Institutions Now Actively Selling Into HFT Permabid
Ever wonder why the SEC, FINRA and all other regulators actively continue to ignore the flagrant quote stuffing, frontrunning (yes, Flash trading is still a perfectly accepted practice) and all other destabilizing market activities facilitated and performed daily by High Frequency Trading (when comparable such actions result in jail sentences in Norway)? Hopefully the chart below will explain it...
With the bulk of stock trading (over 70%) now executed by various algorithms, which in turn are programmed by 20 year old math Ph.D. who just happen to know nothing about P/E rations, debt leverage, interest coverage, PEG, balance sheets, and other such relics of an ancient fundamental-ist past, it is no surprise that momentum trading and a nearly 1.00 cross asset correlation is now the norm. What it also means is that HFT provides a permanent bid, as the computer algos are woefully incapable of "reading" between the lines of various press releases, and trade purely on keywords (a topic we have discussed previously), which we are confident the PR departments at major blue chip companies are all too aware of and have long-since reverse engineered. Yet the most notable consequence of the HFT perma bid is that it tends to provide a terrific "idiot" receptacle for all stocks that institutions want to dispose of. To wit: anyone looking at yesterday's trading would think that everyone bought all stocks equally. Not so - as the attached chart from Lazard Capital Markets confirms, this was certainly not the case, and in fact block transactions, i.e., those initiated by large institutions, saw a major unwind of Consumer Durables, Materials and Retailing stocks, even as stupid computers were buying up everything. In essence, institutions are now selling into the HFT bid, which manages to pull up the NBBO far higher than it would be without such an algorithmic thrust. And since the price is higher, retail momo chasers end up following, and buying into a market in which the smart money is actively dumping positions. The sad conclusion is that this will result in such a massive bid-side positional imbalance one day, that HFTs will be unable to sell to each other, and the May 6 redux will occur all over again.
The other scary observation is that the market is now so fragmented, it has to be thought of as HFT and "everyone else." And with implied correlation for the entire market already at record levels, north of 80, and since the block trades tend to be far more rational and balanced, it is probably fair to say that implied correlation for the High Frequency Traders alone is at or near 100, meaning that for computers, all stocks trade as 1 or 0. The entire market is now a binary on or off operation. And May 6 demonstrated all too well when the flickering 1 finally moves to a solid 0 position.
SkyNet may be sentient, but it sure is dumb.