dark pools

The SEC has opened up the public comment section for File No. S7-02-10 "Concept Release on Equity Market Structure" also known as the "Help us because the SEC is hopelessly lost when evaluating the impact of high frequency trading" proposal. As the SEC points out: "This release is intended to facilitate public comment by first giving a basic overview of the legal and factual elements of the current equity market structure and then presenting a wide range of issues for comment. The Commission cautions that it has not reached any final conclusions on the issues presented for comment. The discussion and questions in this release should not be interpreted as slanted in any particular way on any particular issue. The Commission intends to consider carefully all comments and to complete its review in a timely fashion. At that point, it will determine whether there are any problems that require a regulatory initiative and, if so, the nature of that initiative." Most relevantly for Zero Hedge readers, the SEC's response solicitation form is now open and can be found here.

• Must read: Did foreigners cause America's financial crisis? Or what happens when all your debt and equities are belong to us (Newsweek)
• Ben Bernanke's term running out as Senate democrats try to set a vote (The Hill)
• Banks set for record pay, and you thought Goldman was bad - Morgan Stanley prepares to fork over a stunning 63.8% of revenue as compensation (WSJ)
• Dark pools may face pricing disclosure rules, EU watchdog says (Bloomberg)
• In defense of the case against HiFTers (Cassandra)
• Senate to vote on PAYGO legislation to clear way for debate over debt ceiling (The Hill)
• Dubai flare up 2.0? Abu Dhabi's Dubai aid shrinks to $5 billion (Reuters)

Since the SEC is beyond incompetent, and all it knows is how to place its employees at major Wall Street firms, the regulator is appealing to you, dear reader, to inform Mary Schapiro just how busted up the current equity market truly is, and to provide ideas on how to fix it, and to explain why "the current highly automated, high-speed market structure" is fundamentally unfair for investors.

As part of the Barney Frank proposed Manager's Amendment, which will accompany HR4173, the "Wall Street Reform and Consumer Protection Act of 2009", are three little-noticed rules that, if adopted, will make shorting stocks if not impossible, then extremely problematic and difficult. It is obvious why these rules would end up in an amendment: the outcry from retail and institutional traders would have been huge had these proposals made the full text of the proper Bill, and into the full view of the Mainstream Media. So why bother with these - simple. As everyone is aware, Ponzi schemes only work when constantly growing, as otherwise they blow up, implode under their own weight, once price discovery is attempted by all. Case in point: when Madoff's securities was unable to find another greater fool in the face of collapsing asset values, the jig was up overnight, and the value of the pyramid went from $50+ billion to $0 instantaneously.

In this manner, Ponzies are like sharks - they need to swim to live: any deviation from the norm threatens their very survival. By comparison, shorting has always been the most traditional way to force price discovery: as idiot money pension funds tend to be long-only, selling only occurs in times when book gains have to be realized, and facilitates a rising market without any natural checks and balances. If this amendment passes, the entire equity market will have become Madoff securities to the dot. It will continue going up, until market values are a reflection of no underlying fundamentals, but simply the latest pension fund long-only dumb terminal willing to throw managed capital into the bonfire of an inevitable future stock market collapse. And, to borrow another page from the Madoff analogy, when the inevitable correction does occur, it would not be 10% or 20%: the entire worth of the Ponzi would be gutted.

Anyone looking at their 401(k) portfolio performance since the end of August will undoubtedly be very happy (and extremely surprised), as the market has climbed steadily higher despite i) increasingly declining trading volume and ii)consistent and material withdrawals from domestic equity mutual funds. Furthermore, if anyone was merely looking at the trading action in regular hours, one would think there was absolutely no profit made since early September. The reason for that: all the upside since September 14th has come exclusively from after hours action. The chart below demonstrates the relative performance of regular hour trading in the SPY as well as that in the extended session. The notable observations: gaps, gaps, gaps. Every single day, minimal volume pushes the futures index higher. Good news, bad news, it don't matter to the Goldman S&P and Russell 1000 futures desk: they just lift every micro offer, giving the impression that the market is unstoppable, often leapfrogging each other as the latest viagra'ed GDP or unemployment rumor is spread. Come morning, it is time for the HFT brigade to come in and scalp their trillions of pennies while leaving the market unchanged, then at 4pm handing it off again to leveraged futures manipulation and dark pools. In a nutshell, this is the secret of the past quarter's phenomenal market performance.

