous as we move up. A simple example I use for members is to imagine the stock market has just 100 total shares. In March, those 100 shares were worth $1,000 and there was $1,000 sitting on the sidelines in cash. Shares are bought and sold every day but it doesn’t really matter as they are never all bought or all sold. The bottom line is that perhaps 25% of the cash actually moved off the sidelines but the market has gained 50% since March. Where does that leave us? Well that means we now have 100 shares of stock “worth” $1,500 but now there is only $750 on the sidelines to buy it.
That makes it exponentially harder to move the market higher as the values grow as it takes more and more sideline capital to grow the market each day… In fact, the entire expansion of “value” of the market is an illusion as it WAS possible in March to exchange 100% of the stocks for the cash on the sidelines for $1,000 (assuming everyone on the sidelines would make the trade). Now that we have USED 25% of the sideline money to inflate the apparent value of the stocks, we have a serious problem because, even if EVERY SINGLE DOLLAR of sideline capital were exchanged for stocks in a panic sale, there is only enough to pay out 50% of the market’s current ‘value.’"
So, are HFT programs being used to increase the price of stocks on a daily basis? How? If, for example, GS keeps the bid artificially high and moving higher in its program trading, stock prices will rise due to GS’s volume dominance. Stock prices keep rising, but not because each…
Paul Wilmott is a legend in quant circles: his website Wilmott.com, which Zero Hedge highly recommends to all readers for an in depth analysis on all things that are below the surface of the market, is one of the most popular resources dealing with the constantly changing topology of our increasingly more complex equity capital markets. Simply said, his opinion on matters in program and high-frequency trading is second to none.
Which is why we read his latest Op-Ed in the New York Times today, Hurrying Into The Next Panic, very carefully. His piece is a stunner – in summary, and in agreement with what Hedge discussed at length many months ago (we suggest readers familiarize themselves with this ZH piece as it is the one that started it all, and also explains partially our fascination with VWAP), Paul sees HFT as a force that is tantamount to what index arb and "dynamic portfolio insurance" was in the crash of 1987.
Thus the problem with the sudden popularity of high-frequency trading is that it may increasingly destabilize the market. Hedge funds won’t necessarily care whether the increased volatility causes stocks to rise or fall, as long as they can get in and out quickly with a profit. But the rest of the economy will care.
This argument goes to the real heart of the problem with HFT – the monopolization of liquidity provisioning, and the complicit nature of both exchanges and specific broker/dealers who are willing to usurp this "liquidity=volume" fallacy in exchange for perpetuating the $20+ billion revenue stream spread among a minute number of market participants. As such, Zero Hedge increasingly believes that what Goldman does on the NYSE (for example) is not so much an SEC issue (ignore the fact that the SEC is about 10 years behind the curve on this topic) but is in actuality an anti-trust concern.
Here is Zero Hedge’s 2 cents: Christine Varney, forget about Google for one day and instead focus on what is easily the scariest, stealthiest, and potentially most expensive anti-trust issue in American society (and history) – that of HFT’s increasingly monopolizing capital markets.
All this other talk about Flash frontrunning is for all
Some short term indicators are flashing that we are nearing at least a short term top. There is also indication of distribution of stock here by insiders to the public, which is also an indication of a possible top. This judgement is based on many charts and indicators not shown here.
Having said that, our discipline will not prompt us to do any seriously non-hedged shorting until the ‘trendline’ Key Pivot is violated at least on a daily close, and then confirmed by a move lower.
The market is rising on thin volumes, and unless the sellers come back in, it can continue to drift higher on program trading and short squeezes.
We are within two weeks of a potential ‘crash window’ where a final top will be made, and a selloff with a significant leg lower will be seen into the end of year. The window is a bit wide for now, a six week period starting around August 17th. We will hope to tighten that up by the end of July.
This is only a probability, not a hard forecast. But it has us edgy to be on the long side, even in precious metals miners, without hedging a general market decline. The Cashflow in the market is looking a bit stretched. We may have to wait until later in earnings season for this to shake out.
In sum, the markets seem ‘precarious’ and unstable to us, but not enough to jump in front of the market to the bear side yet.
As an aside, we are seeing quite an increase in ‘screwy fills’ on the bid ask level II where fills on the retail side seem to be made ‘out of bounds’ of the usual bid/ask action.
We do not use market orders normally and would not suggest them here for those that do. The market makers are shaving fills and front running perhaps although that is harder to spot except on the thinly traded stocks where other issues may come into play.
But we are seeing far too many fills BELOW our limit bids on some stocks to believe this market is functioning normally.
A paper has been going around that describes a startling new world of high-velocity computerized trading that causes volume and volatility to soar and costs ordinary investors billions of dollars.
