Don’t fight the acronyms or You can’t eat alphabet soup with a knife and fork

Now, with the Fed being the last of the true Masters of the Universe to reveal their cards, its two thumbs up for risk assets all around. After QE1, QE2 and Operation Twist, Ben Bernanke finally whipped out his secret weapon that’s been bulging uncomfortably from his front pocket for so long – The Open Ended Bazooka, or OEB. Earnings, sales, GDP-figures, productivity, inflation, nothing really matters when trying to dissect and calculate fair value anymore. It’s all the about the printing presses now, and has been for a long time. The ECB’s contribution is of no less consequence: LTRO, OMT, OMG and WTF. Ever the Italian, Mario Draghi gallantly promised to do what it takes, try every move, explore every nook and cavity to get the fat lady off.

You can bitch and moan all you like, but at the end of the day, it’s just another input in the moving target that is the market. And if you haven’t adjusted accordingly, well, better luck next time. Barry Ritholtz’s blunt, but oh so true post, spelled it out thusly:

”I see this unfortunate tendency to go full on wonkasaurus too often amongst equity traders, bond managers, prop desks. They seem to forget that their job is to manage risk and seek opportunity. Long digressions into why the Fed is misguided or Congress has failed are beside the point. That should be the starting point of their analysis, not the end point.

The rest of the analysis must be: If the Fed is misguided, how shall we position ourselves?”

Never mind slowing of the BRIC’s, near death of the PIIGS’s, crushing debt and world wide synchronized swan dive, the market knew it all along and swooned higher. How long it will last and how far it will go is anybody’s guess. Perhaps this is what needs to be done to get the economy going but we’re now entering new territory and with that comes risk. All the previous boatloads of cash doesn’t seem to have done the trick, what if even more of the same doesn’t either? And if it doesn’t reach it’s intended target, where does it all go? Well, that’s an easy one to answer. Risk on baby, risk on!

Source: WSJ

From the FT: QE3 serves up a post-summer pop

”The Bernanke effect may not wear off quickly. The Fed chairman had made clear “that he considers the stock market a crucial mechanism for the transmission of monetary policy,” says Quincy Krosby, market strategist at Prudential Financial. “That means the rally carries on. Shorting the market would be betting against the Fed, against Mario Draghi and perhaps the Chinese state. That’s a bet that most traders simply cannot make.””

 

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Faster baby, faster!

Wired har en mycket väldokumenterad artikel om den ljusskygga värld av HFT-handel där 14,5 millisekunder tur och retur mellan New York och Chicago är soo slow. Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading

”Under the “maker-taker” model, some exchanges offer tiny incentive payments, or rebates, for posting a quote (to buy or sell a stock) that results in a trade. The exchange charges the other side in the trade, the taker, a slightly higher fee and collects the difference. So an algo can buy a stock, earn a rebate, then sell the stock and earn a rebate for that too.

All of this is governed by algorithms whose lifespans can be as short as a few weeks.Sometimes an algorithm does something as simple as look for a stock that ticks up in price several trades in a row. A “momentum” algo would buy the stock, expecting the rise to continue. A “mean-reversion” algo would sell, expecting a drop back to average price. They might both even be deployed by the same firm. Over the course of a minute, they might both be right.” 

”By some estimates, 90 percent of quotes on the major exchanges are canceled before execution. Many of them were never meant to be executed; they are there to test the market, to confuse or subvert competing algorithms, or to slow trading in a stock by clogging the system—a practice known as quote stuffing. It may even be a different stock, but one whose trades are handled on the same server. On the Internet, this is called a denial-of-service attack, and it’s a crime. Among quants, it’s considered at most bad manners.”

Orsak och verkan, vem behöver vem och varför en verksamhet existerar har vänts upp och ned. Men vem är förvånad, fistad igen.

