How The Fed Masterfully Punk'd Algos Into A Stock Buying Frenzy

Tyler Durden's picture

Something unexpected took took place yesterday: as we showed just after the FOMC statement hit, while the "hawks" had been pre-advised by the unofficial Fed mouthpieces to watch for instances of the word "patient" as a signal of shift in monetary policy by Yellen, the "doves" were looking for just one thing: any instance of the phrase "considerable time."  Or rather the Doves' algos, because if the Fed had maintained its "considerable" language it meant the coast was clear to bid up risk to the moon.

So what happened: in a completely unexpected twist, the Fed used not only the much anticipated "patient" phrase, but - in what many speculated was a hint to the word-scanning algos that the coast was all clear to buy - it also added the "considerable time" phrase within the same paragraph. To wit:

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. 

Some promptly saw right through this cheap attempt at linguistic manipulation of the only kneejerk "market-makers" left that matter: the HFT algos that decide whether to buy or sell based on a nanosecond parsing of the Fed statement in search of specific keywords (such as "considerable time"), and then immediately going all in on the bid or ask side.

And since the Fed was allegedly shifting to a hawkish posture, yet had managed to invoke the much desired "considerable time" kneejerk response which suggested an indefinite dovish posture, the market exploded higher both in the millisecond following the announcement and in the final print, and the DJIA is now up some 600 points in the past two days on the back of the Fed statement and its successful punking of a few not so bright algos.

Impossible, you say. The Fed would never stoop so low as the actually collaborate with algo "nuance" analyzers in order to goose the best possible, and thus most bullish response possible.

Really? Here's Bloomberg, 24 hours after our tweet:

The financial press, universally considered to be among the smartest not to mention best-looking humans on the planet, faced a conundrum yesterday when the Federal Reserve’s policy statement came out.

 

Much of the investment universe was fixated on whether the two words “considerable time” would remain in the central bank’s statement in reference to how long policy makers intend to keep their benchmark interest rate near zero. A quick search of the document found the phrase, and so some of the fastest typists dutifully reported its presence.  Yet taking the time to actually read the paragraph showed that the Fed was moving away from those two words. The Fed was saying it would be “patient” when it comes to normalizing monetary policy, guidance it then said was consistent with the previous “considerable time” language. As the headline on the Barron’s web site put it seven minutes later: “Fed Keeps ‘Considerable Time’ Phrase – Sort Of.”

 

As humans struggled to understand what nuance, if any, existed between the two catch phrases, the automated computer programs that do so much of the trading these days immediately reacted and so stocks and Treasuries shot higher in tandem. Did the machines start a buying binge after a simple, successful search for “considerable time?” It’s possible, according to Paul Tetlock, an associate professor at Columbia Business School, who has researched how stocks react to news stories.

 

“But it’s hard to predict how automated news reading programs would react,” he said in an e-mail. “High-frequency trading firms regularly redesign their algorithms to take subtle wording nuances into account and to respond appropriately to other firms’ trading strategies.”

Actually, judging by the market reaction - which was a masterfully choreographed universal jerk higher - it was not hard to predict at all: "the Standard & Poor’s 500 Index (SPX) leapt from the 1,995 level at 1:59 p.m. New York time to 2012.47 at 2:03 p.m., a rise of almost 0.9 percent."

Of course, the Fed, like everyone else, merely caters to its audience:

The central bank, of course, must now realize that its audiences stretches well beyond the legions of “Fed watchers” in banks, brokerages and media to the all-important silicon constituency nestled together in exchange data centers.

So for all those who predicted that the Fed will indeed stoop so low as to merely engender yet another contrived, and much needed Santa Rally, by punking algos with its announcement, congratulations.

For everyone else, Bloomberg has a pun to cheer you up: "The initial rise in Treasuries sent 10-year yields from 2.105 percent at 1:59 p.m. to 2.066 percent by 2:02. The rate climbed back to 2.137 percent five minutes later.  In today’s frenetic electronic trading environment, that is -- to borrow a phrase -- a "considerable time."

