We were not surprised, though certainly delighted, to see that after years of railing against Citadel's dominant position at the intersection of HFT trading and retail orderflow - recently Citadel was found to be the largest private US trading venue - this morning Reuters reports that Federal authorities are investigating the market-making arms of Citadel LLC and KCG Holdings looking into the possibility that the two giants of electronic trading are giving small investors a poor deal when executing stock transactions on their behalf. In other words, the DOJ is looking into whether Citadel is frontrunning its clients, something we have claimed for years.
But... but... they just provide liquidity.
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While all the algos are programmed and set to scan today's FOMC statement for whether both "patient" and "considerable time" are still there (as it did last time when it supposedly sent a pseudo-hawkish message while telling Virtu and Getco to buy, buy, buy), the market is torn between the trends observed in recent days: on one hand finally succumbing to the adverse impact of USD strength, which overnight also saw the Singapore Dollar admit defeat in the ongoing currency wars, is crushing both revenues and EPS, as well as outlooks, for the bulk of US companies, even as millennials - long since given up on buying a house - allocate their meager savings to the annual incarnation of Apple's flagship product as seen in yesterday's record, blowout numbers by AAPL which is up 8% in the premarket and sending Nasdaq futures soaring compared to the stagnant DJIA or S&P. And then there is Europe where the mood is decidedly sour this morning, with Greece imploding on fears Tsipras really means business and concerns the Greek "virus" may spread to other peripheral nations whose bonds have also seen a lack of a bond bid this morning.
The EU’s financial watchdog, the European Securities and Markets Authority, will look at whether automated trading adds fake, or ghost, liquidity to markets, said Steven Maijoor, the regulator’s chairman. “There has been a suggestion that the liquidity they are providing is not real liquidity because once you would like to go into the trade and accept an order the offer disappears,” Maijoor said in an interview in Hong Kong on Jan. 20. “We are looking now into the specific issue of what is called ghost liquidity.”
First it was gold, now it is HFT - poor Barclays just can't get away with any market rigging crime these days: "In sum, Barclays’ courting of high frequency traders, and its willingness to falsify the extent of high frequency trading activity in its dark pool, was contrary to Barclays’ representations to clients that Barclays operated with “transparency” and provided a safe venue in which to trade. As described by one former senior Barclays Director: “there was a lot going on in the dark pool that was not in the best interests of clients. The practice of almost ensuring that every counterparty would be a high frequency firm, it seems to me that that wouldn’t be in the best interest of their clients . . . It’s almost like they are building a car and saying it has an airbag and there is no airbag or brakes.”
Ultimately, I think the problem for HFT liquidity providers is not that they are skinning investors, but that they are outsiders. They're doing what the keepers of the market infrastructure keys have always done - skin investors, retail and institutional alike, to the outer limits of what technology and the law allows. But while their outward behavior and appearance may be familiar, they are clearly an alien species on the inside, without so much as a microgram of Wall Street DNA. They are Rakshasa's. HFT liquidity providers are technology companies disguised as financial intermediaries. They hijacked the market infrastructure in the aftermath of the Great Recession, stealing it away from under the noses of the big financial firms who had come to see control over market structure as their birthright, and they had a good run. But now the big boys want their market infrastructure back, and they're going to get it.
Yesterday, we read with some amusement that Goldman has moved Guy Saidenberg, reportedly one of the greater profit centers at the firm - and how could he not be when he always traded against Tom Stolper's recommendations which led to tens of thousands of pips in losses to those who listened to him over the past five years - from head of global foreign-exchange trading to a new role, as co-head of commodities. Why did Goldman decide to scrap its once uber-profitable FX vertical and redo it from scratch? Simple - the ability to rig and manipulate FX markets, which are now under every global regulator's microscope after the "Cartel" members so foolishly let themselves be exposed to the entire world, is no longer there, as confirmed last night by news that a dozen large investors have filed a joint lawsuit against 12 banks for "allegedly conspiring to rig global foreign-exchange prices." Allegedly? Hasn't everyone read the Cartel chatroom transcripts yet?
The stock market really was rigged... “It’s 2009,” Katsuyama says. “This had been happening to me for almost two years. There’s no way I’m the first guy to have figured this out. So what happened to everyone else?” The question seemed to answer itself: Anyone who understood the problem was making money off it...
