As Europe is approaching the end of Q3 in a rather “dull” afternoon session, here is some interesting HFT Material from Nanex. We wonder when the market will collapse yet again, due to stupidity of HFT.
On September 29, 2011, beginning at 14:08:25, quote rates from one stock, AMD, accounted for nearly half of all equity quotes. The pattern of data is similar towhat we found in Dell a month earlier. There were 6 seconds that each had over 20,000 AMD quotes.
We are having trouble finding the appropriate superlative to describe the level of lunacy that generated this event, and the incompetence of regulators to allow it to continue. And continue it does: both in frequency and magnitude. Soon 20,000 quotes/second per stock will be the new normal.
This problem will only continue to grow until one day, when there is real market impacting news, there simply won’t be enough bandwidth or computing power to process legitimate equity prices. And everyone will wonder what happened. The last time this occurred was May 6, 2010.
One explanation for the 2007-09 global crisis is that consumers, markets, and politicians were gripped by “irrational exuberance” that led them to believe the record-high house prices and stock prices were sustainable. This column proposes a new explanation based on rational behaviour and microeconomic theory. It argues that however high stock prices rise, there is always an equilibrium in which they can rise further.
According to a popular narrative (e.g. Shiller 2008), the Great Recession was caused by a bubble in the housing market. When the bubble burst, households were left with mortgages that exceeded the values of their houses. When they stopped spending, the resulting fall in consumer demand triggered an increase in unemployment. The drop in housing wealth was accompanied by a stock market crash, precipitated by the failure of Lehman Brothers in the fall of 2007.
Although this narrative fits the facts, it poses two major difficulties for conventional microeconomic theory.
- First, the existence of an asset price bubble is inconsistent with the theory of forward-looking rational agents interacting in markets (Santos and Woodford 1997).
- Second, conventional theory has no good explanation for why the bursting of an asset price bubble should be associated with the emergence of high and persistent unemployment.
Full article here.
Maybe we should not be afraid, but at least cautious. Good must read report by The Economist.
IN DARK days, people naturally seek glimmers of hope. So it was that financial markets, long battered by the ever-worsening euro crisis, rallied early this week amid speculation that Europe’s leaders had been bullied by the rest of the world into at last putting together a “big plan” to save the single currency. Investors ventured out from safe-haven bonds into riskier assets. Stock prices jumped: those of embattled French banks soared by almost 20% in just two days.
But those hopes are likely to fade, for three reasons. First, for all the breathless headlines from the IMF/World Bank meetings in Washington, DC, Europe’s leaders are a long way from a deal on how to save the euro. The best that can be said is that they now have a plan to have a plan, probably by early November. Second, even if a catastrophe in Europe is avoided, the prospects for the world economy are darkening, as the rich world’s fiscal austerity intensifies and slowing emerging economies provide less of a cushion for global growth. Third, America’s politicians are, once again, threatening to wreck the recovery with irresponsible fiscal brinkmanship. Together, these developments point to a perilous period ahead.
Full article here.
Guest Post by Macro Story;
Equities have been in a pure state of denial many bears would believe. On the other hand bulls would believe bears are the ones in denial. One thing both sides can agree upon by looking at almost any chart is that equities continue to diverge from various credit products, sentiment readings, commodities, etc.
As the saying goes “united we stand divided we fall.” In other words equity, facing a multitude of asset classes that are moving in the opposite direction can ill afford division within their ranks. But it appears division is what is happening. It appears there is now divergence within equities.
For reference the Dow is currently 13% off the 2011 highs (SPX 15%, Nasdaq 14%).
Does Dow theory no longer hold? Transports are down 23% off their July highs and at one point were down 27% in September.
Three years after Lehman Brothers declared the biggest corporate bankruptcy in history, the defunct bank is approaching the end of the process as additional creditors voice their support for a final pay-out plan, http://ftalphaville.ft.com/thecut/2011/09/30/689546/lehman-brothers-windup-nears-end/
Bank of America, the largest US bank by deposits, is to charge its customers for using debit cards, as the beleaguered bank tries to claw back revenue in the face of new rules contained in the Dodd-Frank act. BofA said its debit card users would pay $5 a month from early next year when they used the cards to buy goods, http://ftalphaville.ft.com/thecut/2011/09/30/689531/bofa-to-charge-customers-for-debit-card-use/
HSBC’s China Purchasing Managers’ Index showed the factory sector contracted slightly for a third consecutive month in September, Reuters reports, while factory inflation quickened to a four-month high. The HSBC PMI, http://ftalphaville.ft.com/thecut/2011/09/30/689526/china-pmis-show-third-month-of-contraction/
Investment banking fees from mergers and acquisitions and capital raising have slumped in the third quarter to lows not seen since the aftermath of the Lehman Brothers collapse, the FT reports. Investment banking fees – about 15 per cent of overall investment banking revenues – fell 43 per cent from the second quarter, http://ftalphaville.ft.com/thecut/2011/09/30/689496/investment-banking-fees-fall-to-two-year-low/
UBS has hired executive search company Egon Zehnder International to help find a permanent chief executive officer following Oswald Grübel’s resignation, the WSJ says, citing a person familiar with the matter. http://ftalphaville.ft.com/thecut/2011/09/30/689431/ubs-hires-firm-to-help-find-new-chief/
All must read News below.
Volatile day, but kind of boring day. Market actually fell 3,2% from top to bottom, and managed to squeeze in a 22 points uptick in 20 minutes Trading. Nobody is in control, and both bears and bulls are thrown between greed and fear. Let the market play out, and show what it wants to do. Some big losers today in Bidu, Nflx and the new dog, Apple, while GS was +3,7%.
They make the best Laptop, they make the best phone, they make the best tablet. Everything they make, is the best. They also have more cash than many countries can dream of. Apple is the best, but it is always the hardest task, to stay at the top.
Of course Apple is different to the (the new dog) Netflix, but the human psychology behind some charts is the same. Greed of not riding the winner. Apple is overowned and loved by everybody, wonder just what the “sudden” fatigue in the share price is telling us. You can have an iPad, iphone, iMac. You can even replace these must have gadgets, but at what pace? Unless they come up with an iCar, things could start turning around. Watch out, as the stock could fall fast and furiously. Below charts, judge yourself, if this time is different, or not?
As Einstein said; “There are only two things indefinite, the Universe, and the stupidity of people”.
Market is trapped in a short term consolidation range. According to us, the brutal moves in early August have “destroyed” the faith among the investors. At these levels it is very much noise trading, disturbing the bigger price picture. Are we forming another giant HS formation (where people get “sucked in” omce more), which will eventually break down, and wipe out much more of the market?
Something for SEC and other regulators to subscribe to?
HCMI announced today the release of HFT Alert, the first real time software designed to detect high frequency and algorithmic trading systems. HFT Alert identifies when these trading systems are running and what stocks are being affected. HFT Alert can detect several types of algorithms as well as stocks experiencing elevated quote rates associated with algorithmic trading.
Full release here.