News That Has Gone Very Quiet Very Quickly

In no particular order...

H1N1 swine flu
Now the reports say WHO exaggerated the threat, influenced by the pharmaceutical industry. Oh really? What a surprise.

Global 'warming' and Climategate
The Gores are splitting, and CBS blames George W. Bush.

Panty-bomber on Christmas Eve last year and terrorists from Yemen (and US military's involvement in that country)
CIA later admitted he was allowed to board the plane under CIA's order. No matter. No one paid attention to that part. All we got out of this shady affair is the pornographic total body scan, thanks in part to the peddling by Michael Chertoff, former Homeland Security chief.

Greece sovereign debt crisis
While Greece decided to sell off national assets to pay the bankers, evil 'speculators' have moved on to the next target, Spain. Italy next? Or France next? I guess they'll need a break before attacking a major country. Maybe take a detour in Hungary?

Heath care insurance "reform" bill actually passed and signed into law
Remember that one, which will force you to purchase insurance you don't want under the threat of fines because it is your right? ('Newspeak' at its best.) Doctors sure seem to remember that well, as an increasing number of them will be calling it quits. Canadians are finding out that the government-mandated health care is not really 'free' of charge. Duh. (Why do they think Newfoundland's minister came to the US for his heart surgery?)

Times Square non-bomber (if you can call that a bomb, you are scientifically challenged)
The news died off even quicker than the panty bomber. As a reward, Pakistan will be targeted by the Obama administration for "unilateral military action".

Second wave of mortgage default due to ARM reset
I don't think that even compares with the much bigger subprime disaster that's coming, via almost insolvent FHA and Ginnie Mae, both of which are fully backed by the US government (i.e. taxpayers).

Goldman Sachs civil and criminal charges
How can they be blamed for what everyone else was doing? By the way, according to Goldman, today's job number was going to be 700K. I guess they were just following the Obama administration's lead (that Friday's job number would be great). How can they be blamed for following Obama?

Audit the Fed
Senator Sanders blinked and watered down his bill in the last minutes to just a slap on the wrist, if that. He blinked on the day of 'flash crash'. Oh it's just a coincidence, isn't it?

'Flash crash' and (unwanted) attention on high frequency trading
Boy this story disappeared so quick. Nothing to see here (which is very true of the stock market - nothing is supporting it but algo bots working in milliseconds), move right along. Nonetheless, the SEC is implementing a new circuit breaker system starting next week, which I suspect will only benefit the high frequency traders more. (More on this later.)

Euro crisis and $1 trillion bailout plan
Remember this? It was announced on May 10 before the markets in Asia opened. The effect of the announcement lasted about 12 hours for euro. The currency closed at about 1.28 (against USD) on May 10. It closed today at 1.1964, the level last reached in 2006, despite incessant central bank intervention in the last 3 weeks.
.
North Korea's threat to go on all-out attack
I think it made the headline for a day or two. Poor Kim Jong Il, upstaged by the Israeli navy commandos only days later.

This must be the "new normal", in which one crisis every few days makes a peaceful, easy week. We would only panic when we have more than 3 or 4 reported crises per day. If they are not reported by MSM, we don't care, do we?

Move along, nothing to see here.

Tweet

Hedge Fund Advised by Nassim Taleb May Have Triggered a "Black Swan" Moment

with its $7 million bet using S&P500 June put options

Now that's ironic, if it is true. Or was it an experiment?

Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?
(SCOTT PATTERSON And TOM LAURICELLA, 5/10/2010 Wall Street Journal)

"Shortly after 2:15 p.m. Eastern time on Thursday, hedge fund Universa Investments LP placed a big bet in the Chicago options trading pits that stocks would continue their sharp declines.

"On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later.

"The trade by Universa, a hedge fund advised by Nassim Taleb, author of "Black Swan: The Impact of the Highly Improbable," led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank Barclays PLC—to do their own selling to offset some of the risk, according to traders in Chicago.

