HFT

Just three weeks ago, Goldman Sachs cried 'uncle' when their market-making options algo-machine exploded in a fit of guilt causing the firm to face hundreds of millions of dollars losses (should the exchange not have DK'd the deals). Nanex has investigated the rogue algo and here are the findings... "As soon as option quotes in the affected symbols began exceeding theoretic economic values by some threshold, quotes (and therefore liquidity) on other options exchanges for those contracts would immediately disappear - bid/ask prices would go to zero at other exchanges. Within 10 seconds of starting, one algo, in effect, completely destroyed the concept of the National Market System and obliterated liquidity..." As they sadly conclude, what was the fine for shutting down an options exchange, and destroying liquidity in hundreds if not thousands of options contracts? There was no fine. Worse, they were able to get the trades busted. As in, pretend we didn't just do that. Pretty shocking. Until there are financial consequences for firms that turn on market disrupting algos, the markets, will continue to be disrupted.

"Traditional risk controls and safeguards - that relied on human judgment and speeds - must be reevaluated in light of new markrt structures," are the initial findings from the CFTC regarding the prevalance of high-frequency trading in futures markets. As USA Today reports, efforts to reduce trading order-processing times could "lead to a competitive race to the bottom" where positions outpace risk systems and potentially lead to systemic threats. All the signals are that the top US financial regulator may impose new restrictions to halt breakdowns and to avoid high-speed trading which "could provide opportunities for information advantage." Of course, we've heard this before and with trading volumes at 15-year lows, we suspect the 'industry' will be lobbying hard; but this is a positive step (only 3 years after the CFTC started to look at HFT).

Today's price action in Chevron will come as no surprise to any reader of ZH, but maybe, just maybe, in flipping from porn site to porn site, the SEC will stumble across our earlier note on unemployment in the 'adult movie' business and will look at the following remarkable charts. As Nanex shows, with 37 seconds to the close, one of the largest market-cap firms in the entire world saw its stock price attacked by an HFT algo that oscillated it by +/-2% about twice-per-second. As Nanex exclaims, "no longer can any HFT'ers or exchange or regulator blame THIS on humans." Perhaps the odds of another black-out on NASDARK should be higher than the current 28%.

News? Who needs news when the New York Fed shares, allegedly, a direct trading connection with HFT momentum ignition behemoth Citadel.

Wednesday's 10-7 vote in the Senate Foreign Relations Committee supporting an authorization of military attacks on Syria may have been affected by varying levels of financial support the senators got from political action committees representing the defense industry, and from the companies' employees. As The Daily Mail reports, on average, a 'yes'-voting senator received 83% more money from defense contractors than one who voted 'no.' Committee members who voted Wednesday to support the proposal collected an average of $72,850 in defense campaign financing between 2007 and 2012, Wired magazine reported, based on data collected by the Center for Responsive Politics. Those who dissented in the committee vote averaged $39,770, with the four senators who received the least amount of defense dollars, ranging from $14,000 to $19,250, all voted no. At a Pentagon-estimated cost of around $5 billion per month (for a 2-month deployment) - and in light of our previous discussion on lobbying ROIs - is it any wonder?

This week's brief 'outage' in US equity markets has been shrugged off by most, with some proclaiming that "we are getting used to it now." However, there is at least one group that are not ignoring this. Paddy Power has inaugurated bets on the next exchange in the world to suffer from a greater-than-2-hour outage, and the winner (for now) is... NASDARK. At 5/2 Odds, the pride of US capital markets is more than double as likely to suffer such an outage again by the end of 2014 than Tokyo and London and four times as likely as the emerging market Brazil's BOVESPA. USA is number 1 once again, well played...

Nearly four years after Zero Hedge first suggested an HFT tax should punish algos that "churned" quotes and blasted empty bids and offers to stimulate "momentum ignition" strategies, and generally corrupt market structure in a way that lead to both the flash crash, the BATS IPO farce, the FaceBook IPO debacle and the Nasdaq 3 hour crash, the first such tax is now a reality. And while it is not, and likely never will be implemented in a major (if declining) exchange such as the NYSE or Nasdaq, the first country to finally put an end to millions of parasitic empty quotes is Italy.

