Meltup “Abysmal Volume” Summer Approaches, Even As Americans Now Openly Shun Stocks
by ilene - June 15th, 2010 12:13 pm
Meltup "Abysmal Volume" Summer Approaches, Even As Americans Now Openly Shun Stocks
Courtesy of Tyler Durden
As algos now focus exclusively on gaming the EURJPY and other funding currency pairs, the stock market is completely dead and trades purely as a correlation and hedging pair. With under two hours into the trading day, we are already at 40% below average volume: don’t be surprised to see a 5%, 15% or 50% market up move if we drop to below 50% of cumulative.
In other news, the LA Times reports that Americans, for the most part, have now officially said goodbye to stocks. With a broken market such as what is evident every single day, who can blame them. Bernanke has officially failed to lead the lemmings into a risky asset reflation, as primary dealers, HFT algos and mutual funds will need to take profits occasionally, and every time this happens we will see another, ever flashier crash.
The amount Americans have in basic savings accounts at banks and thrifts rose to a record $5.06 trillion at the end of May, a jump of $209 billion since the start of the year.
But even as bond portfolios now hold a record $2.4 trillion, individuals and institutions still sit with $2.8 trillion in money market mutual funds that pay next to nothing. The average annualized fund yield is a barely detectable 0.04%.
The world’s richest people, too, are hoarding cash. You might imagine that they got wealthy by taking risks, not by playing it safe with their money. But they’re playing it safe now: The annual Boston Consulting Group report on the world’s millionaires, issued this week, estimated that those households (there are 11.2 million of them) overall hold 48% of their financial assets in cash accounts, up from 44% in 2007.
We all know where to affix the blame for this state of affairs. In the wake of the world’s worst financial crisis since the Great Depression, and the devastation it wrought on stocks and real estate values, fear has triumphed over greed. For many investors, capital preservation now trumps all else.
Some large portion of the population that was comfortable in 2007 having, say 60% of their money in stocks, 30% in bonds and 10% in cash now has significantly lowered the amount allocated to stocks. Watching the market drop 50% in six months
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DiggHappy High Frequency Trading Day!
by ilene - June 14th, 2010 6:20 pm
Happy High Frequency Trading Day!
Courtesy of Joshua M Brown, The Reformed Broker
Michael Peltz has a mammoth 13-pager on High Frequency Trading in the latest issue ofInstitutional Investor magazine. The article is chock full of important information, including the 25 stocks most played with by high frequency traders (Sprint, Las Vegas Sands, Bank of America…).
It also contains some killer quotes. Here are a couple before I send you over to read the whole thing:
An exchange between the writer and financially-savvy Senator Ted Kaufman:
“We have a 300-pound gorilla in the room, and we’re saying that we’re going to keep it in a cage somewhere,” he told me. “This thing will be 600 pounds.”
“But isn’t part of the problem that there are 300 gorillas?” I asked, referring to the fact that an estimated 200 to 400 firms do high frequency trading.
“Good point,” he replied. “We have all these gorillas, and guess what? We put them in zoos where the people running the zoos don’t have enough information and authority to take care of them.”
Seth Merrin of LiquidNet, a block trading marketplace:
“The institutions are the equivalent of the British army, walking down the battlefield wearing bright red. The high frequency traders are the Americans hiding in the woods in camouflage, picking them off. If the British army hadn’t changed its tactics, they would have lost every subsequent war.”
There are some HFT defenders in the piece, spouting the usual rhetoric about how wonderful their liquidity is (a claim that I believe was invalidated during the Flash Crash as the robots drooped their heads like marionettes with cut strings just when their liquidity was needed most), but these defenders are industry insiders for the most part.
Anyway, get acquainted with the players involved and the terminology – this debate is just beginning.
Source:
Picture credit: Jr. Deputy Accountant
GE Capital, and an Amendment to Exempt Shadow Banks?
by ilene - May 15th, 2010 11:37 am
GE Capital, and an Amendment to Exempt Shadow Banks?
