Q: How do you make a small fortune on Wall Street?
A: Start with a large fortune.
~ old investing adage
As Nanex's Eric Hunsader pointed out, while the well-paid HFT-lobbyists proclaim their rigging clients "knit together liquidity from all markets," it appears BATS' new CEO (since the lying old one left) disagrees. The exchange that caters significantly to the front-running HFTs believes it knows how to improve the market for thinly traded stocks... it will stop handling them.
While the last trading day of 2014 will be important if only to see if Dow 18,000 can be recaptured on what is sure to be the lowest volume in years, don't expect much help from Brent which continues to slide and was down nearly 3% at $56.20 or WTI which is also flirting with the $53 level, down almost 2% overnight both set to cap the worst year for the commodity since 2008. Not much should be expected from Treasuries either, set to return over 6% in 2014 - the best performance since 2011 - crushing the latest hoard of bond shorts all of which got the Treasury move in 2014 epically wrong, which will close early at 2 pm. Which means that the HFT algos will once again be driven off the illiquid USDJPY correlation, where low volume will mean 5-10 pip moves today should be the norm, as well as European stocks, whose Stoxx Europe 600 Index rose 0.3% earlier on the latest round of jawboning by an ECB member, this time Dutchman Peter Praet, who said in an interview with German newspaper Boersen-Zeitung that lower oil prices increasingly risk de-anchoring inflation expectations, indicating that quantitative easing is becoming more likely.
Blind faith in policymakers remains a bad trade that’s still widely held. Pressure builds everywhere we look. Not as a consequence of the Fed’s ineptitude (which is a constant in the equation, not a variable), but through the blind faith markets continuing to place bets on the very low probability outcome – that everything will turn out well this time around. And so the pressure keeps rising. Managers are under pressure to perform and missing more targets, levering up on hope. Without further delay we present our slightly unconventional annual list. Instead of the usual what you should do, we prefer the more helpful (for us at least) what we probably wouldn’t do. Five fresh new contenders for what could become some very bad trades in the coming year.
Just because Russia has managed to stabilize its currency, that certainly does not mean the soaring dollar tantrum-cum-crude crash episode is anywhere near over, nor that stability has returned to the rest of the oil-exporting countries. Case in point, crude-exporting powerhouse Nigeria, where things are going from worse to #REF! Bid and ask prices for the naira were quoted from 162 to 190 per dollar with only 16 trades by 1 p.m. in Lagos [yesterday], compared with more than 170 by the same time yesterday, according to data compiled by Bloomberg. The naira fell 12 percent against the dollar this quarter, the worst among 24 African currencies tracked by Bloomberg after Malawi’s kwacha. Investors dropped Nigerian assets as the outlook for Africa’s biggest oil producer worsened with Brent crude prices almost halving since late June. “The banks can’t stop trading because of the circular,” the Deputy Central Bank of Nigeria Governor Sarah Alade said. “It is not supposed to close the market. We have told them we’ll continue intervening in the market, so there is no need to panic.”
Moments ago, Bloomberg released a stunning update that Europe's largest bank is exiting the single-name, both IG and HY, CDS product line, which for years was one of its biggest revenue generators and a product in which DB was for a long time one of the best and deepest CDS trade axes. As Bloomberg reports, Deutsche Bank AG will stop trading investment-grade and high-yield credit default swaps on single credits and will instead focus on trading corporate bonds, according to a spokeswoman.
The mainstream media is latching on to the idea that all is not well in the world of 'markets'. The FT's Gillian Tett notes that, as we have vociferously explained, almost every measure of volatility has tumbled to unusual low levels, "this is bizarre," she notes, "financial history suggests that at this point in an economic cycle, volatility normally jumps." But investors are acting as if they were living in a calm and predictable universe, "[Investors in] the options markets are not pricing in any big macro risks. This is very unusual." In reality, as Hyman Minsky notes, market tranquility tends to sow the seeds of its own demise and the longer the period of calm, the worse the eventual whiplash. Tett concludes, that pattern played out back in 2007... and there are good reasons to suspect it will recur.
It is very apparent the Fed literally are making policy up as they go along and Wall Street doesn`t realize that the Fed has no exit strategy. The learning curve is going to be painful as always for Bond Holders.
China and Russia signed an historic agreement in Shanghai this week - the ramifications of which have yet to be appreciated ... Reserve currency status does not last forever. Empires rise and fall. The world is constantly changing and evolving. Nothing lasts forever …
The topic of High-Frequency-Trading quickly dissolves into a smorgasbord of mnemonics and 'inside-baseball' technical terms - just complicated enough to lose everyone that matters or should care about its implications. Despite the fair-and-balanced defense from the mainstream media business channels (sponsored by the belief in the status quo fair markets that 'America the free' is known for), the fact is that HFT does front-run (perfectly legal under the umbrella protection of Reg NMS) order flow, but there may be one more wrinkle - one which would cement the Michael Lewis (accurate) allegation that the market is rigged.
It is perhaps little wonder that Virtu was in such a hurry to use the cover of the JOBS Act to IPO itself before the whole HFT 'game' was exposed. Just 5 years after we first drew the world's attention to the potential damage that HFT could do; and mere minutes after we posted our article on how HFT is being set up to be the scapegoat for all that is broken with the market and conveniently distracting from the Fed, and god, or perhaps his agent on earth Goldman Sachs, 'completely unexpectedly' sends in the FBI:
- *FBI SAID TO PROBE HIGH-SPEED TRADERS OVER ABUSE OF INFORMATION
- *FBI Working With SEC, CFTC in High-Speed Investigation
- *FBI Investigating Whether High-Speed Firms Trade on Nonpublic Information
Now, the question is: how many HFTs will stop trading for fear that any further trading on 'non-public information' will be deemed criminal from this point... or keep trading and lobby/hope that "a reasonable man" will believe their liquidity-providing lies.
There is no reason for Russia to worry about the western sanctions it is facing now over the Ukrainian issue since "Moscow has too many other trade partners to work with," Jim Rogers explains in this interview, adding that "America is shooting itself in a foot getting the most of our world to pushing China and Russia closer together." Simply put, he warns, "I don’t see any sanctions strategy that they can use that will hurt Russia worse than it will hurt the people imposing those sanctions... I think Mr. Obama is making the fool of himself yet again."
As we warned last week, stockpiles of iron-ore have reached record levels in China as end-demand slumps but, as Bloomberg notes, this is potentially creating massive dislocations in other markets. Record imports of iron ore and copper, driven by traders who use them as loan collateral, risk repeating the vicious cycle of repayment difficulties and falling prices already seen in the steel-trading market. A stunning 40 percent of the iron ore at China’s ports are part of finance deals (having replaced copper after China's last shadow-banking crackdown) and with the glut, prices drop (driving down the value of collateral on loans) and "borrowers, forced by their bankers to repay loans or to top up collateral, will have to sell the metals, sinking market prices even further and begetting a vicious cycle."
“This is different" and "this location is different" is the mantra of every property bubble. We will soon see if the London property bubble is truly different or will suffer the fate of the bubbles throughout history. Of the four charts in our market update today, which ones do you think show characteristics of a bubble? Those diversifying and buying gold in the UK will be rewarded in the coming years. The smart money is reducing exposure to overvalued London property and increasing exposure to undervalued gold.