"Then, as the market fell, those declines are likely to have forced even more "hedging" sales, creating a tsunami of pressure that spread to nearly all parts of the market.

"The tidal wave of selling fed into a market already on edge about the economy in Europe. As the selling spread, a blast of orders appears to have jarred the flow of data going into brokerage firms, such as Barclays Capital, according to people familiar with the matter.

"Exchanges, in turn, were clogged by huge volumes of offers to buy and sell stocks, say traders and exchange executives. Even before some individual stocks collapsed to just a penny a share, data from the NYSE Euronext's electronic Arca exchange started to appear questionable, say traders.

"In the disarray, some huge superfast-trading hedge funds that now provide much of the liquidity for the stock market pulled to the sidelines. The working theory among traders and others involved in the exchange meltdown is that the "Black Swan"-linked fund may have contributed to a "Black Swan" moment, a rare, unforeseen event that can have devastating consequences." [The article continues.]

Algo bots all ran to the same side. How did the market recover so quickly? A different set of algo bots that were hunting the bargains ran to the other side:

"Around 3 p.m., the selling pressure abated. Just as swiftly as the market fell, it recovered ground. One factor behind the swift recovery, traders say, were funds that use computers and formulas to sniff out bargains in the market. These funds swooped in on hundreds of cheap stocks, helping push the market higher."

Forget the quaint idea that the stock market is a price finding mechanism. It's been rendered just a playground for bots.

Tweet

Stock Market Futures Jump on Euro Rescue

I don't think I have ever seen the stock index futures this high. According to Bloomberg as of 3:47 AM EST:

Dow +346.00
S&P 500 +45.80
Nasdaq 100 +75.00

The stock markets around the world are going to celebrate the massive rescue plan of euro, the plan that will backstop, to the tune of nearly $1 trillion, the public and private bad debt in the EU, particularly eurozone. The ECB is going to print money and buying up those bad debts, just like the US Fed has done. European taxpayers are on the hook, so are American and Asian and just about anyone in the world (through IMF), to keep EU governments from defaulting and keep the bankers paid.

In this global celebration, Dow's 1000-point free fall last Thursday will be soon a distant memory. Move along, there's nothing to see here. Just join the crowd and start buying. Anything. High-Frequency Trading bots will make sure you will be given the best price.

Tweet

More on May 6 Market Meltdown: HFT and Dark Pools

Wall Street Journal has some interesting bits of information about the stock market near-meltdown on May 6.

In the May 8 article "Computer Trading Is Eyed",

There were abnormally wild moves in currency tradings, [particularly Japanese yen, which surged more than 2% in a matter of minutes (a huge movement in currencies)], before the turbulance started in the stock market.

The heavy sell order on Procter and Gamble (PG) doesn't look like a "fat finger" - i.e. trading mistake, but it does seem to have caused the indices (it is a Dow and S&P500 component) to drop. It does coincide with the withdrawal of liquidity by high-frequency trading firms (see below).

The high-frequency trading firm Tradebot Systems Inc. dropped out of market making when Dow hit -500 mark. So did other HFT firms, draining the market liquidity that they were supposed to provide.

NYSE, when the plunge started, did halt trading, or slowed it. But that probably caused more damage than good, as sell orders, which were growing extremely heavy by the second, were routed to other electronic exchanges including dark pools like DirectEdge, where there was hardly any liquidity. So the sell orders were met by ever-disappearing, ever-dropping bids.

The article still doesn't say WHO placed the big sell order on PG, and WHO stopped the freefall and HOW.

I should also ask, WHY?

Tweet

High-Frequency Traders Were Short LAST WEEK

CNBC casually mentions that some hedge funds and high-frequency traders were heavily shorting certain stocks LAST WEEK, betting on the imminent decline in the stock market. It reports these funds were doubling down on SHORTS this week.

Well, "decline" was an understatement, wasn't it?

