Archive - Jun 30, 2011 - Story

The recent elegant explanation for the activities of the HFT algos by Nanex seems likely to be a better one than the analysis that follows, as it answers the all-important question--why? In the following analysis we will look a little bit at how, but most or our interpretation of the results is coloured by the Nanex explanation. It explains why so many trades happen outside the bid-ask spread, particularly as the bid and ask prices are moving rapidly. They are scalping fractions of pennies from some poor fool who has data more than a few ms old. As this is the reason, the method of choosing bid and ask prices pales in significance next to the methodology of stuffing the orders. This methodology I know nothing about and will not address. This article will address how to use this stuffing to create endless opportunities for arbitrage. The principal advantage discussed in the Nanex report is stuffing the market with so many orders that competitors have trouble seeing the present state of the market. Whenever such inefficiencies are created, an arbitraging opportunity may also be created. One method of creating arbitrage opportunities is through manipulation of time. We are accustomed to thinking of information flow as instantaneous, but it is limited by the speed of light. How might HFT take advantage of this?

So much for the Japanese renaissance which somehow is supposed to lead to a surge in Q3 US GDP growth. Following yesterday's surprisingly strong factory production growth rate of +5.7% (the second highest in history), every economist (and Joe LaVorgna), was already shifting their strawman from declining energy costs (which are now back to early June levels courtesy of the IEA idiocy), to Japan as the last bastion of growth. Alas, the just released Tankan quarterly index of large manufacturer confidence has confirmed that the rumors of Japan's economic reincarnation have been greatly exaggerated after it dropped by the most since the Lehman collapse, plunging from +6 in March to -9, well below the economist (and Joe LaVorgna) consensus of -7. From Bloomberg: "Forecasts by Panasonic Corp. (6752) and Hitachi Ltd. for weaker earnings have added to signs of depressed demand. Monetary tightening by Asian economies grappling with inflation means that Japanese companies also can’t count on customers within the region for boosting sales. “The global economy is starting to slow, heightening uncertainties about its future direction,” Ryutaro Kono, chief economist at BNP Paribas in Tokyo, said before the report. “The downside risks to China and other emerging economies seem to be on the rise." In other words, the global economic growth is impacting Japan, and it is not the Japanese slowdown that is impairing some mythical global growth story. Of course, by the time the economist (and Joe LaVorgna) pool figures this out, QE 3 will be well on its way.

In another case of purely coincidental serendipity, three days ago Zero Hedge informed readers that the "NYSE Boerse [sic] has just announced its purchase of Kingsbury International Ltd., which surveys managers for the Chicago Business Barometer, also known as the company that hosts the Chicago PMI data, in order to bring PMI data direct to feed subscribers. Net result: expect even more market volatility at each PMI release, now that the market is not two but three-tiered, and consisting of regular HFTs, HFTs with access to the Deutsche Boerse feed, and everyone else." We concluded: "It is unclear if the ultra-speed, HFT friendly feed would be activated before its next release on June 30. That said, we will certainly coordinate with our friends at Nanex for any trading abnormalities, primarily in the critical ES futures, this Thursday at 9:42am, keeping a close eye on the tape, and indicating precisely when the tiered data release hits." Well, as promised here is the Nanex data. As expected, it's a stunner.

Three weeks ago, when discussing the failed (yes, failed) Maiden Lane 2 auction by the New York Fed, we said: 'Something quite disturbing happened during today's latest attempt by the Fed to sell $3.8 billion in face amount of Maiden Lane 2 assets: it had a busted dutch auction. In fact, the auction was so massively busted, the New York Fed managed to sell only half of the bonds for sale, or $1.898 billion in 36 Cusips of the total 73 Cusips offered for sale." Subsequently we noted the sudden radiosilence from the Fed on this issue on Twitter. To be sure, every MBS trader and the kitchen sink promptly complained that the Fed was saturating the market with toxic AIG garbage, which prompted us to declare that: "unless someone opens up a release valve, we are about to see a massive
regurgitation and even more massive repricing of credit risk, first in
IG, then in HY and ABX/CMBX, and lastly, and most massively, in
equities, which continue to exist in their own world and which are now
totally disconnected with HY, which they used to track so very closely." We just got the release valve: from Bloomberg: "The Federal Reserve Bank of New York is halting its sales of mortgage bonds acquired in the rescue of American International Group Inc. "Given prevailing market conditions” for residential mortgage-backed securities, “we do not anticipate any sales of bonds in the near term or until such time as the New York Fed deems it will achieve value for the public," Jack Gutt, a New York Fed spokesman said in an e-mail." Uh, what prevailing market conditions: a Nasdaq which has ripped over 100 points in one week (granted on no volume and on unprecedented market manipulation but so what). Regardless, this is a huge slap in the face for the Fed, which has just proven that even in a surging market it can not unwind an amount from its book that is less than 1% of its total asset holdings without actually crashing the market.

Bill Clinton, in what appears to be an attempt to succeed where the IEA failed so miserably to score some brownie points for the president, told Bloomberg's Al Hunt during an interview, that Bank of America Corp.’s accord with mortgage-bond investors may give more “underwater” homeowners a chance to cut the principal on their home loans. "You’d relieve the anxiety of countless Americans who would know they could hold onto their homes." That you would also bring moral hazard to the masses and demonstrate to the public that the alternative of prudent monetary management is not insolvency, but yet more bailouts, apparently was lost on the slick one. And confirming that he still has no clue how anything in the ponzi system works, he added: "You lift not only an economic, but a psychological burden off of the homeowners and the banks,” he said. “And we’re free to start lending again, we’re free to engage in normal economic activity." Apparently marking down one's assets, which would in turn lead to massive Tier 1 capital (as artificial as it may be) erosion, and a need to funnel hundreds of billions of new cash in on the balance sheet, while at the same time setting off a chain reaction whereby everyone else is forced to remark their assets (all currently at par thanks to FASB encouraged Mark to Unicorn), an act which QE 1, Lite and 2 have been doing all they can to avert, is stimulative to "lending". And this is the thought process of the person credit with generating the last American budget surplus...

