Thursday, May 21, 2009
Wednesday, May 20, 2009
The mysterious Tyler Durden said in his Zero Hedge blog last month: "The implication is that Goldman Sachs, due to its preeminent position not only as one of the world's largest broker/dealers (pardon, Bank Holding Companies), but also as being on the top of the high-frequency trading/liquidity provision "food chain", trades much more often for its own (principal) benefit, likely in tandem with the other top dogs on the list: RenTec, Highbridge (JP Morgan), and GETCO. In this light, the program trading spike over the past week could be perceived as much more sinister. For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this."
See? A great conspiracy theory if I ever heard one.
Tuesday, May 19, 2009
I am very concerned about the quality of financial journalism post-recession. If all of the seasoned experts are either freelancing or have found greener pastures, that leaves us with the general press and television reporters covering markets they can't possibly understand. A year ago none of them would have known a credit derivative if it bit them in the backside. While we had been writing about the dangers in that marketplace for several years. Having said that, it seems no one really listened. They were making too much money. Moral hazard risk is alive and kicking.
Monday, May 18, 2009
I have said before that sentiment is running the markets. Therefore it is more important to know what the masses think than what a company's current P/E ratio is. There is a service gaining momentum out there called the Trade Ideas Monitor from technology company youDevise. TIM is technology that enables institutional brokers to send trading ideas to their customers. Then it tells us what they did. Given these brokers and their clients - hedge funds, funds, asset managers - are pretty big fish, what they do tends to move markets. In the past few weeks the brokers have been advising their clients to take their profits and run. Last week the stock markets tumbled. I think I'll stick to TIM and let everyone else look at traditional research.
Friday, May 15, 2009
Thursday, May 14, 2009
US Treasury Secretary Tim Geithner has finally laid down the law on over the counter (OTC) derivatives. He is going to push for them to be listed on exchanges, or cleared through registered clearing houses, or posted into a trade repository. But the most important thing Geithner is insisting upon is that they are traded electronically. Only by using electronic trading can there be transparency. Deals concluded over the phone, by fax and instant messaging should be things of the past. But the temptation by traders to rip someone else's face off through OTC dealings is too great. Traders are not in the game for any other reason than to make money. And none of Geithner's efforts can stop trading firms from inventing new and different derivatives, most of which - no matter how well regulated - will be beyond the scope of regulators' understanding. Transparency does not tend to make traders as much money as does opacity. As my friend and ex-boss Gerald Ashley said in his new book Financial Speculation*: "Many market players have an almost schizophrenic relationship with the market; wanting to know all that is going on, alternating between secrecy and publicity over own their positions and being constantly influenced by the opinions and actions of those around him. Now we can start to see why trading is a hard way to make money." And we can see why the regulators will have a hard time seeing through OTC derivatives.
*Financial Speculation is published by Harriman House. It is currently Number 2 on Amazon UK's Hot Future Releases List (www.financialspeculation.co.uk). Gerald Ashley has over thirty years experience in international financial markets, having worked for Baring Brothers in London and Hong Kong, and the Bank for International Settlements in Basel, Switzerland. He is now Managing Director of St. Mawgan & Co which he co-founded in 2001, a London-based consultancy specialising in risk management, strategy consulting, and behavioural finance modelling in finance, business and risk-taking.
Wednesday, May 13, 2009
Meantime the CFTC is preparing to regulate and monitor carbon trading if legislation passes. It has formed and expanded a panel called the Energy and Environmental Markets Advisory Committee to prepare the government for carbon trading. The CFTC said that the panel will help it to prevent 'fraud, abuse and manipulation' of carbon markets. Given the CFTC's dire track record of preventing these things in energy futures, I have my doubts. But the fact that Dr. Richard Sandor and Bob Pickel are on the panel gives me hope.
Tuesday, May 12, 2009
Monday, May 11, 2009
Joe Saluzzi, an outspoken source of mine who is co-CEO of Themis Trading, said in his blog last week that just because volumes are increasing doesn't mean more investors are coming into the market. On the contrary, the increase in volumes is mainly down to the high frequency stat-arb traders who are goosing the market in order to increase volatility. Only in a volatile market can they make money. This trading pattern is misleading ordinary investors to think that the current market trend is real. If the buy-and-hold crown jumps back into the market and it turns out to be a Fool's Rally, they will not come back again for a very long time.
I'd buy shares in the high frequency trading firms, personally.
Friday, May 8, 2009
Thursday, May 7, 2009
Americans (in particular) have a deep-seated need to hear only good news. Bad news is to be avoided at all costs. Witness the stock market of late. The news reports say that banks need more capital or they are in danger of collapse, like Bear Stearns and Lehman Brothers did, remember? And what happens? The stock market rallies. CNBC trumpets the end of the bear market. The nation breathes a sigh of relief and goes after those scoundrels that caused this mess - the short sellers.
Studies have already proven that the outright banning of short selling throttled liquidity. And exchanges, ECNs, brokers and investment banks need liquidity in order to get their fees. The uptick rule didn't work before. That leaves the cooling off period. I wrote about this in Financial News in October last year. The consensus from designers of trading algorithms was that an algorithm can smell a time-out coming a mile off. Which means panic buying or selling will INCREASE during times of volatility. Making volatility GREATER. And the short selling could dump prices even faster and further than would have happened before. You can't beat the algos. My advice is to leave short selling alone, and let the market recover of its own volition.
Wednesday, May 6, 2009
Is it any wonder the nation is sceptical about Wall Street's good intentions? Now it seems the bank stress tests ordered by the Obama administration are finished, the results are in. But we still don't know what the results are. Why? Because the administration doesn't want any 'bad news' to spoil the recovery party. I feel sorry for the regulators, the power remains on the Street and there is nothing they can do about it.
Tuesday, May 5, 2009
Monday, May 4, 2009
But the so-called rapid recovery from the recession is sending the speculators back into the ring. Credit markets are loosening up. Equities are buoyant. Spring has sprung and everybody feels good. Crude oil started the year at around $44 per barrel and has already gained about $10.00. Demand is still in the toilet, so one can only imagine that the speculators are once again running these markets. If they manage to drive oil prices up again, and gasoline approaches $4, the rapid recovery will be over. (Still, this plays right into my hands. The novel I am writing is about corruption and speculation in the oil markets!)
Saturday, May 2, 2009
Friday, May 1, 2009
But I can't help but wonder what impact low volumes are having on this bullish trend. NYSE Euronext revenues fell 55% last quarter, largely due to sharply lower trading volumes. Nasdaq is offering rebates, BATS is paying liquidity takers - anything to grab some of the all-important trading volume. Retail investors have yet to come back into the market, and there is the distinct possibility that when they do it won't be to the extent that they did before the crash. When you have less money to spend, you don't usually spend it on stocks and shares. This leaves hedge funds, investment banks and proprietary trading firms doing the lion's share of business. And as more quant traders enter the market, newer and more sophisticated algorithms come along. Smaller spreads, higher frequency trading and lower overall volumes - sounds like volatility will remain high.