By Mike Konczal, courtesy of New Deal 2.0
GE Capital
People who know me well know that I am obsessed with GE Capital as being one of the key stories of the change in the American economy of the late 20th century, a story I hope to develop more 3 or 4 projects from now. GE Capital was founded in 1932 to finance dealer inventories and consumer purchases. People made things in a factory and bought things from a factory and GE Capital helped provide both a burgeoning middle class and the businesses that served it with sufficient lines of credit.
Starting in the 1960s it began to provide leasing and financial services to other large Fordist-Keynesian style businesses. And then starting in the 1980s during the financial deregulatory wave it expanded rapidly into one of the world’s premiere shadow banks: it was the single largest issuer of commercial paper in the United States before the crisis, with $620 billion in assets at the end of 2007.
Did you ever listen to the Giant Pool of Money epsiodes of This American Life? (You must have.) If you remember it, during the episode you meet rising subprime mortgage star Glen Pizzolorusso, who was an area sales manager at an outfit called WMC mortgage in upstate New York. He made over $1 million dollars a year handling the subprime market and spent like mad on cars, real estate, and impressing celebrities. Here’s his description, from the transcript:
Glen Pizzolorusso: What is that movie? Boiler Room? That’s what it’s like…We lived mortgage. That’s all we did. This deal, that deal. How we gonna get it funded? What’s the problem with this one? That’s all everyone’s talking about…
We rolled up to Marquee at midnight with a line, 500 people deep out front. Walk right up to the door: Give me my table. Sitting next to Tara Reid and a couple of her friends…We ordered 3, 4 bottles of Cristal at $1000 per bottle. You know so you order 3 or 4 bottles of those and they’re walking through the crowd and everyone’s like: Whoa, who’s the cool guys? We were the cool guys.
He then losses it all during the crash and has to move back home. (He has since joined the Tea Party.) Now WMC sounds like a fly-by-night operation in…
Capitalism Without Capital
by ilene - May 13th, 2010 12:02 pm
This is an excellent article by Mike about the causes of the financial meltdown. – Ilene
Capitalism Without Capital
Courtesy of MIKE WHITNEY writing at CounterPunch
Volatility is back and stocks have started zigzagging wildly again. This time the catalyst is Greece, but tomorrow it could be something else. The problem is there’s too much leverage in the system, and that’s generating uncertainty about the true condition of the economy. For a long time, leverage wasn’t an issue, because there was enough liquidity to keep things bobbing along smoothly. But that changed when Lehman Bros. filed for bankruptcy and non-bank funding began to shut down. When the so-called "shadow banking" system crashed, liquidity dried up and the markets went into a nosedive. That’s why Fed Chair Ben Bernanke stepped in and provided short-term loans to under-capitalized financial institutions. Bernanke’s rescue operation revived the system, but it also transferred $1.7 trillion of illiquid assets and non-performing loans onto the Fed’s balance sheet. So the problem really hasn’t been fixed after all; the debts have just been moved from one balance sheet to another.
Last Thursday, troubles in Greece triggered a selloff on all the main indexes. At one point, shares on the Dow plunged 998 points before regaining 600 points by the end of the session. Some of losses were due to High-Frequency Trading (HFT), which is computer-driven program-trading that executes millions of buy and sell orders in the blink of an eye. HFT now accounts for more than 60 percent of all trading activity on the NYSE. Paul Kedrosky explains what happened in greater detail in his article, "The Run on the Shadow Liquidity System". Here’s an excerpt:
"As most will know, liquidity is, like so many things in financial life, something you can choke on as long as you don’t want any….Liquidity is a function of various things working fairly smoothly together, including other investors, market-makers, and, yes, technical algorithms scraping fractions of pennies as things change hands. Together, all these actors create that liquidity that everyone wants, and, for the most part, that everyone takes for granted…..