In Part 1 of this article we documented the insane remedies prescribed by the mad banker scientists presiding over this preposterous fiat experiment since they blew up the lab in 2008. In Part 2 we tried to articulate why the country has allowed itself to be brought to the brink of catastrophe. There is no turning back time. The choices we’ve made and avoided making over the last one hundred years are going to come home to roost over the next fifteen years. We are in the midst of a great Crisis that will not be resolved until the mid-2020s. The appearance of stability is illusory, as the civic fabric of the country continues to tear asunder. Record high stock markets do not trickle down. The masters of propaganda seem baffled that their standard operating procedures are not generating the expected response from the serfs. They have failed to take into account the generational mood changes that occur; propaganda loses its effectiveness in proportion to the pain and distress being experienced by the citizenry.

Spoke to Tim. Planning dinner in September. Tim believes in buyback and is doing one. What will be discussed is magnitude.

— Carl Icahn (@Carl_C_Icahn) August 22, 2013

Perhaps the best source of real, actionable financial information, at least as sourced by Wall Street itself, comes in the form of the appendix to the quarterly Treasury Borrowing Advisory Committee (TBAC, aka the Goldman-JPM chaired supercommittee that really runs the world) presentation published as part of the Treasury's refunding data dump. These have informed us in the past about Goldman's view on floaters, as well as Credit Suisse's view on the massive and deteriorating shortage across "high quality collateral." This quarter was no different, only this time the indirect author of  the TBAC's section on fixed-income market liquidity was none other than Citi's Matt King, whose style is well known to all who frequent these pages simply because we cover his reports consistently. The topic: liquidity. Or rather the absolute lack thereof, despite what the HFT lobby would like.

You're not going to believe this: gold is manipulated.  Also, Paul Craig Roberts debunks GDP and lifts the veil off our disinformational gov't

The country which over the past decade is most synonymous with "financial innovation" of the less than desirable kind, such as hyperinflation, complete currency and economic collapse and wholesale property confiscation, has just taken financial central-planning brilliance to the next level and following dictator Robert Mugabe's "reelection" has announced plans to open a new and "racially exclusive" stock exchange, allowing blacks alone to trade. And not trade just anything, but shares of recently nationalized foreign companies, most of which are South African-owned miners. Or rather were, because following the most recent nationalization round, Zimbabwe would take a 51% stake in all major foreign-owned companies valued at over $7 billion. No compensation will be paid.

Frequent readers are aware that one of our favorite topics is forensic market evidence confirming early release of market moving data to select "buyers" of said data, who then can trade ahead of the crowd and make illegal profits. The most recent example of just this took place last Friday when someone or something was leaked the non-farm payroll data as much as three second early. But while various third party profit-seeking intermediaries such as Deutsche Boerse's MNI, UMichigan consumer confidence and others have acknowledged to presell early dissemination of specialized data to subscribers such as well-paying high frequency traders, at least government data was said to be exempt from such a profit motive. At least until now: the WSJ reports that the FBI "has discovered vulnerabilities in the government's system for preventing market-moving economic reports from leaking to traders before public release. Law-enforcement officials found "a number of operational vulnerabilities" involving "black boxes" used by several departments to control the release of sensitive economic data such as the monthly unemployment rate, according to a report by the inspector general at the Commerce Department."

This insane world was created through decades of bad decisions, believing in false prophets, choosing current consumption over sustainable long-term savings based growth, electing corruptible men who promised voters entitlements that were mathematically impossible to deliver, the disintegration of a sense of civic and community obligation and a gradual degradation of the national intelligence and character. There is a common denominator in all the bubbles created over the last century – Wall Street bankers and their puppets at the Federal Reserve. Fractional reserve banking, control of a fiat currency by a privately owned central bank, and an economy dependent upon ever increasing levels of debt are nothing more than ingredients of a Ponzi scheme that will ultimately implode and destroy the worldwide financial system. Since 1913 we have been enduring the largest fraud and embezzlement scheme in world history, but the law of diminishing returns is revealing the plot and illuminating the culprits. Bernanke and his cronies have proven themselves to be highly educated one trick pony protectors of the status quo. Bernanke will eventually roll craps. When he does, the collapse will be epic and 2008 will seem like a walk in the park.

With revenues fading, profit margins collapsing, and only financial institutions' entire lack of transparency providing any lift in EPS, the 'great rotation' continues to provide enough cognitive dissonance to sink a boat for the asset-gatherers. The trouble, as we showed previously, is this 'rotation' is dominated by US retail investors (more specifically non-US domiciled and non-retail investors are rotating away from US equities). The US retail investor has shifted in a great-rotationary manner by the greatest amount since Feb 2000 - just as the last great bubble burst. US equities are the 3rd most over-crowded speculative long asset in the world after Crude Oil and the Brazilian Real. It seems the Fed is getting just what it wants but, just as Kyle Bass warned, "investors should be really careful doing what the central bankers want them to do."