Prop Trading

Earlier today Jefferies reported another quarter in which its Fixed Income revenue could best be described as dismal: Fixed Income posted a nominal $8.4 million in revenue: a whopping 83% collapse from the already subdued $48.6 million a year ago.  The biggest irony is that while other banks are clamoring to be allowed to "prop trade" again, Jefferies which has had the green light to do just that as it never got an FDIC bailout and remains the only sizable pure-play investment bank, just got crushed precisely due to its junk bond prop trading.

From witch hunts to corporate defaults to abysmal data, Friday marked a rather unceremonious end to the week for China, as a veritable perfect storm of bad news sent the SHCOMP reeling. Unfortunately for China's day trading masses the plunge protection team was, like Guotai Junan International Holdings’ CEO Yim Fung, "missing" in action.

"This is legal?" Stephanie Ruhle on CDS after watching "The Big Short" (Bloomberg TV) 

At least parts of the Fed all the way back in 1979 appreciated how Greenspan and Bernanke’s “global savings glut” was a joke. Rather than follow that inquiry to a useful line of policy, monetary officials instead just let it all go into the ether of, from their view, trivial history. But the true disaster lies not just in that intentional ignorance but rather how orthodox economists and policymakers were acutely aware there was “something” amiss about money especially by the 1990’s. Because these dots to connect were so close together the only reasonable conclusion for this discrepancy is ideology alone. Economists were so bent upon creating monetary “rules” by which to control the economy that they refused recognition of something so immense because it would disqualify their very effort.

While the big TBTF banks managed to hide much of their ugly balance sheet exposure, and prevent it from hitting the income statement in Q3 as reported previously, while covering up prop trading losses as well as they possibly could, the banks without trillions in deposits were less able to do so: first it was Jefferies, then Goldman posted its worst quarter in years, and now here comes the bank also known as Margin Stanley, which moments ago reported Q3 EPS of $0.34, which even if adjusted for various "one-time" items, at $0.48, not only missed consensus of $0.63 wildly, but it also missed the lowest range of the estimate range ($0.53-$0.70).

Once again, Jefferies' one-month early glimpse at Wall Street trading revenues proved to be spot on. After the boutique mid-market banks reported a total collapse in fixed income trading revenues (which ended up negative following massive charge offs), everyone was looking at the biggest hedge fund among the TBTF banks - Goldman Sachs - to see just how bad the trading environment really is. The answer came moments ago, and the answer is bad. Very bad.

First The Bank of Japan destroyed the Japanese bond market, and then, back in May we warned that The Bank of Japan had 'broken' the stock market. Now, it appears the all too obvious consequences of being the sole provider of buying power in an antirely false market are coming home to roost as Nomura reports the "temporary suspension" of new orders for 3 leveraged ETFs - the largest in the world - citing "liquidity of the underlying Nikkei 225 futures market."

This is the story of a veteran NYSE specialist who noticed manipulation in the NYSE market open Imbalance, loudly complained to the NYSE, was ignored, then decided to profit from said manipulation himself... and got busted.  And that's where the story begins...

With the SEC moving to head off the risk of a bond market meltdown triggered by a dangerous combination of illiquidity and bond fund proliferation, WSJ decided to see which fund providers are the most at risk in a crisis. The list may surprise you...

"The one thing I do worry a little bit about, by the way, is Treasuries. So I wouldn’t be shocked to see 10-year Treasuries, when rates are going up, people change their mind, they change direction, that they will be violently volatile and go up much faster than people think."

Earlier today, Jefferies which is now a part of Leucadia, provided this much anticipated glimpse into how the rest of Wall Street is doing. The answer, if Jefferies is any indication, is "quote horribly" because just like two of the past four quarters, Q3 was also a disaster and indicative of nothing short of a trading bloodbath on Wall Street in the past three months of trading and especially August. In fact, it was so bad for Jefferies, it reported a massive 31% plunge in total revenues down to $579 million resulting in net income of a tiny $2.5 million as a result of what may be only its first negative fixed income revenue print since the financial crisis.

During Monday's flurry of tripped circuit breakers and flash crashing mayhem, ETF investors learned the hard way that Howard Marks was precisely correct when he warned that ETFs "can't be more liquid than the underlying and we know the underlying can become highly illiquid." The question now, is whether subsequent flash crashes will trigger even more spectacular divergences between fair value and ETF unit prices on the way to proving, once and for all, that ETFs may indeed be the new financial weapons of mass destruction.

The following map lays out the embedded, and regulator blessed, latencies between the three big New Jersey exchange centers: Mahwah (NYSE), Secaucus (BATS), and Carteret (Nasdaq) for everyone but the top tier exchange clients, the HFTs, who are greenlighted to frontrun everyone else, and generate quarter after quarter of perfect trading records.

It doesn't get more flagrant than this: the full HFT criminal monty exposed for all to see.

The WSJ reported that none other than the operator of the biggest dark pool in the US by volume, Credit Suisse and its massive Crossfinder dark pool, "is in talks with regulators to settle allegations of wrongdoing at its “dark pool” with a record fine in the high tens of millions of dollars, according to people familiar with the matter." What is grotesque about this story, is that back in December 2012, it was none other than Credit Suisse which conveniently explained and laid out all those forms of HFT manipulation which we accused virtually every HFT firm of employing since 2009... and which Credit Suisse itself is now accused of engaging in!