Smart Money Betting More Downside To Come (5/7/2010 CNBC)

"Chatter suggests some hedge funds may have seen this plunge coming and got short last week. So what are they doing now?

"Before we get to that, we first wanted to make sure there was substance behind the chatter.

"And analysis from LocateStock.com seems to confirm that there is, in fact, a great deal of substance.

"LocateStock.com is a company that finds stocks in the marketplace that hedge funds and high frequency traders are looking to short.

And CEO John Tabacco tells us last Thursday the number of requests to locate stocks to short jumped 50% above the normal 60-day average; with top requests listed below:

Most Requested Stocks To Short Last Week
Ambac
Citigroup
Bank of America
MBIA
Frontier Financial
Source: John Tabacco, Locatestock

"So what's the smart money doing now?

"With the market turning negative for the year on Friday, you'd think the smart money would be covering. But they're not.

"”Now, they’re doubling down and shorting more,” says Tabacco, “with financials the most shorted again.”

"You read that right. Despite the sharp declines this week the smart money is getting shorter.

"”Our analytics suggests there’s a big event out there and there could be more downside,” says Tabacco." [Emphasis is mine. The article continues.]

To call them "smart money" annoys me, unless "smart" means "devilishly crooked". Thursday's market near-meltdown may well have been caused by those hedge funds and investment banks using high-frequency trading. They were shorting big LAST WEEK.

This is no trading, not even betting. They go short on stocks or indices, and they CAUSE the breakdown. A guaranteed, huge profit. This is swindle; from the non-HFT institutional traders and investors who (used to) supply real liquidity to the market, and from the general public who invest and trade in the financial markets.

As to the stocks in question, this is how they fared in one week:

Ambac (ABK): $1.51 (April 30) to $1.38 (May 7), 8.6% drop
Citigroup (C): $4.37 to $4.00, 8.5% drop
Bank of America (BAC): $17.83 to $16.18, 9.3% drop
MBIA (MBI): $9.58 to $8.73, 8.9% drop
Frontier Financial (FTBK): $3.57 as of April 30, but the firm declared bankruptcy on May 3. Good luck closing the short trade during bankruptcy, algos.

During the same period,

Dow Jones Industrial: 11,009 to 10,380, 5.7% drop
S&P 500: 1,187 to 1,111, 6.4% drop
Nasdaq: 2,461 to 2,266, 7.9% drop
Russell 2000: 716 to 653, 8.9% drop
Dow Jones US Financials Index: 291 to 270, 7.2% drop

Tech, small/mid cap, and financials were hit hard.

Just about the only thing that not only held but increased in price during the mayhem was gold:

Gold continuous contract: $1,179 to $1,208, 2.5% increase

We the hapless small investors and traders have few choices to protect what is left in our portfolio against these high-frequency trading raiders. Either you join them in shorts and probably get burned when they flip to massively long in a millisecond, or just buy gold and/or gold miners' stocks and sit on it. (This is no investment advice, do your own due diligence.)

Just be aware that paper golds (gold ETFs and ETNs, straight or leveraged) are heavily held by some of the largest institutional investors and speculators (George Soros, John Paulson, to name a few), which means they may not be as safe as they portray themselves to be.

There is actually a third choice: sell out the positions and sit on the pile (big or small) of cash. But then, there is this thing called the government, who wants to grab whatever they can -new taxes, fees - to feed itself. On top of that, it can cause (the central bank attached to the government actually wants to cause) inflation, taking away the purchasing power of the money further.

"Between a rock and a hard place" is another understatement.

Tweet

Dylan Ratigan, Phil Angelides, Jon Najarian on May 6 Market Meltdown

It was NOT because of a "fat finger"... Listen particularly to Jon Najarian, as he explains how the High-Frequency Trading and flash trading work.

Visit msnbc.com for breaking news, world news, and news about the economy

Tweet

US Stock Market Plunge and Snap Back - Algo Bots Gone Crazy or Cyber Terrorism?

