Archive - Oct 21, 2010

Open Letter To The SEC's Worthless Enforcement Division

To Whom It May Concern,

I have a question. Why does the SEC allow high frequency traders/co-location traders/etc., to front run retail orders every day in almost every security? When I say front run, I mean the practice of utilizing sub-penny orders whereby these so called traders step in front of real bids and offers by 1/100th of a penny to get the trade done, knowing there's a bid or offer right behind them. This has happened to me at least fifty times in the last year. It is particularly a problem on illiquid issues in which the sub-penny order that front runs my orders may be the only business done at that level. And so my order just sits there and never gets filled.

Guest Post: China's Naval Ambitions Spur New Regional Strategic Planning

SITUATION: Defense planning efforts in East Asia have been markedly influenced by China's bellicose response to the detention of a Chinese fisherman for ramming a Japanese naval boat in disputed waters.
ANALYSIS: The detention generated vituperative reactions from Beijing, out of character from its traditional policy of quiet insistence on territorial claims while building naval capacity. This episode, in conjunction with China's continuing claim of primacy in the South China Sea as a 'core interest', is encouraging increased discussion among its regional neighbors regarding naval collaboration.

Federal Reserve Balance Sheet Update: Week Of October 20; Foreign MBS Holdings Drop To 3 Year Low

As of October 20, the Fed's balance sheet was $2.3 trillion, of which the $832 billion in Treasury debt was a new all time record. As per the revised TIC data, Japan's latest holdings of $837 billion are about to be trampled by Brian Sack once again. More importantly, in the past week, bank excess reserves declined by $34 billion: total reserves stood at $993 billion, down from $1.026 trillion the week before. This was in addition to the Fed's $11 billion in POMO excess liquidity. Probably most importantly, foreign holdings of agency/MBS debt dropped to a 3 year low, dumping $100 billion agencies in the Fed's custodial account over the past two months.

Goldman Advises Clients To Front Run The Fed Via POMO

After a few months of breaking down what the simplest trade in the world is, that would be frontrunning the Fed for the cheap seats, Zero Hedge is happy to advise our readers that finally Goldman Sachs itself has capitulated and is now indirectly telling its clients to frontrun Ben Bernanke via POMO. No complicated value investor nonsense, no pair trades, no cap structure arbitrage, no hedging, no levered beta plays. Buy ahead of POMO. Sell. Rinse. Repeat.

Reading Between The Lines Of Netflix' Ugly Earnings Report - An AOL Type Accounting Gimmick In The Making?

Yesterday Netflix reported a quarter which missed EPS, and provided a guidance that was essentially below the street. Yet for some reason the stock shot up 10% on what was perceived to be a dramatic pick up in subscribers and a very low Subscriber Acquisition Cost. We wonder if all those computers who bid up the stock with impunity, lifting all offers on the way up, were aware that in fact the subscriber metrics were a major disappointment. To wit from Bank of America: "without a dramatic lift in free subs as percent of total (from 2.8% in 2Q and 2.5% in 3Q09 to 6.3% in 4Q), Netflix would not have met Street expectations, and paying subscribers of 15.9mn (still up an impressive 46% y/y) missed our estimate by 275K." Yes, ladies and gents, it is the AOL scam all over again. Free subs are subs, the CEO will tell you, and it is all a matter of converting them. Ah yes. That worked out very well for the clusterfuck that is the dial up company. In other words, NFLX results were in reality a disaster across every vertical, and once Q4 is in the books and the inability to fool the vacuum tubes that free subs will become paying subs is realized, this overbloated bubble is in for a dramatic reacquaintance with gravity.

Guest Post: Twilight Of The Models

There is nothing destabilizing about a credit default swap. You are either in the money or out of the money: one side loses and the other wins. This means these derivatives transfer risk, not create it. What creates systemic risk is bad pricing, selective margining, and lack of netting, not the instruments themselves. A clearinghouse facilitates transparent pricing, netting, and straightforward settlement with less collateral squeezes. So what’s the problem? Many people think that Satan himself unleashed credit default swaps on the world.