Ha-ha. Now back to BTFATH.

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El Vaquero's picture

<--- Zimbabwe style

<--- Systemic FUCK YOU style contagion

 

If the Fed doesn't fire those printing presses back up and hyperinflate us out of this mess, we're going to wake up one morning and some major player(s) won't be able to meet obligations, and shit will just be frozen.  

JRobby's picture

Being first is not always a good thing.

Think: Pontiac Aztec

ParkAveFlasher's picture

Second mouse gets the cheese.

himaroid's picture

Picking at TLT.

Not much more upside in stocks.

Option expiry and SPY ex div date tomorrow.

Give it all back soon.

i_call_you_my_base's picture

"universally considered to be among the smartest not to mention best-looking humans on the planet,"

Man, fuck you.

Bollixed's picture

I suspected they were using fun-house mirrors to frame their perspectives. Now they finally admit it.

madbraz's picture

like the FED has nothing to do with those algos...yeah right.  where is the NSA when you need them.  call the north koreans.

KnuckleDragger-X's picture

The game can be played by both sides and I'm willing to bet that the release was written by somebody wth experience in symbolic logic. You can program the hell out of a computer but it still doesn't think.

TruthHunter's picture

The Sorcerer's Apprentice is busily chopping up his broom

Ahoy Polloi's picture

So that's what it's come down to? [Single word PARSING ~ aka 'algo secret code']

 

Let's help the poor befuddled 'word challenged' banksters with future 'keyword' nominees starting here:

 

I'll start:

 

FUCK YOU GREENYELLNANKE

 

 

SidKhadak's picture

Why the entire Western Media including ZeroHedge backed out the Peshawar Attack ?

 Continuation of Colonial British Strategy for the Subjugation of the Subcontinent

http://greatgameindia.com/peshawar-attack-the-empire-strikes-again/

The recent attack in Peshawar following the blueprint of the ongoing disintegration of Pakistan is not just a matter of penetration of the military and the intelligence services by forces friendly to the Taliban, but is the direct result of Colonial British Strategy—with the help of U.S.-based co-conspirators—to partition the country into a potpourri of ethnic entities.

The break-up of Pakistan’s westernmost wing is evidently backed by the colonial forces, and their adjuncts; it would establish an unstable state that would depend wholly on Western powers for its survival. That would cut off both India and China, in particular, from land access to the Central Asian oil and gas fields, as well as from Iran. Over a period of time, it would also endanger Russia’s southern flank.

PeshawarAttack Continuation of Colonial British Strategy for the Subjugation of the Subcontinent

http://greatgameindia.com/peshawar-attack-the-empire-strikes-again/

Usurious's picture
Usurious (not verified) SidKhadak Dec 18, 2014 3:18 PM

 

 

yep.......the neo-cons gots there fingerPRINTs all over this one....

Bell&#039;s 2 hearted's picture

banksters managed to get 10yr yield back to 2.2% ... in order to preserve their preciously slope yield curve ... but like anyone borrowing? ... looking forward to MBA's weekly mortgage index for this week ... i bet a $1 it will be a double digit down crater

 

but like they even care about the real economy anymore ... how many more thousands of mortgage lending officers will be let go?

JRobby's picture

No borrowing, the FED is buying. Undercover ops

Esso's picture

The fed "pwned" some folks.

pFXTim's picture

seriously? I find it hard to believe that these algorithms are this stupid/naive/simple-minded.

 

Bell&#039;s 2 hearted's picture

like the statement mattered ... if it didn't work they would have a sent a parade of "bullards" out there till objective achieved

yrad's picture

Cue the upside-down Deer DAMMT!