(Yes, I have my tinfoil hat on...)

Not that they are mutually exclusive.

First it was a rumor that European banks stopped lending (did they?). Then it was a "fat finger" by a trader. Then it was a "fat finger" by a trader at Citigroup. Then it was NOT a Citigroup trader. Then it turns out that in addition to this alleged fat finger of someone, eight stocks which normally trade with modest volume and are not exactly household names spiked down to one cent or zero during the period when the entire market violently slid and snapped right back up.

CNBC's Bartiromo: 'That is Ridiculous. This Really Sounds Like Market Manipulation to Me' (Jeff Poor, 5/6/2010 Business and Media Institute)

"While everyone is scratching their heads and trying to figure out how the Dow Jones Industrial Average (DJIA) lost nearly 1,000 points before rallying back to lose only 347 points – it appears not to be limited to just one stock.

"On CNBC’s May 6 “Closing Bell,” correspondent Matt Nesto explained that investigators for both the stock exchanges and for Citigroup, the firm that some are pointing fingers at for a so-called trader error, have narrowed it down to a futures index called the E-mini S&P 500.

"“A person familiar with the Citi investigation said one focus of the trading probes were the futures contracts tied to the S&P 500 stock index known as the E-mini S&P 500 futures and in particular that two-minute window in which 16 billion of the futures were sold,” Nesto said. “Again, those sources are telling us that Citigroup’s total E-mini volume for the entire day was only 9 billion, suggesting that the origin of the trades was elsewhere.”

"Nesto named eight stocks that were hit with the supposed computer error/bad trade, if that’s indeed what happened, that went all the way down to zero or one cent, including Exelon (NYSE:EXC), Accenture (NYSE:ACN), CenterPoint Energy (NYSE:CNP), Eagle Material (NYSE:EXP), Genpact Ltd (G), ITC Holdings (NYSE:ITC), Brown & Brown (NYSE:BRO), Casey’s General (NASDAQ:CASY) and Boston Beer (NYSE:SAM)

"... Nesto calling these trades “bogus” drew backlash from the host and CNBC veteran Maria Bartiromo, who said those trades sounded like “market manipulation” to her.

"“ That is ridiculous,” Bartiromo replied. “I mean this really sounds like market manipulation to me. This is outrageous.”" [The article continues.]

Market manipulation? Hello Maria, where have you been all these years?

It was more like a complete breakdown of any order. For more, read Zero Hedge "The Day The Market Almost Died (Courtesy Of High Frequency Trading)".

So here's what happened to these eight stocks between 2:47 and 2:56PM EST today:

2:47 PM EST
ACN: went from $38 to $0.01
CNP: went from $13.15 to zero
ITC: went from $45.90 to $0.01
BRO: went from $18.07 to zero

2:48PM EST
CASY: went from $35.24 to $0.01
SAM: went from $54.32 to $0.01

2:50 PM EST
EXP: went from $29.41 to zero

2:56PM EST
G: went from $15.58 to $0.01

Dow Jones Industrial Average hit the low of the day (9,887) at 2:46PM EST. Nasdaq and S&P 500 hit their lows at the same time as Dow.

I think these are the examples of algo bots gone haywire, but whoever put in the initial bomb of selling 16 billion S&P e-mini futures, which came through CME, wasn't a bot. After the bomb detonated, all the algo bots decided to pile on to one side, in this case sell sell and more sell.

Whoever detonated this e-mini futures bomb must know the high-frequency quant trading programs very well, inside out. And in the last second the switch was turned off, and the market snapped back.

OK, tinfoil hat off.

To make up for the fear and loathing that they caused, they (whoever they are) are busy buying the stock futures so that the market will open high and cheerful tomorrow morning. Right now, Dow futures up 60, Nasdaq futures up 11, S&P futures up 6.5, according to Bloomberg.