The paper, Toxic Equity Trading On Wall Street, appears to have been published late last year by Sal Arnuk and Joseph Saluzzi from a firm called Themis Trading. (One word of caution: We have not yet verified a single assertion made in the paper, and we had not heard of Themis Trading. We would be grateful if those of you with insight into this would help us understand the real facts here.)
The paper is embedded below (you can also download it at Themis’s web site). Here, in brief, is the world it describes:
Many trading orders these days are executed by computers. Like human traders, the computers break big orders into small chunks (say, 100 or 500 shares) and then match them with orders on electronic stock exchanges. The reason the orders are broken into chunks is so they won’t move the market too much. Stock trading is relatively illiquid, and big orders can drive the price of a stock sharply up or down. Since the dawn of Wall Street time, clever traders have tried to hide the amount of stock they ultimately want to buy or sell to avoid having their own orders move the market sharply against them.
In recent years, such "algorithmic" electronic trading execution has grown in popularity, and a number of electronic trading strategies have sprung up to exploit it.
In one of these strategies, called "liquidity rebate trading," a program analyzes the incoming order flow on an electronic exchange to try to spot a big institutional order that is just hitting the market (apparently this is relatively easy to do). The program then front-runs the order by modestly outbidding the institution for the stock and then turning around and selling it to the institution at a higher price than the institution would have otherwise paid.
Front-running is an age-old cheating technique: A trading firm gets a big order from a client and, before it executes it, buys some of the same stock for itself. Front-running is, in fact, what many Wall Street insiders thought Bernie Madoff was doing before they discovered he…
This Is Outrageous
The Land of the Setting Sun
Buddy, Can You Spare $5 Trillion?
There is no doubt that the US is in financial trouble. Those talking of a strong recovery are just not dealing with reality. But the US is in better shape than a lot of countries. This week, we begin by looking at Japan. I have written for years about how large their debt-to-GDP ratio is, yet they keep on issuing more debt and seemingly getting away with it. But now, several factors are conspiring to create real problems for the Land of the Rising Sun. They may soon run into a very serious-sized wall. And it is not just Japan. Where will the world find $5 trillion to finance government debt? We look at some very worrisome graphs. Those in the US who think that what happens in the rest of the world doesn’t matter just don’t get it. There is a lot to cover in what will be a very interesting letter. I suggest removing sharp objects or pouring yourself a nice adult beverage.
This Is Outrageous
But first, I want to direct the attention of those in the US finance industry to a white paper written by Themis Trading, called "Toxic Equity Trading Order Flow on Wall Street." Basically, they outline why volume and volatility have jumped so much since 2007; and it’s not due to the credit crisis. They estimate that 70% of the volume in today’s markets is from high-frequency program trading. They outline how large brokers and funds can buy and sell a stock for the same price and still make 0.5 cents. Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds.
Back-up: This week’s NYSE Program Trading report was very odd: not only because program trading hit 48.6% of all NYSE trading, a record high at least since the NYSE keep tabs of this data, and a data point which in itself was startling enough to cause some serious red flags as I jaunt from village to village in what little is left of Europe’s bison country, but what was shocking was the disappearance of the #1 mainstay of complete trading domination (i.e., Goldman Sachs) from not just the aforementioned #1 spot, but the entire complete list. In other words: Goldman went from 1st to N/A in one week.
While most in the United States were celebrating the Fourth of July holiday, a Russian immigrant living in New Jersey was being held on federal charges of stealing secret computer trading codes from a major New York-based financial institution. Authorities did not identify the firm, but sources say that institution is none other than Goldman Sachs.
The charges, if proven, are significant because the codes that the accused, Sergey Aleynikov, tried to steal are the secret sauce to Goldman’s automated stock and commodities trading business. Federal authorities contend the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major financial institution generate millions of dollars in profits each year.
Oh this is bad for Goldman if true.
It’s even worse for the NYSE however, as Reuters goes on to explain:
The case against Aleynikov may explain why the New York Stock Exchange moved quickly last week to stop reporting program stock trading for its most active firms. Goldman was often at the top of the chart — far ahead of its competitors. It’s possible Goldman had asked
Major developing story: Matt Goldstein over at Reuters may have just broken a story that could spell doom if not [for] the entire Goldman Sachs program trading group, then at least those who deal with "low latency (microseconds) event-driven market data processing, strategy, and order submissions." Visions of swirling, gray storm clouds over Goldman’s SLP and hi-fi traders begin to form.
Back-up: This week’s NYSE Program Trading report was very odd: not only because program trading hit 48.6% of all NYSE trading, a record high at least since the NYSE has kept tabs on this data, and a datapoint which in itself was startling enough to cause some serious red flags as I jaunt from village to village in what little is left of Europe’s bison country, but what was shocking was the disappearance of the #1 mainstay of complete trading domination (i.e., Goldman Sachs) from not just the aforementioned #1 spot, but the entire complete list. In other words: Goldman went from 1st to N/A in one week.
