Front Running

After exposing the stock market manipulative arsenal that is High Frequency Trading, quote stuffing, flash trading, packet churning, layering, sub-pennying, liquidity, latency and dark pool arbitrage, NBBO and Reg NMS exemptions, "hide-not-sliding", collocation, and much, much more for four years, or so long even Credit Suisse joined the chorus we started in April of 2009, we are glad to learn that finally, with a ridiculous Rip Van Winklesian delay, but better late than never, "the FBI has teamed up with securities regulators to tackle the potential threat of market manipulation posed by new computer trading methods that have taken operations beyond the scope of traditional policing." In other words, the SEC has finally realized it can no longer pretend it is not co-opted, but because it has no clue where to even start with HFT, has asked the help of the Feds. Which in itself is hardly reason for optimism, but if there is one thing Hans Gruber has taught us, it is that when the Feds get involved, the first thing they do is cut the power, and in this algo-based market that will end some 99% of all daily manipulative practices we have all grown to love and look forward to every single day.

That`s all I heard for two straight months, “Gee everyone is waiting for a pullback to get in on the rally”.

If you often wonder why ‘free market capitalism’ feels like it is failing despite universal assurances from economists and political pundits that it is working as intended, your intuition is correct. Free market capitalism has become a thing of the past. In truth free market capitalism has been replaced by something that is truly anti-free market and anti-capitalistic. The diversion operates in plain sight. Beginning sometime around 1970 the U.S. and most of the ‘free world’ have diverged from traditional “free market capitalism” to something different. Today the U.S. and much of the world’s economies are operating under what I call Monetary Fascism: a system where financial interests control the State for the advancement of the financial class. This is markedly different from traditional Fascism: a system where State and industry work together for the advancement of the State. Monetary Fascism was created and propagated through the Chicago School of Economics. Milton Friedman’s collective works constitute the foundation of Monetary Fascism. Today the financial and banking class enforces this ideology through the media and government with the same ruthlessness of the Church during the Dark Ages: to question is to be a heretic.   When asked in an interview what humanities’ future looked like, Eric Blair, better known as George Orwell, said “Imagine a boot smashing a human face forever.”

"This ain't no party, this ain't no disco, this ain't no fooling around..."

The financial elite - using academe for intellectual cover - want you to believe that markets are efficient, as defined by the Efficient Market Theory (EMT). Neoliberal economic philosophy is based on the belief that neoclassical economic theory is correct. That is, that “markets are efficient”. Wall Street touts markets as trustworthy and infallible, but that faith is misplaced. Gullible US politicians believe that markets are efficient and defer to them. Therefore, US politicians abdicate their responsibility to manage the overall economy, and happily for them, receive Wall Street money. Mistakenly, the primary focus during the 2008 credit crisis is on fixing the financial markets (Wall Street banks) and not the “real economy.” The financial elite are using this “cover-up and pray” policy—hoping that rekindled “animal spirits” will bring the economy back in time to save the status quo. This is impossible because the trust is gone. The same sociopaths control the economy. A Federal Reserve zero interest rate policy (ZIRP), causing malinvestment, and monetizing the national debt with quantitative easing by the Fed, and austerity for the 99% to repay bad bank loans has not worked—and doing more of the same will not work—and defines insanity.

They call their clients muppets, they lose their clients massive amounts of money, they get preferential government treatment and get paid billions in bonuses at the same time they accept trillions in bailout aid. Exactly why not a class actiion FB suit again?

We pay homage to one of the architects and chief implementors of quantitative easing and discuss the end game for the Fed.

All you need to read and some more.

It could be a pretty boring month. 

The Volcker Rule ignores the most basic and elementary facts about bank risk taking in the financial markets and must hurt overall liquidity among financial intermediaries and investors. 

Are the markets already front running a potential announcement of a third round of Quantitative Easing (QE 3)?   Maybe so.  We had expected QE3 at the end of last summer as the economy weakened substantially from the impact of the Japanese earthquake/debt ceiling debate/Eurozone crisis trifecta.  However, with political pressures running high due to the raging battle in Congress raising the debt ceiling there was little support from the public for further intervention.  Furthermore, with inflation, as measured by CPI, already outside of the Fed's comfort zone, the Fed opted to institute "Operation Twist" (O.T.) instead. With the Euro-Crisis on the broiler, another debt ceiling debate approaching, the U.S. economy struggling along as Europe slips into a recession and corporate earnings being revised down there are plenty of reasons for stocks to decline in price.  Yet, they have continued to inch up.  With short interest on stocks having plunged in recent weeks it certainly sounds like the markets are betting on something happening and soon.

Dearest SEC, since we know you are infrastructurally and intellectually challenged (in the broadest sense of the word), we have decided to make your life easier. As you likely are not aware, Dell today acquired Perot Systems (we imagine the companies used the attorney-client privilege to avoid disclosing any transaction details to you). All fine and good: here is the link to the 8K should you wish to familiarize yourself with the EDGAR filing system. Yet something that you may want to consider in your 8 hour daily coffee breaks is the following blatant front running in Perot October Call Options.

It is good that the long discussed on Zero Hedge topic of prop versus flow trading at Goldman is finally starting to gain some attention. Today, it comes courtesy of former CEA Chair and Nobel prize winner Joseph Stiglitz: "The main problem that Goldman raises is a question of size: 'too big to fail.' In some markets, they have a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information. That raises the potential of conflicts of interest, problems of front-running, using that inside information for your proprietary desk... If you're going to trade on behalf of others, if you're going to be a commercial bank, you can't engage in certain kinds of risk-taking behavior."

An article in yesterday's Advanced Trading magazine, written by Pipeline executives Fred Federspiel and Alfred Berkeley, which was supposed to extol the virtues of HFT (or of the Pipeline product offering specifically, we were a little confused on that issue), ended up doing anything but, and in fact confirmed many of the concerns voiced with regard to high frequency trading in the blogosphere and in other venues.

"All that being said, I'm pretty proud of my own 100-day accomplishments. So how have things changed? Before I joined the Division in March, the Dow was struggling around 6500 points. Now the Dow is over 9200. So am I really responsible for a 41% increase in the Dow? I am, and I'd explain it, but it's very complicated. It involves algorithms, and calculus, and a black box and other … stuff. Now, when I ran this speech by my wife, she looked (kind of like some of you out there) a little incredulous. She said, "you're not claiming credit for the stock market, are you? While you're at it, are you also taking credit for the mild hurricane season or the sharp decrease in lethal shark attacks world-wide." Well I am, and I'd explain it, but it's very complicated. It involves algorithms, and calculus, and a black box and other … stuff." - Robert Khuzami, Director Of Enforcement, SEC.