Archive - Apr 8, 2010 - Story

One of the key "market integrity" (actually, much more appropriately said, lack thereof) topics that has not been touched at all by the Mainstream Media is the issue of Sub-Pennying, or the process of stepping in in front of displayed orders in blatant violation of NBBO rules as determined by Rule 612, in which broker-dealers profit to the tune of billions of dollars from "playing inside the spread" and in the process compromising the NBBO, having stocks being propped up by passive limit orders, pushing legitimate liquidity providers out of the market (after all,who wants to be constantly front run by block sniffing algos) and in general hurts the price discovery process. With regular exchanges predominantly used by schmucks and market small-timers, who trade in small volumes as the bulk of block order traffic has moved to various ATS and dark pools (primarily that of Goldman Sachs' Sigma X) leave it to the pros to find a way to make a mockery out of the market. Of course, as long as everyone is buying (with the taxpayer selling involuntarily) nobody has much reason to complain. However, when the ponzi ends and the rush to offload hits a fever pitch, the spirit of friendly thievery may turn sour very, very fast. Also, anyone who has any illusions they can trade fairly in dark pools (or the broader market), you have our condolences. We present a great guide on the dangers to market integrity from Sub-Pennying as presented by Dennis Dick of Bright Trading.

In an ironic twist for one of the biggest liquidity providers in the world, and now a brand spanking new DMM on the NYSE, giant quant trading firm Getco was just slapped in the UK with a $2 million fine for "failing to make accurate reports of transactions." It appears that these may very well have been purposeful transgressions masking some improper underlying trade activity, because as the WSJ reports, "the FSA said the errors were particularly serious because they took place during a period of heightened awareness around transaction reporting because of Mifid's implementation." In addition to Getco, Credit Suisse (which lately has been peddling its own algo product suite) and Instinet have both been fined. In other news, the farce that is the SEC is now threatening to tag HFT firms and keep a very much private and internal track of their trades. HFT algos in turn are shaking in fear in anticipation of their manipulative practices being uncovered by a bunch of transvestite porn aficionados... Not.

• Yield of 4.770% compared with exp. 4.768%
• Bid To Cover of 2.73 vs 2.66 Average, 2.89 previously
• Indirects take down 36.80% vs 37.08% Average, 23.85% previously
• Direct take down 25.48% vs record 29.65% previously, more than double the 11.24% average
• Alotted at high 30.96%
• Primary dealer hit rate: 22.7%

Courtesy of David Rosenberg, here is how the media propaganda scene looked like the last time the US stock market was about to enter a 10 year bear market culminating with world war. Hopefullyall who threw their money in the market back then managed to sell at the very peak and avoided the upcoming 10+ sequential plunges in the stock market. Of course, selling at the peak is exactly what all the computers, algos, momentum chasers, primary dealers, and naive daytraders hope to do, just ahead of the flush. As usual, we wish them all the best.

The shell game has continued this long without the bond market calling the bluff, and I am baffled by the extent to which the other world central banks have both enabled and participated in this game. Part of the explanation behind this unwavering support for the dollar and US deficit spending by other central banks lays in the fact that other Western and Eastern governments are equally insolvent. It's possible that they feel they really have no choice but to play along, because the alternative would be to inflict a vicious and deeply unpopular austerity program on their own country, while everybody else is partying on thin-air money. Who's going to be the first to do that? Nobody, that's who.

RANsquawk 8th April US Afternoon Briefing - Stocks, Bonds, FX etc.

The ECB just disclosed that it will continue accepting sub-A rated debt as collateral post January 1, 2011, as was widely speculated, merely to facilitiate funding needs of countries which are getting increasingly lower-rated by the rating agencies. Furthermore, the ECB has made it clear that this whole exercise is merely for optical purposes: "The new haircuts will not imply an undue decrease in the collateral available to counterparties." What is notable, however, is that the ECB has highlighted it will no longer accept non euro-denominated collateral after 2010. This is not good for countries which plan on syndicating dollar-denominated debt, as has been recently the case for Portugal, and, currently, Greece. Although in Greece's case we tend to think the country doesn't give a rat's behind about whether new issuance will be eligible, andis much more focused on just avoiding default.

In an interview with Bloomberg's Tom Keene, Richard Clarida of PIMCO has pretty much sealed the fate of Greece: "I don’t think that [7%] would be an attractive enough yield. Greece is sort of like the Titanic. Eighteen things went wrong, and when they go wrong at once it’s problematic." Of course, with this kind of rhetoric the 10 Year will be trading at 8% tomorrow, followed up by Clarida saying not even 9% would be attractive, and so forth. When you have the world's largest bond fund say it is not touching Greece with a ten foot pole essentially no matter what the yield, you get an idea of why Greek 1 Year CDS is trading 600/700. In the meantime, stocks continue to be blissfully unaware of what the surge in the dollar will mean to Obama's export-led US manufacturing utopia. Oh well, at least we can continue to export "advanced" Wall Street services to Greece (and most other European peripheral countries) post default, courtesy of every domestic restructuring firm which is currently brushing up the sovereign reorganization "we are great" pages in its pitchbooks.

