HFT

Encouraging and supporting asset bubbles is essentially the only force remaining to keep the system intact as we know it.

As regular readers are well aware, when it comes to "more than arms length" equity market intervention in New Normal markets, the New York Fed's preferred "intermediary" of choice to, how should one say, boost investor sentiment aka "protect from a plunge", is none other than Chicago HFT powerhouse, Citadel. Recently we discovered that the true culprit behind the May 2010 Flash Crash was not Waddell & Reed, but quote stuffing. The most recent revelation for Citadel is that quote stuffing is not just some byproduct of some "innocuous" HFT strategy, as none other than the Nasdaq has now stated on the record, that the most leveraged hedge fund (at 9x regulatory to net assets), and the third largest after Bridgewater and Millennium, used quote stuffing as a "trading strategy." The following 2 clips give a sense of what goes on from day to day inside the firm that trades more volume than the NYSE every day...

While in July margin debt did dip modestly from near all time highs hit back in June when total margin debt was virtually tied with the previous record, at $464 billion, it was that other metric tracked by the NYSE, namely Investor Net Worth, calculated by subtracting margin debt from the notional represented in free credit cash accounts and credit balances in margin accounts, that was the notable highlight in the July report: at a negative $182.1 billion, a decline of $6.3 billion from the prior month, investor Net Worth has never been lower.

It's been one of those days. First, the CME broke for 4 hours due to what some suggested were HFT connectivity issues, then Russia announced it would send a second humanitarian convoy into Ukraine (a big risk off move the first time it was announced, now not even an algo stirred), then Germany reported that the IFO Business Confidence/Climate dropped for the fourth consecutive month to 106.3 from 108.0, below the 107.0 expected, with the IFO chief economist stating that German GDP expectations are likely to be cut to 1.5% from 2.0% later in the year, and finally the French government collapsed due to disagreement over policy between finance minister Valls and economy minister Montebourg. All in all, a typical day in Europe's slow-motion implosion. So why are Spanish and Italian bank stocks soaring and European bond yields reaching new record highs? Simple: following Draghi's speech on Friday at Jackson Hole, which at initial read was hardly as dovish as many had expected, the FT and various other media outlets promptly changed the narrative and made it seem as if the ECB head was about to unleash QE.

As regular readers are well aware, when it comes to "more than arms length" equity market intervention in New Normal markets, the New York Fed's preferred "intermediary" of choice to, how should one say, boost investor sentiment aka "protect from a plunge", is none other than Chicago HFT powerhouse, Citadel. Yet one question had remained unanswered: just how does Citadel manipulated stocks? We now know the answer, and perhaps more importantly, it also links in to the true culprit behind the May 2010 Flash Crash, no not Waddell & Reed, but quote stuffing. Most importantly, the revelation that for Citadel quote stuffing is not just some byproduct of some "innocuous" HFT strategy, is that none other than the Nasdaq has now stated on the record, that the most leveraged hedge fund (at 9x regulatory to net assets), and the third largest after Bridgewater and Millennium, used quote stuffing as a "trading strategy."

Direct Edge wasn’t the only exchange, nor the first exchange, to do what it did, which was the creation of symbiotic relationships between exchanges and HFTs.  

"The risk sell-off we've seen in recent weeks frustrates us a little as the chart we've published most this year has pretty much predicted that tougher times would come around July. We've been paying it a lot of attention for over a year now but decided to wait until the autumn before we raised the warning flags. The chart in question (included in today's pdf) is the one showing the Fed balance sheet and the S&P 500 (as a proxy for risk generally). As you can see, since the Fed balance sheet was used as an aggressive policy tool post-GFC, the graph suggests that the S&P 500 is well correlated with the size of the Fed balance sheet...  This is important as virtually all of the mega rally in the last 5 years has come in the Fed balance sheet expansion periods." - Deutsche Bank

On July 7, Bart Chilton, a former commissioner of the Commodity Futures Trading Commission, wrote an article about high-frequency trading for the New York Times's DealBook. He argued, in effect, that because high-frequency trading has become so central to the stock market, it must be serving some necessary purpose. This is false...