“Largely unnoticed, however, at least among non-professional investors, the provision of liquidity has changed immensely in recent years. It is more fickle, less predictable, and more prone to disappearing suddenly, like snow sublimating straight to vapor during a spring heat wave. Why? Because traditional providers of liquidity,
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JP Morgan’s Perfect Quarter More Evidence “Game Is Fixed”
by ilene - May 11th, 2010 5:09 pm
Karl Denninger may be calculating the odds of this, coupled with the odds of Goldman Sachs’s results – I’m thinking something in line with the odds of the sudden birth of a new universe. (And if you’re trading the markets, it may feel like that.) – Ilene
JP Morgan’s Perfect Quarter More Evidence “Game Is Fixed”
Courtesy of Larry Doyle at Sense on Cents
First Goldman Sachs. Now JP Morgan.
The shop where I worked from 2000-2006 released a report highlighting the fact that it made money each and every day of the 1st quarter. Thanks again to Matt for bringing this story to my attention. Bloomberg highlights, JP Morgan Traders Match Goldman’s Quarter with No Trading Loss,
JPMorgan Chase & Co.’s traders matched those at Goldman Sachs Group Inc. in making money every day of the first quarter, a first for both companies.
Daily trading revenue averaged $118 million on each of the 64 days in the first quarter, JPMorgan said in a regulatory filing yesterday with the U.S. Securities and Exchange Commission.
JPMorgan’s trading revenue from investment banking, its chief investment office and consumer lending division exceeded $90 million on 39 of those days, or more than half the time, according to the filing. Trading revenue surpassed $180 million on nine days, or 14 percent of the time, the second-largest U.S. bank said.
Believe me, having worked in the industry for 23 years, traders and firms do not make money each and every day. These results are a reflection of easy money provided by the Fed, lessened competition leading to a financial oligopoly in our country, and a variety of programs and mechanisms which are conduits funneling money into the banking system.
While the traders on Wall Street may believe it is their talents (and plenty are truly talented), the system is rigged and the game is fixed. Uncle Sam is the accomplice to the fix in hopes that revenues being generated currently on Wall Street can be utilized to write down the values of loans which are mismarked, have defaulted, or will default.
Is JP Morgan taken aback by these revenues? Publicly, I believe they are. How do we know? Listen to the statement put forth by the bank.
JPMorgan said it doesn’t expect the same trading revenue throughout the year. “The high level of trading and securities gains in the first
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Relief rally as Eurozone liquidity issues fade; solvency and contagion still at issue
by ilene - May 10th, 2010 3:07 pm
Relief rally as Eurozone liquidity issues fade; solvency and contagion still at issue
Courtesy of Edward Harrison at Credit Writedowns
As in 2008, when global financial institutions were under attack, we are now facing a solvency crisis. This time the issue is Eurozone sovereign governments.
Make no bones about it, the EU’s trillion dollar gambit has worked and a melt-up is underway because near-term liquidity issues have been put to rest. But, this is not a liquidity crisis; it is a solvency crisis. And unless meaningful reform is taken in the Eurozone, this crisis will re-appear in due course.
Overnight, the Eurozone put together the European Stabilisation Mechanism programme, a hefty plan to provide fiscal support to any Eurozone government that runs into difficulty. While details are still coming into view, the euro and equity and bond markets have recovered tremendously. Meanwhile credit default swaps have fallen (see Marc Chandler’s pre-market summary here).
But, before we start popping the cork on the champagne, we need to realize that this stabilization mechanism and the developed market (DM) central bank swap lines only resolve liquidity issues. The genesis of this crisis is not liquidity, but solvency.
As I outlined in my last post on Germany (The Soft Depression in Germany and the Rise of Euro Populism), Germany has undergone extensive labour market reforms which Greece and Spain in particular have not. This makes Greek and Spanish labour forces uncompetitive vis-a-vis other countries also locked into the currency union, most notably Germany. The result, with the Euro well above its launch rate of 1.17 to the US Dollar, is international uncompetitiveness. Combined with extremely low interest rates, the result is a gaping current account deficit.
Unless the Eurozone attempts a beggar-thy-neighbour massive devaluation in the Euro, this closes off the export escape hatch for Greece and Spain. Therefore, in order to bring down enormous budget deficits and prevent national bankruptcy, the only option left is internal devaluation – across the board wage and spending cuts.