Life for Greek administrators can not be much fun these days - anywhere they look they just see more bad news. The latest comes from (appropriately named if you are Greek) S&P analyst Marko Mrsnik who told Reuters that "if the high borrowing cost persists and the consequent deviation from the consolidation path is not addressed, this would in our opinion, delay the reversal of the government debt trajectory and could lead to lower ratings." Nothing yet from Moody's - should Greece and the linked NBG be downgraded even one more notch by Moody's then all sorts of colletaral trigger horrors will be triggered and the liquidity crisis will reach a whole new level of pain.

With 3D being all the rage, just like in the 50s (when is Amazon releasing a 3D Kindle? nobody reads those things anyway, but at least wearing stereoscopic glasses when reading a book will make you look really cool), below is a fancy way of demonstrating what happens when a country goes the way of Lehman. The chart from Bloomberg shows the shift in the GGB curve from steep to inverted over the past month. As we have long claimed, an inverted curve is the death knell for any company, let along a country. The only question now, as John Taylor asks, is what the final outcome will be: civil war due to austerity or civil war due to the inability to fund anything, and a confiscation of deposits (and gold, if there was any left to be confiscated).

Yesterday we reported that the MBA announced the highest average 30 year FRM rate since August: a jump from 5.04% to 5.31%. Today this deterioration in mortgage rates was confirmed by Freddie Mac, whose 30 year Fixed Rate Mortgage jumped from 5.08% to 5.21%. Whether this is a function of the recent surge in 10 Year yields (subsequently ameliorated by Chinese purchases during yesterday's auction) or of the end of QE finally being felt is uncertain, although it is probably a combination of the two. This implies a loss in household net worth of billions of dollars in just one week. Of course, that is money that was already spent to bring you last month's fantastic retail store data, which was driven purely by everyone doing the moral hazard jingle, and refusing to pay for anything already purchased. Wholesale government justified theft is now a way of life in America, but it's cool - the banks on the hook for these billions in losses will keep getting back door bailouts in perpetuity.

"There is nothing but politics that says that Greece can make it through this process. Although politics includes compromise when it is working, the breakdown of politics is war. Usually the war implied in this famous aphorism would be between states, but in this case it would be between the people and the government that has failed them. The Greek government can’t follow the current course. On the issue of ‘internal devaluation,’ the European political elites are way out of touch with their people: almost no one will stand for it. The political maze we are entering might have many twists and turns with distorting mirrors, but money is money and its powerful logic will win in the end. No matter how many speeches and new regulations are made, the Greek economy will continue to deteriorate, dragging down the rest of Europe far more powerfully than its 3% implies. Please let the Greeks out and please restructure the euro, or drop the whole idea. If you don’t, the future will not be pretty." - John Taylor, FX Concepts

The Gold Anomaly – As noted earlier, gold seemed to opt out of the usual Pavlovian response to the dip in the Euro. There were several hypotheses for the gold step-out. One was a rumor, actually a series of rumors that one or more gold fund or ETF had scantly any real bullion backing. That would not show up in trading but only if delivery was called for. Some felt the buying of gold was kind of a short covering to reduce the gap. There were also rumors that gold might be used as the anchor of a new monetary basket that might become a supplemental reserve currency. That thesis may have sprung, in turn, from reports that China is looking to allow the Reminbi to trade with several currencies, most notably the Russian Ruble. There were lots of other hypotheses and rumors about the gold trading anomaly. Whatever the cause, the anomaly stood out like a sore thumb. It began to disappear overnight. - Art Cashin

Regarding our collateral framework, the Governing Council has decided to keep the minimum credit threshold for marketable and non-marketable assets in the Eurosystem collateral framework at investment-grade level (i.e. BBB-/Baa3) beyond the end of 2010, except in the case of asset-backed securities (ABSs). In addition, the Governing Council has decided to apply, as of 1 January 2011, a schedule of graduated valuation haircuts to the assets rated in the BBB+ to BBB- range (or equivalent). This graduated haircut schedule will replace the uniform haircut add-on of 5% that is currently applied to these assets. The detailed haircut schedule will be based on a number of parameters which are specified in the press release to be published after todays press conference.

• Jonathan Weil: How $1 trillion time bomb posts a phony profit (Bloomberg)
• Jobless recovery becomes more jobless and less recovery: initial claims spike by 18k to 460,000, miss expectations by 25k (Bloomberg)
• Ken Rogoff Op-Ed: Bubbles lurk in government debt (FT)
• Investors playing defense heighten Greek debt woes (WSJ)
• Early Easter boosts March retail sales (Reuters) as consumer buy trinkets with money saved from not paying mortgage or credit cards
• With oil surging, the old merger rumor is back: US Airways, United in talks again and again (WSJ, Reuters); in the meantime US Airways prepares to allow standing-only passengers on its flights