SPY

Government to Spy On Everyone Who Banks In the U.S.

On November 12, 2012,  Adam D. Clark-Joseph published Exploratory Trading, which analyzes CFTC audit level trading data in the eMini S&P 500 futures market. This is a special, "regulators-only" data-set that contains all orders and trades, and each order and trade has a trader identifier. What this paper exposes is astounding. Nanex notes that the top HFTs probe the market by aggressively pinging order books and then analyzing market reaction: a practice that allows them to get a private glimpse of the "true" supply and demand at the expense of everyone else. Once the market direction is ascertained, these HFT aggressively remove liquidity, causing an immediate market move. Since the eMini is heavily arbitraged by SPY (which in turn is arbitraged by its many components and options), these sudden moves in the eMini will set off waves of overwhelming message traffic as traders and algos react and reprice thousands of instruments in milliseconds.

U.S. equity markets rallied once again after opening weaker Monday repeating previous performances. There wasn’t much news domestically. The Fed continued modest POMO actions which will grow in scope throughout the week. Stocks were quiet most of the day but got a lift on rumors that Apple (AAPL) will declare a dividend of some kind. If they do this, then the SEC should be monitoring who and what groups were front-running this piece of news.

We are wondering if and when these signals will have significance.

Holder’s Letter Raises More Questions Than It Answers

Bernanke gave more testimony on Wednesday emphasizing and defending all Fed policies. He successfully parried all questions about QE and ZIRP risks and made no mention of any policy exit dates. Bulls translation, the printing press will be on “auto” to infinity.

Interesting testimony tidbits were:

“Fed could go some time without sending profits to Treasury,” (Fed is allowed to be a deadbeat).

“Savers will benefit with economic recovery; savers won't get strong returns in a weak economy,” (So not in my lifetime?).

Ben was in congress campaigning er, testifying mostly about the effectiveness of all things ZIRP and QE. He was grilled about possible risks with QE especially if interest rates should rise. The Bernank saying that interest rates would rise was unlikely but he then cavalierly stated if rates rise, the Fed would just “hold back on payments” er, stiff the Treasury. That’s no big deal for him since by then he’ll be down the road writing his memoirs, making speeches and joining some big Wall Street firm as a well-paid consultant. The Bernank was also asked if he noted any bubbles or market excess and said he saw none. 

Equity markets relatively collapsed intraday yesterday given the recent lack of volatility with the range around four times larger than the three-month average and volume at its highest in that period. While that is significant of itself, as the S&P broke its uptrend, Nanex has found a much more serious shift in the market structure that occurred yesterday. Soon after the open on the US day session, market-making HFTs surged their quote-stuffing efforts to the highest level in months. Whether this was intended to artificially inflate orders to enable institutional sell-orders to be crossed with falsely hopeful retail orders is unclear but given the order flow and direction of trade, it seems something significant changed yesterday.

Someone ended up holding the bag

Back in December 2011, a US RQ-170 Sentinel drone was either brought down or crash landed smack in the middle of Iran, allowing the local military and scientists to reverse engineer it furthering their own understanding of possible countermeasures, as well as selling the underlying technology to China and other countries eager to peek inside America's remote-controlled "oppression liberators." All this happened because someone during the drone design phase forgot to add a self-destruct option. Now, over a year later, we will see if someone finally thought of adding this simple feature following news that Iran has just brought down another (just modestly antagonizing) foreign spy drone over its territory.

Some interesting numbers from the Spooks.

How Many Constitutional Freedoms Do We Still Have?

While most mainstream market watchers will pontificate wildly on the VIX as indicative of whatever their whimsy of the day tends to be, we prefer to look at relative performance. The forward-looking implied vol is currently only just below its multi-year average premium to realized volatility (so a low VIX is not that exciting standalone). Realized volatility is pretty much as low as it has been in the last four years, courtesy of the Fed - and each time has been followed by a resurgence soon after. However, there is one more indicator of potential over-exuberance that offers some hope for traders - the spread between SPY (S&P 500) implied vol and HYG (high yield debt) implied vol is at its lowest since the crisis - and each of the previous four times this spread has been this narrow, we have seen notable weakness in stocks soon after. With HYG so 'cheap' to stocks, it seems being long HYG vs. short SPY, or long SPY vol vs. short HYG vol makes some sense for some low vol cheap protection.

Chinese data takeaway...

Scattering political debris and money laundering allegations far and wide