• Bad news for Athens: ECB says no bailouts, look for record Greek CDS risk shortly (WSJ)
• Suspected intervention weighs on Swiss franc (FT)
• For stocks, the worst decade ever (WSJ)
• Fund boss made $7 billion in the panic (WSJ)
• Mihskin's brilliance to the forefront again, as Iceland lawmakers reject Icesave bill, another downgrade impending (Bloomberg)
• China now exporting its bubbles: considers extra $200 billion for CIC sovereign wealth fund (Bloomberg)
• Tishman's $5.4 billion boomerang gives Rob Speyer costly lesson (Bloomberg)

With the role of HFT in stocks being actively investigated thanks to Senator Kaufman's ongoing crusade against a two-tiered market, the spotlight has shifted toward High Frequency Trading strategies in options, where now the exchanges themselves are evaluating whether HFT traders are benefiting from their two-tiered role as both a preferential customer and a market maker, however one, having no obligations to create a market, when things turn ugly. A report by Dow Jones titled "Influx Of High-Frequency Traders Prompt New Rules In Options" notes that "options exchanges are drafting new policies to address the ever-expanding role of high-frequency traders in their markets. The policies aim to eliminate some of the advantages that high-frequency traders currently have over professional options market-makers, representing an attempt by the exchanges to level the playing field between these two huge players in the options market and to maintain the orderly functioning of the market." As more transparency is shone on every market dominated by this now-pervasive paradigm, especially with regulators woefully behind the curve, the latest development in the ongoing unmasking of various HFT strategies will only benefit the broader markets.

Dark pool operators, who have quietly been redirecting shady order flow via dark pools of "liquidity" with minimal supervision and below the radar for many years, are getting spooked by a proposed SEC rule which would have these same dark pools identifying their trades in real time, thus removing the benefits associated with what is effectively an OTC equities market. Their response: blame it all on the HFT guys, who use the information that would leak to front-run the crap out of the "long-onlies." Yet weren't these same HFTs claiming just yesterday that all they do is provide liquidity and tighten spreads? ... Someone is lying.

“It is alarming to look at what the Europe and Central Asian countries are soon to face as the region continues to age,” said Schwarz. “Future pension system deficits can be threefold than what is currently expected, and are expected to remain at that level for more than 20 years before slightly improving. Policymakers need to use the opportunity of the current crisis to address long-term issues, which could bankrupt pension systems precisely when the numbers of people who need them are growing.”

There is now no question that the sole, undisputed factor driving credit and equity markets is the dollar destructive collusion between the Fed and the major global central banks. As long as the Fed is dead set on inflation, and is willing to throw trillions of free liquidity at any problematic flare up, and is happy to keep interest rates at 0%, liquidity-addicted equities will likely push higher until such time that the incremental hopium "hit" does nothing, and markets overdose, ending up not just in the critical condition reminiscent of fall 2008, but outright death. Until then, expect to see your daily dose of market buoyancy from whatever algo is currently the dominant momentum platform gunning the market ever higher, even past all disconnect with traditional correlations such as FX, credit and commodities. If the Fed wills it, so it shall be. Alas,while the Bank of England was apparently an easy target, when it comes to massive financial fraud and malfeasance, the Fed is untouchable.

Uh-oh...

One has to admire Senator Kaufman's persistence. Yet with the market now going back to massively inflated levels which reflect nothing but excess Fed-subsidized liquidity, and with the general population having again forgotten that a year ago on November 21 2008 the world seemed like it was going to end (and SRS hitting several hundred dollars per share), the window to speak to sympathetic ears that actually care may have closed. It will open again, of course, but by then it will be too late.

High Frequency Trading coming to a Joe Francis-produced, soft-porn torrent near you.

"How much of the rebound in real GDP was due to the fiscal stimulus, and where do we stand in terms of the effects of stimulus thus far? Although precise answers are impossible at this juncture, several aspects of the report are consistent with our estimates that the fiscal package enacted in mid-February as the American Recovery and Reinvestment Act (ARRA) would have accounted for virtually all of the growth reported for the third quarter." - Goldman Sachs

These are some, of the more important, headlines coming from Europe