Even more odd, this "disappearance" comes hot on the heels of what Zero Hedge reported could be potentially a major change to the way the NYSE provides its weekly program trading report. Of course, Ray over at the NYSE immediately replied to Zero Hedge that all was going to be same as always … Odd, maybe he meant that all is back to normal except the reporting of Goldman’s trades. Either way, it might very well be time for proactive readers to again contact the two employees publicly disclosed by the NYSE as lead-contacts on the issue. Readers will recall that it was these same two who were previously steadfastly assuring anyone who would listen that there would be no change at all in data reporting.
Robert Airo, Senior Vice President, NYSE Euronext at (212) 656-5663 or AleksandraRadakovic, Vice President, NYSE Regulation at (212) 656-4144
Alas, the just released weekly data proves that either theirs was a material misrepresentation of facts, or Goldman simply suddenly decided to stop transacting with the
While Ben Bernanke will never agree that global economic growth has ground to a halt as a result of his monetary policies, a phenomenon which in the past year has been dubbed "secular stagnation" by the very serious weathermen (and will certainly never admit the reason for such stagnation), with every passing month one thing becomes clear: there can be no growth and certainly no prosperity for the broader population with a $200 trillion (and rising at over ...
Those men who wrote our Constitution made it perfectly intelligible to anyone who cared to read it. They also left some flexibility in its articles to ensure that as time passed and circumstances changed the document would remain viable as the indispensable protector of the republic they created and of the liberty of citizens who delegated a limited amount of their sovereign power to the national government through its provisions. And after a long and often angry ratification debate, the first congress ad...
The tug of war between the bulls and bears has created an unusual situation this year, a historically tight trading range! The chart below reflects that the Dow Jones has traded within a 6.68% high to low trading range this year. That is the 4th tightest trading range through May, in the past 115 years.
CLICK ON CHART TO ENLARGE
The inset table to the right looks at future performance of the Dow following narrow trading ranges through May. As you can see, most of the time the market has ended the year to the upside. Will it be different this time?
Wednesday’s action was almost a 180 degree turn from Tuesday’s with the S&P 500 up 0.92% and the NASDAQ 1.47%. Sone vague belief in (yet another) resolution in Greece seemed to be the catalyst. Greek Prime Minister Alexis Tsipras said on Wednesday the negotiations are on the “final stretch” towards a positive deal, Reuters reported. Later in the day, German Finance Minister Wolfgang Schaeuble said there was not much progress in the Greek debt talks and he was surprised by the upbeat tone from some Greek government officials. Athens must make a 300 million euro payment to the International Monetary Fund on June 5, ahead of several other payments due to the IMF later in the month, for a total of 1.6 billion euros.
We’ll see if yesterday’s move was the head fake or today’s was shortly.
Early last week, stocks broke out, with the S&P 500 setting a new high with blue skies overhead. But then the market basically flat-lined for the rest of the week as bulls just couldn’t gather the fuel and conviction to take prices higher. In fact, the technical picture now has turned a bit defensive, at least for the short term, thus joining what has been a neutral-to-defensive tilt to our fundamentals-based Outlook rankings.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the t...
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Understanding the new normal of a business model is key to the success of any company. The managment of companies need to adapt to the changing demand, but first they must recognize what changes are taking place. Big Pharma's business model is changing rapidly, and much like the airline industry, there will be but a handful of pharma companies left at the end of this path.
Most Big Pharma companies have traditionally done everything from research and development (R&D) through to commercialisation themselves. Research was proprietary, and diseases were cherry picked on the back of academic research that was done using NIH grants. This was in the heyday of research, where multiple companies had drugs for the same target (Mevocor, Zocor, Crestor, Lipitor), and could reap the rewards on multiple scales. However, in the c...
Bitcoin, the virtual digital currency, has been called the future of banking, a dangerous fad, and almost everything in between, but we're finally about to get some solid data to help settle the debate.
On Monday, the Nasdaq (NDAQ) stock exchange said it would ...
Chris Kimble likes the idea of shorting the US dollar if it bounces higher. Phil's likes the dollar better long here. These views are not inconsistent, actually, the dollar could bounce and drop again. We'll be watching.
Phil writes: If the Fed begins to tighten OR if Greece defaults OR if China begins to fall apart OR if Japan begins to unwind, then the Dollar could move 10% higher. Without any of those things happening – you still have the Fed pursuing a relatively stronger currency policy than the rest of the G8. So, if anything, I think the pressure should be up, not down.
UNLESS that 95 line does ultimately fail (as opposed to this being bullish consolidation at the prior breakout point), then I'd prefer to sell the UUP Jan $25 puts for $0.85 and buy the Sept $24 call...
Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself.
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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