HFT

“We have come regretfully to the conclusion that the current algorithmically driven market environment is one which is increasingly incompatible with our fundamental, research orientated, investment process.  The bear market in emerging market equities, which began in 2011, may eventually engulf developed markets too."

My overriding theme and the central drama for the coming year is that unexpected events can take on greater importance as the Federal Reserve ends its near-decade-long Zero Interest Rate Policy. Consensus premises and forecasts will likely fall flat, in a rather spectacular manner. The low-conviction and directionless market that we saw in 2015 could become a no-conviction and very-much-directed market (i.e. one that's directed lower) in 2016. There will be no peace on earth in 2016, and our markets could lose a cushion of protection as valuations contract. (Just as "malinvestment" represented a key theme this year, we expect a compression of price-to-earnings ratios to serve as a big market driver in 2016.) In other words, we don't think 2016 will be fun.

This, ladies and gentlemen, is what "trading" has become.

It wasn’t supposed to be this way. We were all told by the “experts” and the so-called “smart crowd” ad nauseam the economy and markets of 2015 were “ready for lift off.” Proclamations that GDP and other economic metrics were indeed going to be the unquestionable catalyst to help propel not only the markets themselves ever higher, but also, prove all the nay-sayers as well as data-deniers wrong. The problem? It was the exact opposite. 2015 exposed the sole overarching fundamental principle the “experts” refused to calculate into their qualitative analysis. That fundamental? Without the continuing interventionism of the Federal Reserve – there is no market. Period.

"The Fed didn't really drain any liquidity yesterday. They moved the IOER up to .50%, moved the RRP rate up to .25%, and the RRP volume came in at $105 billion, only $3 billion more than the day before. Where was the draining? But interest rates moved up anyway to reflect the tightening, without any fundamental change. Basically, the Fed decreed a rate tightening and the market moved rates higher.... I wonder how many economic interest rate models include "by decree" as a factor?"

This is where the Fed. now finds itself. Here they were. Just holding policy lines doing what they in their Ivory Tower contemplated and the so-called “smart crowd” insisted they do. And now the saying of “Between a rock and a hard place” might be an understatement. The world sits atop a tinderbox fueled by monetary policies that created them and awaits a match that could set it off in a blaze of who knows what. All in short order. Unless they don’t do anything except try their best Draghi impersonation and declare, “They too are once again at the ready to do what ever it takes!” Except – just not now.

The table below lists the bonds with the largest one-day volume among those that traded yesterday on TRACE at a spread of 1,000 basis points or more than their government benchmark.

"There are $1.1 trillion of S&P 500 options expiring on Friday morning. $670Bn of these are puts, of which $215Bn are struck relatively close below the market level, between 1900 and 2050. At the time of the Fed announcement, these put options will essentially look like a massive stop loss order under the market. This important event falls at a peculiar time—less than 48 hours before the largest option expiry in many years. "

...and a trader who doesn’t pay attention to the modern realities of market structure and liquidity provision is not long for this world.

The market is now officially so broken, that the biggest HFT-player no longer even makes any sense.

So now, here we are in the lull just as we were before that Sept. meeting, And what is happening this time? Well, don’t look now, but there indeed looks to be trouble brewing on the global stage (or should I say “international developments”) that could turn out to be just as big of a headache to the Fed’s reasoning’s on whether or not to “just do it.” Just one of those issues is – once again: China.

In a world where every market is rigged and manipulated - either by central banks, by algos, or by human actors eager to "get rich quick" - we doubt many will care that the New York Attorney General has finally figured that the FX market was also rigged by spoofing (something we have pointed out since 2013), and yet this latest development is worth pointing out. The reason for that is not so much the companies which are named in this latest crackdown on widespread manipulation in the world's most important market (now that all central banks are engaged in currency warfare) but which are not.

There’s an old adage among veteran stock traders that goes something like his, “If I told you the news before it were made public – it’s still a 50/50 bet you would guess the market’s reaction correctly.” That was when the markets had some resemblance of normalcy. Today, normalcy has been replaced with sheer lunacy as to the speculation and interpretations for where these markets go from here.

“Do not involve Sales in anyway [sic] whatsoever.  In fact avoid mentioning the existence of the whole BATS Last Look functionality.  If you get enquiries just obfuscate and stonewall.... for the future, sales absolutely 100% do not know about the existence of last look and it shouldn’t be a concern for them...  IF any client does call up about a rejected trade . . . it is important that you state in any communication ‘THE TRADE WAS REJECTED BECAUSE OF LATENCY.’ . . . DO NOT talk about P&L on trades."

Last night, after Japan's quintuple recession, we had a simple question: "How is the BOJ not buying every USDJPY on this ridiculous news?" We only had a to wait a few hours...