Capital Markets

"Most institutional and retail investors have no idea that the private trade information they are entrusting to the market centers is being made public by the exchanges. The exchanges are not making this clear to their clients, but instead are actively broadcasting the information to the HFT’s in order to court their order flow. The exchanges are likely to counter that when a subscriber signs up to their exchange they then allow the exchange to use this data as they see fit. However, how many investors would have signed that agreement knowing that their hidden orders were being exposed? This practice has been going on for years but not many investors have read the market data specifications. Every day high frequency traders are using the information that some exchanges are supplying to disadvantage unsuspecting investors.
Every time a trader places an order in certain market centers, whether at the market centers directly, or through a third-party DMA, those market centers are collecting data regarding the trader’s order flow. They are supplying the information to HFT’s that allows them to track when an investor changes price and how much stock has been accumulated. This information is helping HFT’s predict short term price movements. Institutional as well as retail footprints are being detected, and “modus operandi” and trading profiles are being created. Traders believe that their trading strategies are protected, when actually their strategies (personal data) -- including variables such as displayed quantity, time stamp, side, revisions, reserve orders, linked executions, order id numbers, accumulations, number of shares -- are being misappropriated for sale by the market centers." - Themis Trading

David Rosenberg is out with some very fitting analogies of the current sovereign crisis. If he is proven prescient, which we have no doubt he will, the Greek near-default will have massiverepercussions to the entire developed world when all is said and done."In my opinion, Greece is the same canary in the coal mine that Thailand was for emerging Asia in 1997, which ultimately led to the Russian debt default and demise of LTCM; the same canary in the coal mine that New Century Financial in early 2007 proved to be in terms of being a leading indicator for the likes of Bear Stearns and Lehman. So, the most dangerous thing to do now is to view Greece as a one-off crisis that will be contained." Furthermore, as he makes all too clear, if a $1 trillion bailout can only buy 400 points in teh Dow, Europe, aside from all the other fundamentals which confirm the same, is doomed, and even the ever-optimistic market now realizes it. Lastly, should Europe pursue the required austerity measures, the hit to European GDP will be massive, and is certainly not being priced in European stocks, but certainly not in US stocks, whose primary export market is about to disappear.

Hilarity ensues!

Not one bit embarrassed by their last witch hunt against speculators that led European politicians to discover that the biggest CDS "speculator" against Greece was in fact the Greek post bank (a fact that received very little publicity surprisingly), they are back at it again. It seems there might be a slight confusion though on their part between investors and speculators. By taking on the supposed speculators with an unprecedented galore of currency debasement, European countries are very unlikely to attract any foreign capital going forward. This is nothing else than capital markets fascism and a poorly disguised ponzi scheme. Fact is that fiscal finances are in poor order and not expected to get much better in the future. Rather than tighten the belt and address the gap as they should, governments around the world are lending themselves the money they need to spend. Throughout the financial crisis the only category of workers that has seen a pay rise are those working for the government. Yes there have been layoffs, but very little pay cuts. Talk about a collective effort! While capital markets seem happy to celebrate the madness this morning, also a by-product of a lot of shorts of risk being chased through the gates of hell, I expect that the markets will see through this mascarade in due time. The only trade that makes complete utter sense is being long Gold, and once the short covering is over short EURUSD. It is worth noting that the precious metal now trades with a positive correlation to the USD, and the weakness this morning should not be expected to last as the weekend's news is exactly what gold investors have been counting on: complete global monetization of debt. It won't be long before central banks run out of gold to sell to put a lid on the market at this pace. Maybe the financial bill will also include a speculation limit on the purchase of physical commodities. - Nic Lenoir, ICAP

The race to the currency devaluation bottom is now in its final lap. And gold is the only alternative to the now imminent collapse of the fiat system: the world had a chance to take writedowns on losses, punish those who took risk and failed, and refused to do so. There is now no risk left, but it only means that eventually all the risk will come back and lead all capital markets to zero. The result will be the end of Keynesian economics as we know it. Do not trade in this broken market, do not hold your money in a bank as they are all now one hour away from a terminal bank run - buy and hold real, FASB mark-to-myth independent assets.

First posted 17 November 2008, this column's analysis is more relevant than ever. It asks why investors rush to government securities when the US was at the epicentre of the financial crisis? This column attributes the paradox to key emerging market economies’ exchange practices, which require reserves most often invested in US government securities. America’s exorbitant privilege comes with a cost and a responsibility that US policy makers should bear in mind as they address financial reform. - Carmen Reinhart and Vince Reinhart

...the former Fast Money lead man is actually pretty spot on. And for all you retail investors who think this market is anything but a two-tiered playground built now exclusively for Wall Street to fleece you every single day, our advice is to get the hell out. Everyone else already is... Except of course for the banks and the various 3-3,000 man quant operations, which are the only market participants left. We hope they cannibalize whatever is left of each other and blow themselves all up in the process. Whatever is left will have infinitely more credibility than the busted mockery of capital markets we have now.