”High-frequency trading raises an existential question for capitalism, one that most traders try to avoid confronting: Why do we have stock markets? To promote business investment, is the textbook answer, by assuring investors that they can always sell their shares at a published price—the guarantee of liquidity. From 1792 until 2006, the New York Stock Exchange was a nonprofit quasi utility owned by its members, the brokers who traded there. Today it is an arm of NYSE Euronext, whose own profits and stock price depend on getting high-frequency traders in the door. Trading increasingly is an end in itself, operating at a remove from the goods-and-services-producing part of the economy and taking a growing share of GDP—twice what it did a century ago, when Wall Street was financing the enormous industrial expansion of the economy. “This is counterintuitive, to say the least,” wrote New York University economist Thomas Philippon in an article for the Russell Sage Foundation. “How is it possible for today’s finance industry not to be significantly more efficient than the finance industry of John Pierpont Morgan?””

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Behavioral Economics, Neuro-Finance, & Faulty Financial Decision-Making

Här är ett föredrag en av mina favorit-bloggare, Barry Ritholtz, höll nyligen.

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April 19, 2011 – Skynet goes online

Jag har tidigare balanserat på stängslet vad gäller algoritm-handeln men börjar nu svänga. Bortsett från det uppenbara, att somliga med lagen på sin sida köper front-running med co-location, har jag sett det som en naturlig evolution av teknisk handel. Men i kombination med den fragmentisering av handeln som skett de senaste åren är det dags att omvärdera. Flash-crashen och nu senast Knight Capitals katastrofala mjukvaruppdatering visar med all önskvärd tydlighet att något är fundamentalt fel. Det är svansen-som-viftar-med-hunden syndromet återigen. Tilliten till avregleringar och industrins påstådda självreglering gör att man blundar för de negativa konsekvenser som fragmentisering och avreglering skapar. Ingen skulle komma på tanken att låta räven vakta hönshuset.

Volymen på Stockholmsbörsen är nu nere på halvdagsnivåer. Är det bara HFT-datorerna och småspararna kvar? The smart money har försvunnit till the lowest bidder. Med så lågt deltagande börjar prisbilden kännas tveksam samtidigt som den lägre volymen förstärker volatiliteten. I min naivitet trodde jag att transparens var att föredra men tydligen inte när industrin får som den vill av clueless politicians.

Via Felix Salmon fick jag upp ögonen för en fascinerande visuell animation för hur handeln har förändrats i USA de senaste åren. Samtidigt som samma fragmentisering skett och HFT-handel tagit över. Börsens, förlåt handelsplatsernas, öppettider är på x-axeln och volmen på y-axeln. Nere i vänstra hörnet visas datumen. Den börjar 2007 och slutar 2011.

Felix Salmon:

”What we see here is relatively low levels of high-frequency trading through all of 2007. Then, in 2008, a pattern starts to emerge: a big spike right at the close, at 4pm, which is soon mirrored by another spike at the open. This is the era of traders going off to play golf in the middle of the day, because nothing interesting happens except at the beginning and the end of the trading day. But it doesn’t last long.

By the end of 2008, odd spikes in trading activity show up in the middle of the day, and of course there’s a huge flurry of activity around the time of the financial crisis. And then, after that, things just become completely unpredictable. There’s still a morning spike for most of 2009, but even that goes away eventually, to be replaced with sheer noise. Sometimes, like at the end of 2010, high-frequency trading activity is very low. At other times, like at the end of 2011, it’s incredibly high. Intraday spikes can happen at any time of day, and volumes can surge and fall back in pretty much random fashion.”

Här är en artikel i samma ämne hos Bloomberg: History of Algorithmic Trading Shows Promise and Perils

En till: Knight Blowup Shows How High-Speed Traders Outrace Rules

Och Joe Nocera på NYT: Frankenstein Takes Over the Market

”This week, yet another Wall Street firm most people have never heard of, relying on a computerized trading program that they can’t possibly understand, shook investors’ faith in the market. This is happening a little too frequently, don’t you think?”

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