Ex-SEC GC: Financial Markets Aren’t Rigged, They’re Broken
Ralph Ferrara, partner at Proskauer Rose LLP, talks with Bloomberg Law’s Lee Pacchia about the problems presented by high frequency trading and potential solutions. Ferrara says that certain policy changes made by Congress in the mid-1970′s had the effect of decentralizing financial markets and diminishing the presence of human controls over trading activity. In his opinion, the resultant market fragmentation combined with high frequency trading has led to a broken, two-tiered system that could force retail investors out of the market and fundamentally change the notion of capitalism in the United States. Ferrara served as General Counsel to the Securities & Exchange Commission from 1978 to 1981.
VIdeo below.
HFT – Declining Species?
The Trader has been covering the HFT space for some time. We are not sure how these charts are constructed, but as the race to zero continues, HFT are making less money, and who wants to be investing billions in technology, in order to make peanuts? Is HFT becoming the next broken dream? Full chart and explanation, click here. Courtesy NYT.
HFT Volume Profits ( max 5 billion)
Maximum estimated annual profit at all H.F.T. firms
Twitter Trading
Whether you believe it or not, people use technical analysis. The latest “indicator” is measuring sentiment by tracking Twitter feeds on individual stocks. Via Downside Hedge.
With the advent of social media sites such as Twitter, investors now have the ability to get real time sentiment information on individual stocks and stock market indexes. The Twitter stream can be read by a computer program that scores each tweet and aggregates the scores into a daily value for each individual stock. The resulting values can be used as a technical analysis indicator in stock charts similar to a Relative Strength Index (RSI) or a Moving Average Convergence/Divergence (MACD).
Downside Hedge currently computes a Twitter Sentiment Indicator for a variety of stocks, ETFs, and indexes on a daily basis. In the chart below we compare our daily sentiment indicator of the S&P 500 Index to the AAII weekly sentiment survey. Full reading here.
If a Stock Doesn’t Trade, Does it Make a Sound?
Guest post by Peter Tchir.
There is a lot of talk about low volumes and what that means. There’s also a lot of chatter about low vix and what that means. I don’t pay much attention to each. I watch them, largely because others do, but don’t rely on them too much.
VIX is NOT a “Fear Gauge” and has NO Predictive Value
I have looked and find no useful predictive value from VIX. It may have had some value at one point in time, when only a few weird little quants in the corner took the time to figure it out and traded on it. But that was a long time ago, and its value as a leading indicator has dropped along with the ability to smack it down by hitting VIX futures, or lifting it higher by buying TVIX and other VIX related ETF’s.
Volumes, algos and other stats
With markets in full August vacations mood, volumes have been hitting new lows.
July’s total average volume of 6.2 billion shares traded a day was the lowest since June 2007, according to Ana Avramovic at Credit Cruisse. Perhaps even more eye opening is how “decidedly back-loaded” some of the volume patterns have become this summer, on both a weekly and daily basis.
Since Memorial Day, daily volume has been higher on Thursdays and Fridays than during the first three days of the trading week. On a daily basis, a flurry of activity is typically picking up toward the end of a trading session.
“Intraday volumes have become so concentrated at the end of the day that nearly 10% of the day’s volume happens in the last 10 minutes now,” Avramovic says.
Charts of declining volume and some more in this WSJ article.
Another spike in VXX volume
Guest post by Bill Luby of Vix and more.
Looking the history of the volume spikes in the iPath S&P 500 VIX Short-Term Futures ETN (VXX) is a lot like looking at the history of market sentiment, contrarian thinking and psychology.
Since its launch in January 2009, VXX has been responsible for luring in unwary investors with its siren song promise of huge profits ahead of the next, inevitable, just-around-the-corner selloff in stocks. Unfortunately for VXX longs, the hoped for VIX spike usually turns out to be much more elusive than anticipated and investors who fail to tie themselves to their masts typically end up shipwrecked on the treacherous shore of complacency.
A glimpse at the biggest volume spikes in the history of VXX (see chart below) shows that almost all of these happen at near the top of a VIX spike and leave longs exposed to a sharp downturn. The notable exceptions are largely limited to last August, when a surge in VXX trading volume accompanied the first leg up of what turned out to be a multi-stage rally in the VIX and VXX.
Will the Dow fall 4 000 points?
People laughed at Joe Granville some weeks ago when he perdicted the DOW would fall 4000 points this year. Then, all of a sudden, markets sold off hard, while volume and vol exploded. The buy the dip investors are still trying to buy the dip, but this bounce is losing steam. Silver is currently reversing the move, and about to enter negative territory on the day. Let’s see if all markets reverse down today. Meanwhile, time to review what Joe Granville actually said a few weeks ago. Video below:
Broken markets and HFT
Saluzzi of Themis Trading on co-location, HFT, dark pools, and much more. Video below.
Where is the Volume?
It has been a great start for the longs this year. All markets are up, but the volume is continuing to drift lower. The GS Hedge Fund monitor this week showed that hedge funds are hitting new lows when it comes to turnover. Guest post by D Short;
The S&P 500 closed yesterday at a new year-to-date high, up 8.32% in the first 44 days of trading versus 5.59% over the same timeframe in 2011, which was also an excellent start to the year (one that finished flat).
But what about volume? I’ve posted comparisons with 2011 after the first 12 and first 24 days of trading. Here is an updated comparison after the first 34 days.
According to the data I downloaded from myStockcharts.com subscription, the cumulative volume so far this year is 102.6 Billion versus 122.6 Billion in the first 34 days of 2011. That is a -16.3% decline.
Biggs is back-bullish as ever…
Earlier this week Roubini became bullish. We have been waiting for Biggs to show up on our radar screens. Wait no more, Biggs is back. Lack of volume in the market is apparently great. Nobody actually wants to sell stocks, and sellers move higher, while the money on the sidelines desperately must get invovled. The man who was dreaming of huge shorts 20% lower, has now once again increased his bullish bets, in anticipation of this “nobody wants to sell stocks” rally to take out new highs. Warning signals are flashing. From Bloomberg;
“There’s a huge amount of money that has been caught on the sidelines in a market that continues to creep its way higher,” Biggs, the founder of hedge fund Traxis Partners LP in New York, said in a phone interview yesterday. “I interpret it as a positive sign that not much of the potential buying power has been consumed by the advance so far.”
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