Jack Burton's picture

Isn't 70% of all market trading done by machine programs using HFT?  How could a person trading using their human skills have a clue how to trade, when machine track his every move and front run him on every trade? That is why machines are housed as close to the exchanges as possible, to be between all human traders and the markets. Catching your signal [via you orders that go by the HF machine on the way to market], and skimming your profits before you can get you trade confirmend.

It seems to me, this is criminal market rigging. It is a crime. Yet in an America that rewards failure at all levels and considers crime as business as usual, perhaps we are fucking dupes for allowing them to use us a crops to be harvested by their HFT machines and ultra short and ultra fast connections set up right inbetween your orders and the market makers.

Does all this sound corrupt and criminal? Yes. Does all this sound like American Capitalism in 2014? Yes. Will legality ever return to markets? No. Will failure ever be punished? Yes! But , YES, only if YOU are in the 99%. The 1% have a Communist Goverment that guarantees their profits, and makes their losses, your losses.

Of course, Media and Government both hail this as the great American market, the great American freedom and opportunity machine. It is of course. If YOU are the 1%.

layman_please's picture

what is the most ridiculous about all this is that anyone willing to expose the criminal market rigging is considered terrorist, enemy of the state or just traitor, and the ponzi is now a matter of national security .

Ghordius's picture

I think this is the point where I have to defend the current markets. I mean of course the exchanges

not long ago, most of them were similar to non-profit organizations. now they are themselves profit-oriented. yes, they are public institutions. fulfilling a public function. and yet they are in general private and for profit, aka corporations

so there you have it, this is the quandary that calls for markets and competition. among exchanges. and this is also again a wonderful example that we, in the whole West, have been subjected to endless propaganda about "leaving it to the markets", when in some markets there are clearly well entrenched oligopolies... like in the exchanges biz

if you want to compete in those private arenas, you have to have algos. so the "competion among exchanges" would have to produce new exchanges, which cater to those who won't or can't compete with algos

and so, if you think about, you'll realize that those exchanges were always special oligopolies, with a few "insiders/specialits" providing a market for all others. just think about the theory of the "benign speculator" or the "benign market maker"

a benign market maker was for example... Baron Rothschild of old fame. he bought debt from the Tsar of Russia at 80 cents for the dollar, sold it in greater bundles at auctions held only for his allies at 85%-90%, then they all floated this in their secondary market at 95%, selling their bonds whenever it went higher as let's say 95% and buying (i.e. setting a floor) whenever it went lower then 90%

the very fact that Baron Rothschild would hold a great chunk of this Russian Imperial Debt showed that he had "skin in the game", and gave confidence to his customers

so yes, for all the fact that exchanges are of public interest, they are nevertheless very private affairs. but at Rothschild's times, customers were more cautious. they required to know who was managing this market, who was the market maker, who stood to lose a bundle if the whole thing went topsy-turvy

in contrast, today, for all this talk about capitalism, people seem to require a state intervention in "corrupt and illegal markets" at every stage. Rothschild's customers of old would be amazed. They would ask: why do you even consider investing in exchanges/markets which you don't understand or where there isn't a clearly capable operator managing it as "market maker"?

but then of course, came plenty of credit, and so plenty of leverage, which resulted in 1929. and so on, with some decades in between where "markets" were shunned. until a new "faith in the markets" came, all circling down in a spiral of less and less... propriety

Eagle Keeper's picture

If the algos are reading search trends to make buying decisions, Maybe we could stary a viral search for "End Of Earth Event" or something that would spook the alogs into a massive selloff?

layman_please's picture

"If the algos are reading search trends to make buying decisions" 

you make it sounds like artificial intelligence. in the hands of the bankers. what could go wrong.

HungryPorkChop's picture

@Eagle Keeper : You bring up a good point.  If you knew key words which the machines use for algo trading you could have numerous people posts these all over of the web in various financial blogs all day long and wait for the machines to pick this up and go into crazy mode. 