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 30/06/11

GEITHNER SAID TO CONSIDER LEAVING TREASURY AFTER BUDGET DEAL

Explains why the market just ripped.

In the meantime, a cubicle at 270 Park is being prepared.

A few days ago, we demonstrated that the latest Greek bailout package is nothing more than recycled MLEC special purpose vehicle designed to cover up toxic assets off balance sheet, like that one that was supposed to wrap up the subprime toxic mess. Luckily that did not happen as all it would do is make the credit crash even more acute when it finally did hit. In the meantime, the other Frankenstein contraption proposed by Wall Street to contain the fallout of the PIIGS bankruptcy, is the EFSF, which also got a facelift a few weeks back, and which is effectively a CDO: the same instrument which caused European banks to now be insolvent after buying up all tranches offered them by Goldman et al in the 2005-2007 period, once US banks realized just how toxic the less than AAA tranches were. It is poetically ironic that the instrument that led to Europe's insolvency is now what is supposed to prevent (temporarily) its plunge into outright default. For all who are wondering what the details of the new and improved CDO at the heart of the Eurozone are, here is Nomura's Nikan Firoozye.

Sometimes it is good to put things in perspective when comparing developed democracies like America and barbaric despotic dictatorships like Afghanistan. In one country, radioactively orange criminal heads of imploded mortgage lenders, who are responsible for billions in losses at rescued companies that will soon require more taxpayer bailouts, received multi million dollar golden parachute severance packages and slips on the write from the country's "regulators." In the other, former executives of a major failed bank have been arrested over huge fraud that led to its near collapse, while the head of its central bank flees to the first country on fears of prosecutions. Take a wild guess which country is which...

The Fed may have stopped printing money, but that does not prevent Fukushima from printing radiation, and a flooded Fort Calhoun to print notices of "all's well" even as a 10 mile evacuation zone has been established. Per Ex-SKF, quoting the Sankei Shinbun: "A citizens' group in Fukushima Prefecture "Fukushima Network to Protect Children from Radiation" tested the urine samples from 10 children in Fukushima City, age 6 to 16, and announced on June 30 that a small amount of radioactive materials was detected from all samples. The highest amount of cesium-134 was from an 8-year-old girl, at 1.13 becquerels per liter. The highest amount of cesium-137 was from a 7-year-old boy, at 1.30 becquerels per liter. The samples were taken in late May, and sent to the French laboratory ACRO (Association pour le Contrôle de la Radioactivité dans l’Ouest) to testing for radiation. ACRO has experience in surveying the radiation exposure in children after the Chernobyl accident. ACRO's president David Boilley said in the press conference, "There is a very high possibility that children in and around Fukushima City have been exposed to internal radiation. Prior to the [Fukushima] accident, these numbers would have been zero." Nothing to see here. Just as there is nothing see in Nebraska, where the NRUC said there is nothing to worry about... despite the imposition of a 10 mile evacuation radius. As a reminder Fukushima has a roughly 18 mile evacuation radius zone.

It's that time of the day when Brian Sack is holding the ES flat or rising even as his increasingly depleted arsenal to push other risk assets higher causes the RISK basket to decline. The latest: the ES-RISK (commodities, FX carry and rates) spread has just blown out to a 7 ES point equivalent. In the past 2 months the divergence has not failed to close upon emergence within 48 hours. Those with discount window access and wishing to take on the Fed in this relatively low risk pair trade, now that the Fed is about to step out of overt market manipulation (and just be stuck the covert one... and with the fiber optic cable to 131 South Dearborn Street) are as usual advised to take a long, hard look at a compression trade at these levels.

We all know special interests own the U.S. Congress and the Federal machinery of governance (i.e. regulatory capture). How much would it cost the American citizenry to buy back their Congress? The goal in buying our Congress back from the banking cartel et al. would not be to compete with the special interests for congressional favors--it would be to elect a Congress which would eradicate their power and influence altogether. A tall order, perhaps, but certainly not impossible, if we're willing to spend the money to not just match special interest contributions to campaigns but steamroll them. A seat in the U.S. Senate is a pricey little lever of power, so we better be ready to spend $50 million per seat. Seats in smaller states will be less, but seats in the big states will cost more, but this is a pretty good average. That's $5 billion to buy the Senate.

But as far as the credibility of at least one $30+ billion (?) hedge fund, he sure as hell is.

According to CNBC's Kate Kelly, Paulson has given up on his $30 price target on Bank of America by the end of 2011, and instead has dumped a "substantial stake" in its holdings of the bank's stock. And so, the claims that the hedge fund which has now become the butt of all due diligence jokes, is about to eat more crow, especially as other objective skeptics have long been warning that the bank is massively underreserved for what is about to become a legal fee freeforall following the just announced non-settlement with the BlackRock, Pimco, New York Fed group, and thus a ticking timebomb. But no, Paulson is in it, so it must be a Buy, Buy, Buy. Idiots. Incidentally the market is only slowly getting to realize that the "settlement" announced a few days ago is actually horrendous news for the bank (but confirms that monkey throwing feces move the marginal money) as we said first upon hearing the news.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.