Ireland, which has faced similar pressures, is embarking on a path of internal devaluation right now to reduce their deficit. But reducing consumption demand at a point when the primary budget deficit is already double-digits still leaves the solvency question open. And Greeks have rioted to show the resistance to those kinds of measures.
My conclusion, therefore,…
More On Yesterday’s Plunge
by ilene - May 7th, 2010 5:38 pm
More On Yesterday’s Plunge
Courtesy of Karl Denninger, The Market Ticker
If you had any doubt about what I have been talking about during this entire ramp job off 666 – that the so-called "bull market" was in fact not much more than a handful of institutions buying shares with free Fed money and passing them between one another hoping to distribute them to you - you should be thoroughly disabused of your skepticism after yesterday.
"Revenge of the algorithms" writ large, basically.
We keep talking about how financial innovation has "helped consumers", "helped businesses" and "made markets more efficient."
Let me put this in nice, large letters for you:
That claim is one big fat LIE.
If you need anything more after yesterday to understand that all these "algos" have done is create systemic risk and permit a handful of very large institutions to siphon off more and more of your money into their pockets like an insane hoover vacuum cleaner on steroids, you need a lobotomy.
The crooners are of course out in force this morning, among them Jeff Immelt:
“This is a point in time when the world needs the U.S. to be a beacon of stability, a beacon of reliability,” Immelt said during an interview at the 92nd Street Y in New York with Norman Pearlstine, chairman of Bloomberg Businessweek. “The world doesn’t need the U.S. in a food fight right now, with everything that’s going on in Europe. We should be the safe harbor.”
But what’s his definition of this? Why, to make sure GE can continue to siphon off more and more money from the productive economy via GE Capital!
“Financial services is a very important industry in this country,” Immelt said. “Goldman Sachs has been a partner to GE for a long time. We trust them, they’ve done great work for us.”
Yep – hinky derivatives deals are great for Goldman, and might be great for GE as well. For the rest of the world that actually produces something? Not so much.
“This point about damning Wall Street isn’t good for the American economy,” Immelt said.
“Some theoreticians that convinced themselves that you can have a great, productive country
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Themis’ Take: May 6, 2010 – The Day That Will Change Market Structure
by ilene - May 7th, 2010 1:07 pm
Courtesy of Tyler Durden
May 6 market commentary from our friends at Themis Trading
May 6, 2010 – The day that will change market structure
Today’s action left us amazed, and we have been warning about this stuff since December 2008. Where do we even start? Yesterday afternoon and evening all the business programming focused on how the markets were in turmoil, and Greece this, and overdue correction that, and fat finger the other thing. They couldn’t even recognize the story, as even the business media doesn’t understand that the markets are a changed structure and beast. The story is not a key-punch error. The story is a failed market structure. The market failed today.
The market melted down and “liquidity providers” quickly pulled all bids. According to today’s Wall Street Journal, high frequency firm, Tradebot, closed down its computer systems completely, as did New Jersey’s own Tradeworx, who was so critical of our silly market structure comments in their SEC comment letter. By the way, if you don’t know who or what Tradebot is, it is the proprietary trading engine that used to be part of the BATS exchange. In fact the reason BATS was rolled out as an exchange to begin with was to lower costs and facilitate trades for Tradebot (Tradebot’s 1251 NW Briarcliff Pkwy Kansas City address is next door to BATS’s North Mulberry Drive address fyi). In the WSJ article Mr. Cummings said his Tradebot system was designed to stop trading when the market becomes too volatile, because he “doesn’t want to compound the problem.” Too bad he doesn’t understand that that was and is the problem. To make matters worse, while some high frequency firms shut down yesterday and pulled their bids, as we warned they would do for over a year and a half, other high frequency firms turned from being liquidity providers to liquidity demanders, as they turned around and indiscriminately hit bids like Randolph and Mortimer Duke.