Daily FX Summary: October 21

Despite better than expected Eurozone related data on Thursday, the pair failed to post any gains as the USD index staged another rebound. As such, even though the bullish trend still remains intact, the pair continues to have difficulty in posting firm gains above 1.4000 level which indicates that there is a risk of a near-term correction. However given the persistent speculation over the potential asset purchase program which to be initiated by the Fed in November implies that any correction is likely to be short-lived since the USD index is almost certain to make another move to the downside. In terms of technical levels, support is seen at the 10DMA at 1.3932, 21DMA at 1.3791 and then at 1.3511 which is also a 50.0% Fibonacci retracement level. Worth noting that Friday sees the release of the ever so crucial German IFO survey which is expected to be the main driver behind the price action during London hours. There is also an intraday option expiry at 1.4075 which is due to expire at 10am ET NY cut.

After Hours Earnings Summary: Amazon, American Express And Sandisk

All three companies beat, yet Amazon not liking the news (down 4% AH), and now AXP going red. Of course, this being one of the most roboticized stocks, looks for the HFT crew to throw in some extra volumechurn in exchange for capital losses offset by liquidity rebates to bring the price back.

Gonzalo Lira on Mulligan Mortgages—The Banks' Only Way Out

We’ve seen this movie so many times already, we can practically recite the ending: The Too Big To Fail banks are once again in the middle of another crisis—another mortgage crisis—that’s breaking like a bad rash. And this new scandal has so many moving parts!
Robo-signings!—Foreclosure mills!—Forged documents!—Attorneys General huffing and puffing!—Too Big To Fail banks tottering!—Foreclosures suspended!—Bond holders freaking out!—Credit default swaps shooting the moon!—Aaaaaahhhh!!!!! Again. As I explained in a long piece discussing the current Mortgage Mess, all of these different issues are all symptoms of the same disease: The Mortgage Backed Securities—America’s Herpes: The gift that just keeps on oozing. - Gonzalo Lira

LiveDeal Flash Smash Sends Stock Up 365%, Nukes Shorts

Today's flash smash comes courtesy of microcap company LiveDeal (Nasdaq: LIVE, market cap around $3 MM) where thanks to a rogue (presumably - there are no news in the name) algorithm the stock shoots up from an opening price of $4.79 all that way to $22.25 in about one minute: a gain of 365%, which is too rich even for KKR's new prop group. And no, this is not a fat finger as the QR screen below shows: the algo was busted enough to lift every single offer in a row - there were virtually no downticks for the span of over 15 seconds. The result: 1,679 shorts end up with an almost 400% loss (one of the benefits of unlimited downside shorting). And as the stock has very little liquidity it is very likely that assorted brokers took matters into their own hands and force covered all those who were underwater and losing substantially. And the cherry on top: not a single trade has been busted. In other words, exchanges are more than happy to unwind trades immediately when an algo loses money, but when an algo creates thousands of forced buy ins and retail investors are left with huge losses, then no luck on the DK. What is scariest is that HFT has now gone microcap: with Apple, Amazon, BofA and Netflix bled dry, it is about time the robotic scalping crew found new pastures.

Fed's Bullard Says QE2 Decision Not To Come Until After Q3 GDP Announcement, Which "May Be Stronger Than Q2 GDP"

In addition to clarifying that the Fed's QE2 approach would likely be one starting in $100 MM increments, which has already been known, the question is where does it end, he makes the important observation that the decision on QE2 will not be made until the actual November 2 FOMC meeting, and certainly not before the Q3 GDP data is released on October 29, and makes the further comment (wink wink) that Q3 GDP may be a little stronger than Q2 GDP (uh oh). Oddly enough the Q3 GDP Of course, the chairman already knows what the bankers want, which is why we suggest everyone continue to frontrun each and every POMO in the fashion already described. The Fed has become the most predictable joke in the history of frontrunning and is nothing more than a "sell the news" type of criminal cartel.