In some very surprising news out Norway (thanks to all our Norwegian readers who alerted us about this), which once again condemns our own SEC for being a criminally negligent regulator, we learn that two Norwegians, Svend Egil Larsen and Peder Veiby, have been charged with market manipulation (a charge which carries up to 6 years of prison time if convicted), after succeeding to reverse engineer a stock trading algorithm used by broker Timber Hill, which is Interactive Brokers' key market maker. Allegedly, the two daytraders found a weakness in the Timber Hill algo on the Oslo Stock Exchange back in 2007 and 2008, and used it to outsmart the market maker and make a few hundred thousand NOKs in the process. The punchline is that the charge against the two is market manipulation with an intent of "using buy- and sell-orders that were not intended to be traded on, but to move the prices." The irony is that as we have demonstrated repeatedly by showing prima-facie evidence from Nanex, quote stuffing patterns by thousands of HFT algos running amok across various US exchanges, ATS and other trading venues, is precisely what happens every single day in the US - namely, algos which merely seek to push the bid or the offer in a given direction, with no intent of ever crossing a trade, all for the sole purpose of sending false indications of bulk orders coming. So when humans do it (and make peanuts compared to the billions the HFTs collect domestically), they end up going to jail; when our own system, which is geared to push stocks ever higher, does it - it is perfectly ok, and possibly even encouraged. After all, the HFTs provide liquidity, remember? Just ask Mary Schapiro. The sad conclusion is that those who wish to trade in markets that have not yet been overrun by SkyNet, or where regulation actually works, may be best served by trading on the Oslo stock exchange, and as far away from the US as possible. As for those who wish to remain in the US, here is what you can look forward for: one of Nanex' most recent crop circles, appropriately called "Robot Hunting."

Zero Hedge fully supports this petition for the return of some semblance of normalcy to America's runaway and chaotic market structure.

A few days ago, we posted a piece which sought to describe EURUSD weakness, equating it to the news of an attempt to change European pension accounting rules (which would have an impact on the all too critical deficit calculation). Oddly enough, any public mention of this development was quickly buried, as most public media venues promptly removed all mentions of this story. Luckily, in validation of our collective sanity, none other than Goldman's European Strategist Erik Nielsen takes on this issue and bring much needed light to the latest accounting fudging exercise, that could have a serious impact for European deficits, and pension systems, down the line.

We have long observed the decline and eventual death of fundamental analysis, courtesy of i) the Fed's dominance of capital markets, ii) the emergence of HFTs and technicals as key driving forces behind the stock market, and iii) the record implied correlation between all stock asset classes, meaning everything trades as one. Ironically, the result is that reasonable, long/short investment strategies no longer generate a return (alpha or whatever one calls this relic of efficient markets), and instead we are back to the good old "pennies in front of a steamroller" strategy that was so "successful" and made so popular by such spectacular implosions as LTCM. Don't take our word for it - the FT reports: "The hedge fund strategy pioneered – and made notorious – by Long Term Capital Management is returning to prominence amid one of its most successful years yet, aided in large part by the massive issuance of bonds by the UK government and other sovereigns." In other words, the market is now stuck in a mode (courtesy of central planning) which guarantees that the only way to make money, sets the seeds of the markets' own destruction. It is only a matter of time before every investment strategy follows in the flawed footsteps of John Meriwether (who unfortunately can't participate in today's market due to three prior collapses, or else he would be making mint) and soon every single asset manager (not due to their own mistakes, but basically as a function of what the market rewards now) will follow a fate which will appear like an LTCM-like supernova in which every spread convergence trade explodes to historic divergence in a span of seconds. 

One of the most beloved phenomena of Fed intervention is the "miraculous" ramp in stocks on days in which the Fed's Permanent Open Market Operations (POMO) occurred: while this was a requisite in 2009 when the Fed monetized $700 billion in Treasurys, it had gradually disappeared from the public consciousness after the termination of the Treasury portion of QE1 in October 2009. Well, now that POMO is back courtesy of QE Lite, and with the help of various sellside analysts, Primary Dealers knew precisely which Treasury CUSIPs to purchase in advance of the auction for a quick leveraged pick up of a few hundred bps. And now that the money is funded back to the PDs, as of the end of the POMO operation at 11am Eastern, it needs to find a new home. And with the PDs providing the initial impetus for a risk asset (read stock) ramp, and momo quants picking up the sloppy seconds as they jump over each other to send the momentum driven ramp ever higher, the result is presented below. What this means is that going forward, every single day that the Fed is monetizing bonds via 10:15-11:00am POMOs, it will be very foolhardy to short into the Fed's stock surging offensive. As a reminder, here are the immediately upcoming POMO days through the end of August: August 19, August 24, August 26, and September 1. Shorting on those days has once again become implicitly illegal.

During the live hearing, Bill Gross stated the obvious: private players in the MBS space will never participate as long as long as the government accepts zero down payments. Of course, he is absolutely correct - the only entity stupid enough to gamble with its seemingly endless resources in such a manner is the US government. And in doing so, it continues to widen the schism between public and private interests, and makes the return of private businesses in this most important segment of US credit markets an impossibility. In fact, Gross urged a move one step further, with the full nationalization of the GSEs - as the GSEs are nationalized now in all but writing, this would be logical. Alas, the fact that US Debt to GDP would jump from 90% to 140% may make this proposal a little difficult to implement.