We are just plain outraged, and think every investor and market participant in the USA should share this outrage. They were sold a lie. How many times over the last year have we all heard that HFT liquidity was a blessing that lowered costs and helped investors, and that it would be there in stressful markets just like the market makers and specialists they replaced were there?…
The Day The Market Almost Died (Courtesy Of High Frequency Trading)
by ilene - May 7th, 2010 12:09 am
The Day The Market Almost Died (Courtesy Of High Frequency Trading)
Courtesy of Tyler Durden
A year ago, before anyone aside from a hundred or so people had ever heard the words High Frequency Trading, Flash orders, Predatory algorithms, Sigma X, Sonar, Market topology, Liquidity providers, Supplementary Liquidity Providers, and many variations on these, Zero Hedge embarked upon a path to warn and hopefully prevent a full-blown market meltdown. On April 10, 2009, in a piece titled "The Incredibly Shrinking Market Liquidity, Or The Black Swan Of Black Swans" we cautioned "what happens in a world where the very core of the capital markets system is gradually deleveraging to a point where maintaining a liquid and orderly market becomes impossible: large swings on low volume, massive bid-offer spreads, huge trading costs, inability to clear and numerous failed trades. When the quant deleveraging finally catches up with the market, the consequences will likely be unprecedented, with dramatic dislocations leading the market both higher and lower on record volatility."
Today, after over a year of seemingly ceaseless heckling and jeering by numerous self-proclaimed experts and industry lobbyists, we are vindicated. We enjoy being heckled – we got a lot of it when we started discussing Goldman Sachs in early 2009. Look where that ended. Today, we have reached an apex in our quest to prevent the HFT "Black Monday" juggernaut, as absent the last minute intervention of still unknown powers, the market, for all intents and purposes, broke. Liquidity disappeared. What happened today was no fat finger, it was no panic selling by one major account: it was simply the impact of everyone in the HFT community going from port to starboard on the boat, at precisely the same time. And in doing so, these very actors, who in over a year have been complaining they are unfairly targeted because all they do is "provide liquidity", did anything but what they claim is their sworn duty. In fact, as Dennis Dick shows (see below) they were aggressive takers of liquidity at the peak of the meltdown, exacerbating the Dow drop as it slid 1000 points intraday.
It is time for the SEC to do its job and not only ban flash trading as it said it would almost a year ago, but get rid of all the predatory aspects of high frequency trading, which are…
Why Can’t We Pop The Bubbles
by ilene - February 4th, 2010 5:16 pm
Why Can’t We Pop The Bubbles
Courtesy of Tom Lindmark at But Then What
Felix Salmon has a very smart post up today about liquidity and its role in creating bubbles. He quotes from an interview with Roy Smith a former Goldman banker:
There is now about $140 trillion in market capitalization in the word’s financial markets looking for investments. That money can now move around very easily. But even if a relatively small portion of that money goes after something — say, mortgages — it can quickly cause a bubble and a crisis. So all this good work we have done in the past few years to make our capital markets more efficient and open has also made them very hazardous, and we haven’t done anything yet to address that problem.
Here’s Smith’s verdict on the history of Wall Street:
The net result has been a positive for users of capital markets, which can be accessed more cheaply than ever before. But the success of the market has resulted in a vast accumulation of capital in tradable form that is now capable of wrecking whole economies. In 2000 and 2007, financial bubbles did great damage, and the monster is still out there.
Felix sees financial innovation as having been one of the drivers of this liquidity glut. I’m not sure I totally agree with him but I wouldn’t totally discount his thesis either. I tend to think that leverage and the willingness to abusively employ it probably plays a big part in magnifying the amount of available liquidity.
Nevertheless, it’s an intriguing idea and, coincidentally, Joe Weisenthal has two posts up today (here and here) that seem to validate the concept.
He points out that several of the central banks that have been recently raising rates have seen their efforts to head off domestic asset bubbles negated by str0ng inflows. Joe sums it up this way:
Let’s touch again on Morgan Stanley’s note from this morning about why the Reserve Bank of Australia and the Norges Bank (Norway) have prematurely stopped tightening.
Yes, part of it is fresh economic jitters in
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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