Tweet

Dow Plunges almost 1,000 Points, Snaps Back - High-Frequency Quant Trading Horror

It was a free fall when it was happening. I was sure that the market circult braker (on 10% fall) would kick in in a second or two.

Some quant funds must have made a fortune. This is high-frequency algo bots for you piling on the downside, then switching to the upside. In the meantime, the system overload of the exchanges seems to have frozen many discount brokerages that the small retail traders/investors use during this violence, leaving many unable to access the accounts or trading screens.

I am so sure that the Senators discussing the so-called financial "reform" is on top of this high-frequency front-running and the highly disruptive damage it can cause in the financial markets. (NOT.)



Oh BTW, the supposed reason for the plunge was the rumor that European banks stopped lending because there was no liquidity.

The latest rumor is that one trader in a major brokerage had a "fat finger" moment, and put 16B (billion) shares order instead of 16 M (million). Algo bots don't care, and they vigorously exploit the opportunity.

Tweet

Talk of Transaction Tax on Stock Trading Is Back Again

The game is on again. Let's tax those greedy traders! We have to curve this, uh..what is it, High Frequency Trading, whatever that is, but since Wall Street guys are doing it it must be bad. (And incidentally it will dramatically increase the government's tax revenue.) Hard-working Americans win! Right?

The idea has been promoted several times in the past year, as a way to raise tax revenue for the increasingly cash-strapped federal government. This time around, it has a unique twist. The one who's pushing for it is AFL-CIO, the largest federation of labor union in the U.S. and Canada.

AFL-CIO, Dems push new Wall Street tax (Alexander Bolton, 8/30/09, The Hill)

"The nation’s largest labor union and some allied Democrats are pushing a new tax that would hit big investment firms such as Goldman Sachs reaping billions of dollars in profits while the rest of the economy sputters.

"The AFL-CIO, one of the Democratic Party’s most powerful allies, would like to assess a small tax — about a tenth of a percent — on every stock transaction.

"Small and medium-sized investors would hardly notice such a tax, but major trading firms, such as Goldman, which reported $3.44 billion in profits during the second quarter of 2009, may see this as a significant threat to their profits."

Oh really? The writer probably doesn't trade much on his 401K or IRA. Small and medium-sized investors would indeed notice significant increase in transaction cost. Who is he kidding?

Let's look at an example.

You are a small retail investor who watches the market and trades fairly frequently, say 2 times a week. You decide to buy 100 shares of AAPL (that's Apple, Inc.). It will be $16,600 or so at today's price. On top of this amount, you normally pay a commission to your online broker, anything from $0 to $13 per transaction, plus ECN fee. These days, the total transaction cost of online brokerages rarely goes above $15.

Now, AFL-CIO wants to impose 0.1% tax on your transaction. $16,600 times 0.1% equals $16.60. Add that to the normal transaction cost, and you now have to shell out between $16.60 to $31.60 for your purchase. That's a 111% to near-infinite (in case your transaction cost is zero) increase.

Suppose AAPL jumps in price after the announcement of new iPod or tablet notebook, and now it is $190. You decide to sell. Now, 0.1% of $19,000 is $19. Your total cost to sell AAPL is now between $19 and $34.

Without this tax on your transaction, your total cost of buying and selling AAPL is between $0 and $30. With this tax, your total cost will be between $35 and $65, of which this transaction tax is $35.

After one year of trading AAPL twice a week, you will end up paying $1,750 in additional tax, more or less, depending on the stock's price movement. The tax you are not paying at all today, and the money you could be putting to good use elsewhere. Instead, it will go to the government. Whether you make money or lose money, you will have to pay the tax on the transaction.

Now, back to this article:

"“It would have two benefits, raise a lot of revenue and discourage speculative financial activity,” said Thea Lee, policy director at the AFL-CIO.

"“The big disadvantage of most taxes is that they discourage some really productive activity,” she said. “This would discourage numerous financial transactions. People flip their assets several times in an hour or a day. They make money but does it really add to the productive base of the United States?”"

