HFT Increases Volatility
HFT is a topic widely covered on The Trader. Despite the fact the HFT has taken over the majority of all trading, there is little academic research on what the HFT actually “do” to the market. Pundits (that don’t ever trade) have claimed HFT increase liquidity, volumes and decrease volatility. We are of the quite opposite opinion. HFT are great revenue makers for the HFT companies, but they do not provide liquidity especially when the markets needs it, and HFT does definitely NOT decrease volatility according to us. Here is a new paper suggesting HFT actually increase volatility. Something for the exchanges to review, but on the other hand, they make a little too much from the HFT community to be objective. Read and judge yourselves. By EDHEC Business School;
We find that greater AT intensity is associated with more liquidity, whether measured at the transaction level or at the daily level, faster price discovery, and greater short-term volatility. These results are remarkably consistent across different markets. To link AT causally to market quality, we use co-location events as instruments. Co-location events allow fast traders to physically locate their computer hardware next to the exchanges’ computer to minimize data turnaround times. These events are essential in facilitating AT and represent exogenous shocks to AT that do not directly affect market quality. We use these events as instruments for AT and find evidence that supports causality from AT to market quality – more AT improves liquidity and efficiency, but increases volatility.
Chart Update as Mean Reversion Rules the Market
With central planners and politicians running the show, this market is getting increasingly pathetic. As we wrote yesterday, “Don’t get over exited though as we live in mean reversion nirvana at the moment”. The market lacks the momentum to break either way at the moment. Nobody is in control, as news flow out of Europe still flip flopping this market.
Note how all the charts below reached the support level created with the central banks move we saw a while ago. Those levels will provide further support, as we still live in a mean reversion heaven. Charts below;
Remember the Maastricht criteria?
It is pathetic how people are following every word coming out of Europe. Stock prices swing, currencies and yields as well. The Political project, is falling apart, that is a fact. What it will emerge into, nobody knows, at this point. What we know though, is the fact, despite all the meetings, rules, obligations, goals and deals, there are few countries that have been inside the predetermined rules the political project was built upon, namely the Maastricht treaty. We have heard Greece was a special situation, but now, all will be fine, if we just say it again.
As the chart below shows, there shouldn’t be too many countries in the project, if the original rules are applied. This time is different….
Ferguson on the mess in Europe. Young people “Go West”.
“Something profoundly is wrong with the Western Civilization.”
Another must view video with Niall Ferguson continue. Continue reading
Volatility Update
Quick Update of the Implied vol, skew, Vix and SPX charts. Divergences in the below charts have increased, and imply that larger moves could occur. Although we think the market is heading lower short term at least, the approaching holiday season will depress liquidity. Therefore we don’t find it very likely the big move to occur until next year. With mean reversion at elevated levels, one shouldn’t get too carried away either way for the moment. Charts below;
Long Term Charting suggests fair value S&P 500
Long term markets should be judged by fundamental analysis is the dogma, but what about long term charts? Are there “reliable” charting techniques looking at very long trends, and what are those suggesting? Below is some interesting research based on long term charts. According, purely statistically, the below model suggests S&P should go down to around 500, give or take a few points. Guest post by Carlucci via D Short.
Based on that data, one could make a reasonable statistical assumption that the slope for the current secular bear market beginning in 2000 would also follow the same 34 degree angle as the previous three bears. Overlaying that slope on the 2000 bull top would suggest that we are not yet half way through the present bear cycle.
But how much more “bear”is left?
To answer that question, we add an additional green line to the S&P chart corresponding to -50% variance from the trend (Figure 3). All three bears in 1920, 1949 and 1982 have touched that line before rebounding. In fact, all three have actually exceeded -50%: 1920 at -59%, 1949 at -57%, 1982 at -55%.
If we follow the 34 degree bear slope line to the -50% green variance line, we arrive at a very conservative end point for the current bear in 2022 – 2023 with the S&P at approximately 540. That, I wish to emphasize, is the conservative scenario.
News That Matters
Ft.com
The president of the European Council said Friday that a new intergovernmental treaty meant to save the single currency will include the 17 eurozone states plus six other European Union countries – but not all 27 EU members, http://ftalphaville.ft.com/thecut/2011/12/09/789181/eurozone-leaders-agree-236-accord/
China’s annual inflation fell in November to 4.2 per cent, the lowest level in more than a year, reports Reuters, fuelling expectations of further monetary policy easing. The rate has dropped rapidly since hitting a three-year high of 6.5 per cent in July. http://ftalphaville.ft.com/thecut/2011/12/09/789171/chinese-inflation-plunged-in-november/
Distressed debt investors are circling a number of European companies that have run into trouble as the continent’s mounting economic woes put pressure on smaller businesses that are often highly leveraged, http://ftalphaville.ft.com/thecut/2011/12/09/789161/distressed-debt-investors-eye-europe/
Chart Update as Market Reversed
The Markets tanked today. On Monday we wrote “We are approaching short term resistance levels, everywhere.” Well, we reached resistance, they tried to push it higher on no volumes, but the market decided to sell off, with decent volumes. As we still think the market lacks real power and determination to start an aggressive move and break down, people will probably once again sell the lows and add to shorts before the market bounces yet again. We are still structurally (and technically) bearish, but investors must get even more frustrated, before we get the real move in the market. That probably won’t occur until next yer. Meanwhile some chart levels. Feel free to check how the charts looked on Monday, perfect reversal. Don’t get over exited though as we live in mean reversion nirvana at the moment.
What if the Euro collapses (we mean collapses)?
What would happen if the euro collapses as in collapses? Despite all the Economic effects, that wouldn’t be offset by the fees lawyers would collect, we could even get the blame game escalating into war. Below are Citi’s bullet points to remember should the political experiment fail, courtesy James Pethokoukis.
1. A break-up of the Euro Area would be rather like the movie ‘War of the Roses’ version of a divorce: disruptive, destructive and without any winners. A break-up of the 17-member state Euro Area, even a partial one involving the exit of one or more fiscally and competitively weak countries, would be chaotic. A full or comprehensive break-up, with the Euro Area splintering into a Greater DM zone and around 10 national currencies would create financial and economic pandemonium. It would not be a planned, orderly, gradual unwinding of existing political, economic and legal commitments and obligations.
Rigged Markets
There is just too much information coming out of Europe in order for the human brain to focus on other important news. The Corzine event today, which is actually a very big event, drowns and disappears in the Euromezz news flow. The other important news that got some attention last week, was Hank Paulson’s information to a small number of people with big pockets. Irrespective if one thinks this is borderline information, at least morally, there is a bigger story to it, namely the markets are increasingly influenced by politicians,central planners (and HFT Algos). The combination of the above, might just make people sick of the rigged markets, and they’ll leave it. NY Post reports;
Among his regular phone buds was Lloyd Blankfein, who, for example, spoke six times with Paulson on Sept. 18, 2008. That was a day of great market turmoil and — while there is no way of knowing what the two men spoke about — the calls did coincide with a major turnaround in stock prices.
That was just one example.
and further we go
the US markets are rigged, with the elite and connected getting a distinct unfair advantage over the rest of us schlumps.
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