Even as the immediate factor for the 1000 point drop in the Dow is investigated for the next several months by the SEC, a process which will likely not come to any reasonable market structure regulatory recommendation before the SEC is forced to analyze the next subsequent (and even greater) crash, the one primary fundamental cause for the sell off in stocks this week was the ever deteriorating situation in Europe. As the euro tumbled on Thursday afternoon, which we noted 20 minutes before the stock market crash began in earnest, as implied correlation algos went berserk, and as viewers were witnessing the near-warfare in Athens live, things just got too real for speculators (investors is so 20^th century). Various computerized trading platforms merely kicked on (or rather, off) after the initial panic had already set in, and liquidity evaporated, leading to the implosion in the market. And the primary reason for the initial market pessimism early on Thursday was the fact that even as the whole world was listening to Jean-Claude Trichet to say soothing words after the ECB's rate decision, the central bank president once again did not realize the gravity of the situation. And to speculators, long habituated to Bernanke's endorsement of infinite moral hazard and speculative mania, the fact that someone refused to play "ball" and leave open the possibility that failure is still permitted in our day and age was the last straw. Now, 48 hours later, we learn that the rumors, which we reported about the ECB preparing a bailout fund, were indeed true. Our sense is that at this point the ECB's action is "too little, too late" as contagion fear has already crept deep within the fabric of various overt and shadow funding/liquidity mechanisms. Additionally, the world is now convinced that Europe can only deal with problems retroactively, and who knows how big and unfixable the next problem will be: the ECB, which has lost most of its credibility after "inviting" the IMF to do a heavy part of the bailout, is about to become the laughing stock of global central banks. Trichet is seen merely as a powerless bureaucrat, caught between Merkel's electoral struggles and Bernanke's demands for contagion interception and implicit Fed supremacy over Europe. The contagion from the "isolated" Greek fiasco is rapidly spreading. Here are some of the ways in which markets are about to be affected.

In addition to having said many things about HFT in general in the last year, over the past 12 months Zero Hedge has focused a lot of attention specifically on Goldman's dominance of the NYSE's Program Trading platform, where in addition to recent entrant GETCO, it has been to date an explicit monopolist of the so-called Supplementary Liquidity Provider program, a role which affords the company greater liquidity rebates for, well providing liquidity (more on this below), and generating who knows what other possible front market-looking, flow-prop integration (presumably legal) benefits. Yesterday, Goldman's SLP function was non-existent. One wonders - was the Goldman SLP team in fact liquidity taking, or to put it bluntly, among the main reasons for the market collapse. We are confident the SEC will aggressively pursue this line of questioning as they attempt to justify their $1 billion porn download budget. We are also confident, that should the SEC truly take its role of protectors of investor interest seriously for once, it will uncover such criminality and corruption at the level of trading integration of open exchange and ATS venues (and the "but it's so complicated - let's just leave it untouched because nobody understands it" excuse is not flying any more), that it will make Goldman's CDO criminal and civil case seems like a dimestore misdemeanor. We have written about 1,000 posts about this. Readers are welcome to go back through our archives and acquaint themselves with the NYSE's SLP program, with Goldman's domination of program trading, with Goldman's domination of dark trading venues via the Sigma X suite, with Goldman's domination of flow trading via Redi X, and with Goldman's domination of virtually every vertical of the capital markets, which would be terrific if monopolies were encouraged in the US. Alas (last time we checked with the DOJ), they are not. Which is why we ask, for the n^th time, when will the anti-trust division of the DOJ finally dismantle the biggest market monopolist in the history of capital markets.

There is the danger of walking out of today's session with a sense of relief for equity traders, because that insane move was "just" a fat finger or at least it is the word in the media and on the street. There are three things to keep in mind: 1/ the market was down 3% already when the alleged input error happened 2/ we are still in the middle of a major unresolved currency crisis threatening all of Europe and that led to deadly riots already 3/ the financial industry does not need any bad press right now and detractors just got some more ammo to push tough regulation. - Nic Lenoir, ICAP