Having been the first to warn the world about the perils of high frequency trading nearly 5 years ago, when momentum ignition, layering and quote stuffing were still incomprehensible buzzwords to all but a select few algo traders from Citadel, GETCO and DE Shaw, and warning about such top-down systemic lock ups like flash-crash over a year in advance; as well as the bottom-up impacts of 20 year old math PhDs being in charge of market topology, our crusade from the micro has since shifted to the macro and the primary nemesis of all that is free and fair, the Federal Reserve. In the intervening years, traders such as Haim Bodek opened the HFT kimono even more publicly a few years ago. The following is a must-watch documentary for every investor and trader to comprehend just what it is (and who it is) that drives stock prices day in and day out.
In all the stories surrounding mass interception, recording (and abuse) of every form of private electronic communication by the NSA, there was always one missing link: encryption. After all, the NSA's primary task has always been to decrypt data, not to record and store every bit of communication traversing the ether or the internet. And yet, with the advent of recent encryption technologies, it would, or at least could, have made such pervasive interception by the spying agency problematic at least. However, according to a just released exposed by the NYT and ProPublica, it turns out the NSA had that base covered too. Presenting Bullrun, or "there's a hack for that."
It's only fitting that in a bizarro new normal, the news that passes for positive is either conflicting, reflexive or, well, simply bizarre. Last night was no exception as the "good" news came in the form of speculation that in order to promote its consumption tax hike, the Abe government would consider a corporate tax cut. How that helps the country with the 1 quadrillion yen in debt is not exactly clear, or how it makes consumer tax hikes any more palatable in a nation in which more people than anywhere in the world are retired and elderly, and thus removed from the corporate lifecycle, is just as nebulous. But the market liked it. Just as it liked the good ole' European cop out, of posting a surge in consumer confidence, or relying on reflexive indicators to represent an improvement in the economy, when in reality the only thing "improving" is the stock market. This happened when the German ZEW Economic Sentiment survey soared from 36.3 to 42.0 on expectations of a 39.9 print. So one must buy futures, or that's what the GETCO algo programming says.
"Overall end-user demand is similar to our previous outlook, but we now expect a more significant reduction in dealer machine inventory. That's the main reason for the reduction in the sales and revenues outlook. During the second quarter, dealers increased their utilization of inventory from our product distribution centers, which allows them to meet customer demand with less inventory. With the sharp reduction in dealer inventory and the decline in mining, 2013 is turning out to be a tough year and we've already taken action to reduce costs. During the first half of the year, we've had temporary factory shutdowns, rolling layoffs throughout much of the company, reductions in our flexible workforce, and we've reduced discretionary and program costs. While we've taken significant action already, we will be taking additional cost reduction measures in the second half of 2013,"
The chart below lays out what lies in store (no pun intended) second half earnings as indicated by companies themselves. What it shows is that optimism in corporate earnings (ignoring the persistent optimism in the economy which always without fail, leaves everyone disappointed despite the fifth ongoing year of QE) is once again misplaced and that EPS are set to disappoint, especially if the stock buyback wave - certainly not facilitated by the rise in interest rates - is finally over.
In a world where bad news is good, the last thing stocks needed to put a dent in the latest spin that the September taper may be moved to December, was an improvement in claims - which is what they got moments ago when the DOL reported a big claims drop from a downward revised 358K (so it does happen) to only 334K, beating consensus of a 345K print. So Taper back on right? Not so fast. The pre-spun narrative is that July data is very "liquid" with car makers and factories either laying off (or not) workers more (or less) compared to historical seasonal patters. Indeed, the unadjusted claims number rose from 383K to 409K signifying that the only improvement was in the eye of the X-12-ARIMA seasonal adjustment bemodeler. And furthering the No-Taper cause were continuing claims which soared to 3.114 million, up 91K from the prior week, the largest 1 week jump since November, and up from the 2.953 million two weeks ago: the biggest 2 week jump since February 2009. Judging by the stock market reaction, where futures have jumped on the news, the GETCO algos have shifted back into good news is good news mode. For confirmation, we will have to see the Philly Fed today, where we expect either a huge beat or huge miss to both be catalysts for fresh all time market highs.