Manipulation of the silver market was covered in a just released ‘Get REAL’ Special on Silver. Key topics discussed in the interview include * The fix is in: Old boys, pints of beer, big cigars and top hats, * the risk of manipulation through HFT, computer trading and ‘dark pools,' * “Meet the new boss; same as the old boss,'  * The importance of owning allocated and especially segregated silver

Singapore’s plans to become a gold and precious metals hub took a key step on Thursday. Jim Rogers, Jim Sinclair and Marc Faber have extolled the virtues of owning physical coins and bars in Singapore. “Individuals are making a mistake if they’re holding all their assets in one country.…I still have the majority of my gold in Switzerland, but I am already moving gold to Asia,” Faber recently said.

• Argentine holdout NML says government "choosing" to default (Reuters)
• Crunch time for Gaza truce talks as death toll passes 800 (Reuters)
• Don’t Tell Anybody About This Story on HFT Power Jump Trading (BBG)
• U.S. Accuses Russia of Shelling Eastern Ukraine (BBG)
• France’s Wheat Exports in Question as Rain Spoils Quality (BBG)
• Tapering in action: Lower printer sales hurt Xerox's revenue (Reuters)
• No liquidity? No Problem, there's an ETF for that: Bond ETFs Swelling in Europe as Trading Debt Gets Tougher (BBG)
• Herbalife hires ex-Biden chief to fend off regulators (NYPost)
• GM recalls far from calamity for some dealers who find new customers, business (Reuters)
• Bad weather likely cause of fatal Air Algerie crash: French officials (Reuters)

• EU to weigh extensive sanctions on Russia (FT)
• U.S. lifts flight ban to Israel (Reuters)
• Russia says will cooperate with MH17 probe led by Netherlands (Reuters)
• Norway faces ‘concrete and credible’ terrorist threat (FT)
• Don’t Tell Anybody About This Story on HFT Power Jump Trading (BBG)
• But... but... PMI: Unilever Sales Growth Misses Estimates on Asian Slowdown (BBG)
• World’s Biggest Wealth Fund Reviews $8 Billion Russian Stake (BBG)
• Qualcomm latest US tech company to reverse in China (FT)
• Hamptons Home Sales Rise as Buyers Find More Inventory (BBG)

As part of Bernanke's and now Yellen's experiment in market central-planning, in which newsflow no longer matters to a market that has lost all ability to discount anything except how big a central bank's balance sheet will be and where HFT momentum is far more important than fundamentals, one of the greatest investing perversions to emerge has been our finding from two years ago since confirmed on a monthly basis, that the best performing asset classes happens to also be the most hated one, as the most shorted stocks have outperformed the market better than twofold just since 2012.

Remember when IEX' Brad Katsuyama swept the floor with BATS CEO Bill O'Brien, exposing him as a liar on national TV in his spirited defense of HFT and an "unrigged market"? Well, Bill has just left the building: as BATS reported moments ago he is no longer with the firm.

From 1998 to 2013, Barclays and Deutsche Bank sold 199 basket options to hedge funds which used them to conduct more than $100 billion in trades. The subcommittee focused on options involving two of the largest basket option users, Renaissance Technology Corp. LLC (“RenTec”) and George Weiss Associates. The hedge funds often exercised the options shortly after the one-year mark and claimed the trading profits were eligible for the lower income tax rate that applies to long-term capital gains on assets held for at least a year. RenTec claimed it could treat the trading profits as long term gains, even though it executed an average of 26 to 39 million trades per year and held many positions for mere seconds. Data provided by the participants indicates that basket options produced about $34 billion in trading profits for RenTec alone, and more than $1 billion in financing and trading fees for the two banks.