A year ago, before anyone aside from a hundred or so people had ever heard the words High Frequency Trading, Flash orders, Predatory algorithms, Sigma X, Sonar, Market topology, Liquidity providers, Supplementary Liquidity Providers, and many variations on these, Zero Hedge embarked upon a path to warn and hopefully prevent a full-blown market meltdown. On April 10, 2009, in a piece titled "The Incredibly Shrinking Market Liquidity, Or The Black Swan Of Black Swans" we cautioned "what happens in a world where the very core of the capital markets
system is gradually deleveraging to a point where maintaining a liquid
and orderly market becomes impossible: large swings on low volume,
massive bid-offer spreads, huge trading costs, inability to clear and
numerous failed trades. When the quant deleveraging finally catches up
with the market, the consequences will likely be unprecedented, with
dramatic dislocations leading the market both higher and lower on
record volatility." Today, after over a year of seemingly ceaseless heckling and jeering by numerous self-proclaimed experts and industry lobbyists, we are vindicated. We enjoy being heckled - we got a lot of it when we started discussing Goldman Sachs in early 2009. Look where that ended. Today, we have reached an apex in our quest to prevent the HFT "Black Monday" juggernaut, as absent the last minute intervention of still unknown powers, the market, for all intents and purposes, broke. Liquidity disappeared. What happened today was no fat finger, it was no panic selling by one major account: it was simply the impact of everyone in the HFT community going from port to starboard on the boat, at precisely the same time. And in doing so, these very actors, who in over a year have been complaining they are unfairly targeted because all they do is "provide liquidity", did anything but what they claim is their sworn duty. In fact, as Dennis Dick shows (see below) they were aggressive takers of liquidity at the peak of the meltdown, exacerbating the Dow drop as it slid 1000 points intraday. It is time for the SEC to do its job and not only ban flash trading as it said it would almost a year ago, but get rid of all the predatory aspects of high frequency trading, which are pretty much all of them. In 20 minutes the market showed that it is as broken as it was at the nadir of the market crash. Through its inactivity to investigate the market structure, the SEC has made things a million times worse, as HFT-trading seminars for idiots are now rampant. HFT killed over 12 months of hard fought propaganda by the likes of CNBC  which has valiantly tried to restore faith in our broken capital markets. They have now failed in that task too. After today investors will have little if any faith left in the US stocks, assuming they had any to begin with. We need to purge the equity market structure of all liquidity-taking parasitic players. We must start today with High Frequency Trading.

As Greece, and Portugal, and recently even Spain bask in the spotlight of the bond vigilantes, I want to remind my subscribers to be prepared for Italy’s turn to dance. Being prepared before the party starts can be most profitable. The Greek and Spanish trades are pushing 400% plus, and the run is not nearly over yet, at least in my opinion.

Today Spain will test the capital markets with a downsized E2-3 billion 5 year issue (from E4.5 billion) carrying a 3% coupon. The yield on the note is expected to come higher than existing comparable maturities which are trading at 3.3%, thus pricing will likely be in north of 3.5%. At the end of March, Greece managed to raise 5 year bonds at 2.8%: there are no concerns that Greece will be able to repeat that result, much to the negative P&L of all those who bought into the last bond issue. "Spain is firmly in the eye of the storm, and the Spanish treasury cannot allow this sale to fail," said Jose Garcia Zarate at consultancy 4Cast. Yet as we showed yesterday, traders are not so worried about Spain, whom they have pretty much written off now, as the UK, France and Germany. In the meantime, the PIIGS fire is raging: Greek 3 Years just hit 15%, as its CDS trades 30 bps wider since the NY close, now at 877 bps. And the eye of the hurricane is moving west: Portugal CDS hit another high of 456 bps today, implying a 33% chance of a sovereign default. Lastly, the euro is plunging and after hitting an overnight support in the low 1.27 area, has bounced slightly. Spain will need all the help it can get. In the very least, today will be a test whether the recent rumor spread by a prominent nationalized and GGB heavy UK bank, that Spain has requested a E280 billion rescue package, was true or not.

Like clockwork: Europe closes, volume flattens, and the market rips. With Greece's revolution now "certainly" resolved even as European markets closed at the lows (someone forgot to tell the Greek people who have now locked down the country in a persistent striking state), nobody can bother the US algos, who only look at themselves as a referential point, and at low volume as reinforcement. And with the US algos out of the barn, the carry traders resume, the AUD now back to 0.91 and the EURUSD back to 1.2900. Credit is ignoring the mini melt up as both IG and HY are wider for the day (+4 and +25 bps, respectively). But at least Getco and SigmaX's no-volume algos can give the impression that all is well with the world, even as Greece and now Portugal are shut out from the funding markets, and the IMF and the ECB's credibility is blown to smithereens. The astrophysicists in charge of the US capital markets are unperturbed.

The Rating Outlook revision to Negative incorporates recent legal developments and ongoing regulatory challenges that could adversely impact Goldman's reputation and revenue generating capacity. Goldman's franchise and market position are potentially vulnerable to scrutiny by stakeholders, and like peers, may be affected by the industry's regulatory evolution.

As punishment for giving fire to mortals, Zeus condemns Prometheus to be chained to a rock, and to have his immortal liver eaten daily by an eagle. It brings to mind the austerity program planned for Greece. No need to go through the details; it suffices to say that it’s the most austere adjustment an OECD country has subjected itself to in 50 years in the absence of a falling currency, a rebound in GDP growth and an open economy. We created the chart below to pull together four variables we’ve discussed before, showing that Greece is effectively in No Man’s Land.