Now, why is it the business of AFL-CIO if people flip their assets several times in an hour or a day? Besides, what does it have to do with High Frequency Trading at all? People who flip their assets several times in an hour or a day are not Goldman Sachs or Citadel. They are more likely to be small, retail investors trying to recover what they have lost in the past year.

High Frequency Trading trades 100 times or more in a second.

So, confusing (intentionally or out of ignorance) the active retail investors and big financial firms that do High Frequency Trading, AFL-CIO, if it has its way, would actually punish the small investors who no doubt include AFL-CIO members whose 401K or pension fund has plummeted.

Back to the article:

"The AFL-CIO and some allied Democrats would like to cut down on the overall level of trading, or at least give the U.S. government a piece of the action, which would likely tamp down trading."

Give the U.S. government a piece of the action?? A-ha. But they already are active, through Working Group on Financial Markets, a.k.a. Plunge Protection Team. Or do they mean that the government should gamble taxpayers money in the stock market against the likes of Goldman Sachs, Morgan Stanley (who's hiring a lot of traders), and numerous hedge funds? Good luck with that.

Cut down on the overall level of trading?? Why don't they just shut down the stock market, then? Soviet Union didn't have a stock market.

Things are getting more hilarious by the day, on all fronts. What's next? That the government will decide the price of any publicly traded stock, as they see "fair" to whatever principle that they want to uphold?

I have a sinking feeling though, that this time around this idiocy will become law under the Obama administration. Unintended consequences that I can think of are numerous: stock market crash because the liquidity, however contrived and artificial, disappears; small investors are crushed, yet again, with their portfolios plunging in value and taxed when they try to get out of the positions; traders big and small desert the publicly traded markets, with big traders moving to dark pools, small traders stopping altogether; lack of transactions causes this proposed tax to collect far less than anticipated, and the government may actually lose money as it has to pay for the new bureaucracy to handle the new tax; the U.S. will lose the global financial center status.

Lastly, what has a trade union got to do with stock trading, you may ask. You've seen the news, I'm sure, but in case, here it is: the most powerful of the Federal Reserve banks, New York Fed, just announced that the president of AFL-CIO New York State branch will be the new chairman of the New York Fed.

New York Fed Names AFL-CIO Leader as Chairman of the Board (8/25/09 Washington Post)

AFL-CIO may be emboldened more than ever, as one of them presides over the most powerful Federal Reserve bank.

Tweet

Danger of Not Having High Frequency Trading

Ever since the likes of New York Times and Forbes Magazine started to yak-yak about High Frequency Trading (as if this were a brand-new innovation just hitting the market), my fear has been that the regulators will come bumbling in and do what they normally do (i.e. something stupid), and pop goes the weasel (i.e. the stock market). I was not alone in that fear.

This from Zero Hedge:

Raymond James On Implications Of Flash Elimination - NYSE Biggest Winner... (7/27/09 Zero Hedge)

"...Although once the debate moves away from Flash to its natural progression into dark pools and ultimately HFT, watch out below: "Any move to restrict high frequency trading could have a significant impact on exchanges’ transaction fees as well as revenue earned from co-location; there is also the chance that efforts to restrict HFT in the equities world could bleed over into other asset classes as well, including futures. We view potential regulatory changes as a net negative for exchanges, but it is far too early to assess the impact of potential regulation on these two issues."

The 2-page Raymond James brief is at Zero Hedge, and here's the link.

Right before the quote that Tyler Durden made in the paragraph above, there is this from the Raymond James brief: "While dark pools represent ~10% of all trading volume currently, HFT volume is estimated to represent ~70% of market trading volumes."

Now you see what I mean by "pop goes the weasel?" Without HFT volume support, the market may indeed revisit March low, and this time it may not stop there. There are posters on Zero Hedge site who recall a "no bid" market during 1987 October market crash.

Tweet