 

 

stocktivity's picture

Bastards!!!  They knew exactly what it meant to keep those words in the statement. That was no coincidence.  It's all Bullshit!!!

tommylicious's picture

punk'd?  they're up another frickin' 30.  

doggis's picture

SO IS THE FED - WITH THEIR ALL SEEING EYE - PLAYING WORD GAMES TO SPARK AN INCREDIBLE ALGO SHORT SQUEEZE BECAUSE THEY HAVE A PUT UNDER THE EQUITY MARKET...... OR.........ARE THEY PLAYING WORD GAMES THUS GIVING THE 'IMPRESSION' OF A PUT BECAUSE WHEN IN FACT THEY ARE IN THE PROCESS OF "CRASHING" THE EQUITY MARKET.

 

IF THEY CAN MANIPULATE EVEN ZEROHEDGE TO REPORT THAT THEY STILL HAVE THIS IMPLICIT PUT, AND ARE DOING EVERYTHING IN THEIR POWER TO LEVITATE THE MARKET - THEN THEIR CURRENT ENGINEERING OF THE CURRENT CRASH WILL PUT THE FED AT ARMS LENGTH DISTANCE.

 

IF SO, THAT IS WHAT I CALL  TRUE FED MASTERY!!!!!!!

 

 

JRobby's picture

I'm having a hard time hearing you. Could you speak up? Thanks.

SillySalesmanQuestion's picture

Welcome....to, the Machine.

One And Only's picture

I've been wondering if "the price in oil is transitory" will be Yellen's "subprime is contained" phrase.

If you're long stocks take this opportunity to correct your mistakes and exit. Don't be the bag holder.

JRobby's picture

They farted and the algos see BUY

Hohum's picture

You have access to a lot of credit.  So, what do you do?

Invest in a factory or energy research or leverage to buy stocks?

We know the answer--a rising stock market, a sign of anti-wealth.

Fun Facts's picture

Protocol #20 Replace sound investment with speculation

silverer's picture

Yellen: 0-1/4%. Vlad: 17%. Yellen: virtually no policy change, full steam ahead. Vlad: trying to fix a problem, and save the Russian currency. This is going to be good...

fukidontknow's picture

My algo is looking for three words fuck you Yellen.

tommylicious's picture

how about if the algos scan my wiener?

will ling's picture
will ling (not verified) Dec 18, 2014 4:17 PM

why does everyone, including it seems ZH, pretend this is a market?

Baby Eating Dingo22's picture

Is it me, or has the market just gone batshit crazy?

TheSkipper1967's picture

All our times have come
Here but now they're gone
Seasons don't fear the Algos
Nor do the wind, the sun or the rain... we can be like they are
Come on baby... don't fear the Algos
Baby take my hand... don't fear the Algos
We'll be able to fly... don't fear the Algos
Baby I'm your man...

La la la la la
La la la la la

RaceToTheBottom's picture

I think that they should just program the stockmarket to go up 2.4%/month, with a standard deviation of 0.  It would more to their goal of price maintenance...  Just don't call it a market

yogibear's picture

The Federal Reserve has to keep intervening.

 

AdvancingTime's picture

When the third quarter GDP was announced it came out that a 10% jump in federal spending, mostly on Pentagon hardware had  bolstered growth. This was the biggest increase in federal spending since 2009 when the Obama administration put in place a huge economic stimulus package. Still important economic numbers being released continue to come in below expectations and the stock market remains at historic highs. Please tell me what is so good? What is so much better?

As I see it the weight of carrying a large number of unemployed and people who have dropped out of the work force is wearing society down through attrition. The article below points out some of the glaring flaws in the argument that blue sky lies ahead as the stock market seems to indicate. As I look at a landscape of empty and under-leased buildings that once housed thriving businesses that provided Americans with good paying jobs I'm forced to ask, How are things getting better?

 http://brucewilds.blogspot.com/2014/10/tell-me-again-how-things-are-getting.html