This week’s “thing that make you go hmmm”. Another great report…..
“If the US Government was a family, they would be making $58,000 a year, they spend $75,000 a year, and are $327,000 in credit card debt. They are currently proposing BIG spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget and debt, reduced to a level that we can understand.” unknown
“…people worried about US creditworthiness are buying the debt at record high prices of the same country they’re worried about…. people worried about banks are selling their bank stocks to get cash so they can deposit it back into the same bank… it doesn’t make any sense”– DICK BOVE
Full must read report, Hmmm August 14 2011
While at the HFT subject, here is Deconstructing Algos part 5. Courtesey World Complex.
In the past few days, some unusual behaviour has been occurring in after-hours trading of Earthlink shares.
Are there any humans in this market? Hello?
After hours pricing on ELNK, August 2, 2011. Lots of action. Image from Nanex.
Details of the above image. Same source.
And here’s the trading action. Not much considering all the bidding activity.
I think what we are seeing is the elimination of humans from the market. Two algos, using their own stat-arb approaches have a differing opinion about ELNK. One thinks it is a buy at any price below, say, $8–the other thinks it a sell at any price better than, say, $7.95. It is normal for such differences of opinion to exist–indeed, they have to exist for the market to exist. When two humans meet in the market, with just such a difference in opinion, they would soon come to an agreement, the price being dependent on which participant gives away his opinion first.
Full reading, check World Complex.
We have written extensively on the HFT Algoritmic Machines trading the Markets. The pale argument of the machines providing liquidity is as stupid as ever. Yes, HFT machines trade a lot, and make up an increasing part of daily trading volume, but it is not increasing liquidity and it is not promoting protecting the average Joe’s orders etc.
During last week’s trading, Nasdaq almost hit the maximum amount of data it can process, before the system shuts down. This is due to the fact the HFT machine’s different predatory strategies such as quote stuffing etc slow up the system and give them an advantage over the average Joe. The trader has argued, for the HFT ultimately being the single most important factor in the markets ultimate collapse, as they will drive the liquidity to low levels while all trying to execute similar strategies. Below some HFT update from Bloomberg;
The stock market’s fastest electronic firms boosted trading threefold during the rout that erased $2.2 trillion from U.S. equity values, stepping up strategies that profit from volatility, according to one of their biggest brokers.
The increase from Aug. 1 to Aug. 10 over their 2011 average surpassed the 80 percent rise in U.S. equity volume, showing that high-frequency traders made up more of the market during the plunge, Gary Wedbush, executive vice president and head of capital markets at Wedbush Securities, said in a telephone interview. Wedbush is the largest broker supplying bids and offers on the Nasdaq Stock Market, according to exchange data.
“We’re seeing a tremendous amount of high-frequency trading,” said Wedbush, whose company is one of the biggest execution and clearing brokers catering to high-speed firms. “Their business is a trading business, and volatility creates far more opportunities. Some of their algorithms and automated systems are trading two, three or five times as many shares as they would have in a more normalized volatility environment.”
and the fallacy of providing liquidity;
“The bulk of high frequency traders are adding liquidity to the marketplace,” Wedbush said. “Automated traders employ a myriad of strategies that seek to profit from a stock’s short- term volatility, but the mass of HFT is adding liquidity by being on both sides of the market or doing creation/redemption arbitrage for ETFs.”
Our view is that the HFT Algo machines will cause the ultimate collapse of the Markets. The system has been feeding of a lack of regulation, and therefore we see many of the HFT machines simply conducting a regulations arbitrage. Due to lack of understanding and a huge lobby organization, the regulators and exchanges are simply not in the position to implement the relevant regulations. Arguments of providing liquidity etc are never challenged and become the truth, without further questioning. The ones providing the arguments are depending on the HFT firms paying the bills. Welcome to free markets.