While the defenders of HFT continue spouting their usual platitudes (with the latest piece of "anti-hyperbolic" fluff coming from "Mr. Quant" (but don't call him an HFTer) Cliff Asness himself who said overnight that "markets are "rigged" in favor of, not against, retail investors"... so - rigged?) the reality is that while one can debate the ethics of HFT frontrunning orderflow until one is blue in the face (or until Goldman tells the DOJ to slam the hammer on the high freaks once and for all), the biggest adverse impact from HFT continues to be the inherent instability that algo trading creates in the market. For empirical evidence of just this, we once again go to the usual source which everyone ignores until months after the fact is seen as having been right about everything, Nanex, which looks at one particular aspect of market instability, namely Limit Up, Limit Down circuit breakers and finds something very disturbing.
We live in a pretend economy. It is important to recognize this condition, especially if you are an investor. Current market behavior is concerning. Bonds and stocks remain volatile and near record levels. Markets ignore the continuing stagnation in the pretend economy, buoyed apparently by government liquidity injections. To justify investing today in these markets, one must anticipate one or both of the following: economic growth is about to surge; and/or market values can continue to rise from here, potentially further widening the already large gap between valuations and fundamental economics. No reading of the economic tea leaves suggests a surge in economic growth is coming. Indeed, a critical analysis of the data makes one question whether there has been a recovery at all. Certainly any recovery has to be labeled as abnormal. Playing these markets in any conventional manner is akin to writing insurance policies for suicide bombers.
UPDATE: Gold futures are back in the green for the day... (and Bitcoin is back under $1000)
Rumors of a 'fat finger' abound from the gold futures pits but the precious metals complex just collapsed instantaneously... and the market was halted for the now traditional 10 seconds as circuit breakers were triggered, only this time instead of Stop Logic the event was "Velocity Logic" or lack thereof. Of course, the timing is perfect as it occurs right before the first POMO of the new year.
Gold (>$1260) and silver (>$20) are extending yesterday's gains as US markets awake this morning. The crack higher at around 8:07ET caused the futures market to be halted after 3,000 Gold Futures contracts traded in one second at 08:07:45 on December 10, 2013 sending the price up $10 and tripping circuit breakers for 10 seconds. Silver is now +4% on the week and gold +2.5% as Treasuries are also bid. Stocks are stumbling overnight, driven by the "fundamentals" of a drop in EURJPY after it tagged 142 overnight and fell back.
Shortly after 1amET this morning, someone with no apparent fiduciary duty to their client's for best execution or any apparent trade allocation expertise decided it was time to dump 1500 contracts into an entirely illiquid gold futures market. The 150,000 ounce notional sell order ($184.5 million), captured graphically by Nanex, sent the price down $10 instaneously, tripped the exchange's circuit breakers and halted the market's trading for 20 seconds (once again). This is now the 4th market halt in the past 3 months (and this time on no news whatsoever), as the manipulative monkey-hammerings from who knows whom (BIS?) is becoming increasingly obvious.
Long before Edward Snowden's whistleblowing revelations hit the world and the Obama administration's approval ratings like a ton of bricks, we ran a story in March 2012 which exposed the NSA's unprecedented domestic espionage project, codenamed Stellar Wind, and specifically the $1.4+ billion data center spy facility located in Bluffdale, Utah, which spans more than one million square feet, uses 65 megawatts of energy (enough to power a city of more than 20,000), and can store exabytes or even zettabytes of data (a zettabyte is 100 million times larger than all the printed material in the Library of Congress), consisting of every single electronic communication in the world, whether captured with a warrant or not. Yet despite all signs to the contrary, Uber-general Keith Alexander and his spy army are only human, and as the WSJ reports, the NSA's Bluffdale data center - whose interior may not be modeled for the bridge of the Starship Enterprise - has been hobbled by chronic electrical surges as a result of at least 10 electrical meltdowns in the past 13 months.
News yesterday that Radioshack was planning to seek new debt financing in order to give suppliers more confidence - which in itself is kind of ironic that suppliers would find an even-more-levered company a better credit risk - sent the stock spiking higher by 10% in mere seconds as the machines took the headline and ran with it. Sanity was restored moments later as the stock hit the exchange limits and was instantly reverted back to unchanged. While the firm faces its own fireworks over employees punching customers "for being sarcastic," the stunning charts below show the real fireworks that the machines started...
As a quick reminder, the old marketwide circuit-breaker system where a drop of over 2,400 points in the DJIA was needed to close the market after 2 pm no longer exists. Instead, the SEC revised its market-wide circuit breakers as follows...
Gross: What hath Kuroda wrought? JGB yields a bigger influence on Treasuries than tapering potential.
— PIMCO (@PIMCO) May 28, 2013
Just over 4 hours ago we discussed the stunning collapse in 10Y Japanese bond yields. Since then - things have taken a very dramatic turn for the worse for bonds. 10Y JGB yields have exploded higher. The move from 32bps to 65bps triggered circuit breakers on the Tokyo Stock Exchange in JGB Futures trading as JGB prices plunged by their largest amount since September 2002. We can only imagine there is liquidations galore occurring given the massive outsize moves we are seeing in Japanese bonds, stocks, FX, swaps, and CDS. Did the BoJ just lose control?
According to the updated NYSE Q2 circuit breaker levels, it will take a 4,350 point drop in the NYSE for an all day trading halt. Of course, if the DJIA tumbles by 30% intraday, whether to close the several hundred shares trading on the NYSE will be the last thing on people's minds.
Here a three views that are outside the consensus.
A few days ago, Credit Suisse did something profoundly unexpected: its Trading Strategy team led by Jonathan Tse released a report titled "High Frequency Trading - Measurement, Detection and Response" in which the firm - one of the biggest flow and prop traders by equity volume in both light and dark venues - admitted what Zero Hedge has been alleging for years (and has gotten sick and tired of preaching), and which the regulators have been unable to grasp and comprehend: that high frequency trading is a predatory system which abuses market structure and topology, which virtually constantly engages in such abusive trading practices as the Nanex-branded quote stuffing, as well as layering, spoofing, order book fading, and, last but not least, momentum ignition. While we we cover the full report in the next few days and all its SEC-humiliating implications, it is the last aspect that we wish to focus on because while all the prior ones have been extensively covered on these pages in the past, it is the phenomenon of momentum ignition that goes straight at the dark beating heart of today's zombie markets: momentum, momentum, and more momentum, in which nothing but stop hunts and even more momentum, define the "fair value" of any risk asset - i.e., reflexivity at its absolute worst (in addition to Fed intervention of course), where value is implied by technicals and trading patterns, and where algos buy simply because other algos are buying. Behold robotic stop hunts: HFT-facilitated "Momentum Ignition."