With the recent “Odd Lot Explosion”, one needs to reconsider of what is happening to the Market Structure, and Why it is happening. The ever increasing HFT activity is bringing new anomalies to the Market Place. One of those being an explosion in Odd Lot trades. These Odd lots used to be for Old Aunts buying Odd Lots at the local bank branch, but oh boy, has this changed. A paper by O’Hara goes deep into the problem, and the implications for the market place. Below from O’Hara’s work. Do you recognize the pattern?
“In this research we investigated the odd-lot bias in TAQ data. We have demonstrated that missing trades are a large and pervasive problem in TAQ data. That trade sizes are truncated below 100 shares means there is a censored sample problem for all stocks. For some stocks, however, this problem is acute, with as much as 40% or more of trades missing from the data. Moreover, these missing trades are highly informative, meaning that analyses of issues related to market efficiency are also subject to error…Our analysis shows that odd-lot trades are now far from unusual, and market practices such as algorithmic trading and high frequency trading are only increasing their incidence.”
“We believe our results also have important policy and regulatory implications. TAQ data is biased because the consolidated tape is biased: odd-lot trades are not recorded to either data source. When odd-lots were a trivial fraction of market activity, this omission was of little consequence. But new market practices mean that these missing trades are both numerous and informationally important. Moreover, while these trades are invisible on the consolidated tape, they are not invisible to all market participants. Market venues now sell proprietary data that allow purchasers to see all market activity. Our results suggest that odd-lot trades now play a new, and far from irrelevant, role in the market. The SEC should recognize this new role and change the reporting rules regarding odd-lot trades.”
“Because odd-lot trades are more likely to arise from high frequency traders, we argue their exclusion from TAQ and the consolidated tape raises important regulatory issues.”
Courtesy Themis Trading.
Obama and his Tax Plans. Inspired by Buffet, we wonder if Buffet has cut a royalty deal for himself. After all, the guy is well known for making good deals. From Gallup;
Obama laid out his proposals for the jobs bill in an address to Congress on Sept. 8, and sent the bill to Congress a few days later. Since then, the president has been pushing Congress to adopt the plan, although there are no signs yet as to when either House of Congress will begin to debate the bill.
The president also proposed raising taxes on wealthy Americans in his deficit-reduction proposal announced on Monday at the White House. Republican leaders have responded that this idea represents nothing more than “class warfare,” but the current data show that the majority of Americans generally favor increasing taxes on the rich as a way to increase revenue.
Full article here.
Latest out of PIMCO, on central bankers around the World.
In removing interest rate risk from the bond market – by removing “duration,” the Fed through QEI and QEII prods investors to move out the risk spectrum. Call it a rebalancing effect – QE actually never was QE, because that entails banks lending their $1.6 trillion of excess reserves and expanding the money supply, which amid a liquidity trap just ain’t happening, as they say. The goal is to boost asset prices and loosen financial conditions to promote increases in aggregate demand to spur economic growth.
|By Nanex. The Trader has no comments…
On September 15, 2011, beginning at 12:48:54.600, there was a time warp in the trading of Yahoo! (YHOO) stock. HFT has reached speeds faster than time itself. Up to 190 milliseconds into the future, or 0.19 fantaseconds is the record so far. It all happened in just over one second of trading, the evidence buried under an avalanche of about 19,000 quotations and 3,000 individual trade executions. The facts of the matter are indisputable. Based on official exchange timestamps, there is unmistakable proof that YHOO trades were executed on quotes that didn’t exist until 190 milliseconds later!
Millions of traders depend on the accuracy of exchange timestamps — especially after bad timestamps were found to be a key factor in the disastrous market crash known as the flash crash of May 2010. We are confident the exchange timestamp problem has been completely addressed by now: the SEC would have made sure of it. Adding accurate timestamps is not exactly rocket science; it’s not even considered to be a difficult problem. Based on recent marketing materials, the exchanges are practically experts on measuring time. And with hundreds of millions in annual data feed subscriptions paid by the same subscribers expecting quotes with accurate timestamps, there is no shortage of funds to make it happen.
So we can be certain the exchange timestamps were accurate, which means that HFT has truly entered the era of the fantasecond.
Majority of the European Indices are within the down trend. The down momentum has eased slightly, and we could be retesting some of the resistance levels a little higher. Market is in a buy the news mood, whatever the news is, until people realize reality.
Dax testing down trend channel.
Before we get too exited about the Markets potentially exploding to the upside. By Turner via DShort.
I took the S&P quarterly closes and overlaid the 3, 2, 1 yr averages of four-quarter earnings. I think it’s instructive in that “normalized” earnings should be somewhere around $65.00. The yellow portion is the forecasted earnings and S&P quarterly close (around 1200 is the best guess).
Here are a few takeaways:
- The $65.00 approximate 3-year average earnings coincides with the long-term historical y-o-y earnings growth.
- “Irrational Exuberance” and easy money post-1995 rapidly inflated the S&P 500 price without associated earnings growth.
- Dot Com burst – earnings continued up while market declined (from extended overvaluation).
- 2002: earnings (1 yr) turned up before market.
- 2007: earnings (1 yr) turned down with market.
- Increasing amplitude of fluctuations above and below mean display Fed Monetary policy distortions (getting worse, by the way).
- Earnings will either rapidly fall off next year or the market will skyrocket to stay ahead of forecasted earnings (I’ll take the under).
In the months ahead, this would be a chart to review to see the “forecast” back then and compare with what really happened.
With S&P downgrading Italy, the MIB in positive territory, somebody is starting to price in Berlusconi’s resignation. But before we get the limit ups hitting the wires let’s reconsider some of the problems if other countries start loosing their credit ratings.
The EFSF (supposed to save the Eurozone) is currently top rated, but that could change quickly, if realists at S&P start downgrading other countries within the Eurozone group. If that starts happening, the EFSF will loose it’s credibility in it’s current form, and will need some adjustments. Then the savior of Europe won’t be as strong as people perceive it to be.
1) The EFSF’s credit rating is downgraded, but the facility continues to operate as before, with higher funding costs (we estimate around 100bps, which corresponds to the gap between yields on French and Belgian debt). We think this is the most likely option.We note that after a French downgrade none of the three biggest sovereign borrowers globally would have a AAA-rating (Japan, US and France) – i.e. many other sovereign borrowers are funding themselves without problems in spite of the absence of a AAA-rating.
2) The ECB buys more peripheral European debt. The ECB makes up for the reduced lending capacity of the EFSF by increasing its purchases of peripheral European sovereign debt in the secondary market (having bought an estimated €80bn so far). This would amount to a form of soft QE (as its would lead to a deterioration of the quality of the ECB’s balance sheet) – or even hard QE (if the purchases are not sterilized, thus leading to an increase in the size of the ECB balance sheet). We note that this scenario could occur in combination with scenario 4 above. The only problem is that this would require the ECB to give up another one of its principles (as they would have to concede that their buying is not just “temporary”, i.e. only in place as long as the EFSF is not fully operational).
Partial Default, Full Default with return to Euro or Full Default with return to Drachma?These are the options Greece faces. People compare the Default of Argentina and Russia to the Greek situation, but remember Greek Debt is 500 billion USD, while Argentina and Russia had levels of around 80 billion USD. Greece is a part of the Euro, so things are slightly more complicated, and require delicate handling. With S&P downgrading Italy, things are getting new twists to the Euro zone problems. Full NYT article here.