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Dollar Ratios

My friend’s dad joked that kids are the most destructive force in the universe.

For stocks, the most powerful (and sometimes destructive) force is the movement of the dollar. The Federal Reserve and the Bank of Japan both meet today so it could soar or swoon. Since the buck holds sway, we should all of us in the capital markets from investors to issuers understand how and why.

Stocks react to the dollar because they’re opposite sides of the ledger. Debits and credits.  If money buys less, a debit, then what preserves value (stocks) increases in price, a credit.  So a “strong dollar” means more value resides in the currency and less in stocks.  A weak dollar is the opposite, and value transfers at higher risk into stocks to offset diminishing purchasing power – the quantity of things money buys.

It’s about ratios.  In the past, countries would scrounge around for a gob of gold. Then they could issue paper currency at a ratio. Played poker?  Chips are an asset-backed currency. Pay money, get chips.  Want more chips? Pay more money. The ratio is always the same so chips have fixed value and supply varies with the number of players.

Not so with money.  If Europe has spent more than it makes, its debts depressing the economy (like credit card debt constrains discretionary income), the European Central Bank can manufacture more money – bump up the chip stack without paying.  Remember our ratios?  Increase the supply of euros and prices of risk assets that preserve value, like stocks and bonds, rise to compensate.

Follow that reasoning. When money declines in value, stuff costs more. When stuff costs more, the revenues of the businesses supplying the stuff increase.  And since consumption – buying stuff – is the core way we count “economic growth” today, economies grow when prices rise.

Get it?  Yeah, it’s balderdash that selling the same unit at a higher price is growth. But that’s how governments now measure it. All central banks including the Federal Reserve thus have inflation targets. They are trying to create growth, without which most governments go broke.

Think I’m making this up?  Follow the math. You can’t print a batch of Benjamins. That’s counterfeiting. So how do central banks create money?  They issue money against the most widely available commodity in the world today:  Debt.

When you buy dinner on a credit card, the bank doesn’t reach into somebody’s savings account to pay the restaurant. It creates money. Pay the balance and that money vanishes.

Remember the ratios? Burn money and there are fewer dollars, which means the dollar rises in value, and prices fall, and economies contract (not really but that’s how we count now), and stocks swoon. Create money and the opposite occurs – everything rises.

Investor-relations people, you know the term “multiple-expansion?” It describes stocks that cost more without any change to underlying fundamentals.  This is a product of money-creation. In effect, central banks are trying to induce us all to pay more for things than they’re worth.  Value investment is the opposite: buying at a discount.

For perspective, JP Morgan is leveraged about 8 to 1.  Citigroup, about 7 to 1.  The Fed? With capital of $40 billion and liabilities of $4.54 trillion, its leverage ratio is 113 to 1.  Where money before depended on assets, like gold, now it’s backed by liabilities – debt.

The European Central Bank is buying eighty billion euros of debt a month to create money. What happens to debt? Its value skyrockets and interest rates plunge. It’s the opposite in the real world. You’re in hock, you pay the vig.  Bigger debts, more cost.

Japan is way beyond that, financing the government by directly trading yen for government debt, and now it’s buying exchange-traded funds, shifting to equities with infinite supply (ETFs can theoretically create as many shares as demand requires – but inevitably leverage increases). Japan is even contemplating paying banks and businesses to borrow. Why? Because debt creates money and more money keeps prices from falling.

The effort fails because consumers buy more when prices fall and less when they rise. So the very attempt to drive economic growth is in fact undermining it. Plus, the soundness of our currencies today depends on the capacity of governments to pay on their debts.

Summarizing, the world is indebted so it needs money. Central banks supply money by exchanging it for debt.  Creating money paradoxically reduces the capacity of consumers to buy things because prices rise. So they have to go into debt.  The cycle repeats like two parties munching opposite ends of a strand of spaghetti.

Back to stocks. When they vary inversely with the dollar it’s contraction or expansion of multiples, not real growth.  And that means consumers are losing purchasing power.  Since consumption drives economies now, it inevitably leads to slower growth.

And that’s what the planet’s got. Circular reasoning obfuscates facts.  The solution is a stable currency so all of us can understand fair value for stocks and everything else. But we’ll start with identifying the destructive force – and it’s not the kids.

Dollars and Sense

I looked back at what we wrote Dec 2, 2008. It was two weeks before Madoff (pronounced “made off” we’d observed bemusedly) became synonymous with fraud. Markets were approaching ramming speed into the Mar 2009 financial-crisis nadir.

In that environment on this date then, we introduced you to Ronin Capital, a Chicago proprietary trader. It had exploded through the equity data we were tracking. Today it’s a top-twenty proprietary trader in equities but not the runway model.

Yet it’s thriving. It has 350 employees. Its regulatory filings show $9.5 billion of assets including financial instruments valued at $6.4 billion, with government securities comprising $4.5 billion, derivatives about $1.1 billion, and equities about $700 million.

As the Federal Reserve contemplates a rate-increase in two weeks, Ronin Capital is a microcosm for the whole market. Its asset-mix describes what we see behaviorally in your trading, clients: Leveraged assets, dollars shifting from equity trading to derivatives, producing declining volumes and paradoxically rising prices. In a word, arbitrage.

The Fed Funds rate is the daily cost at which banks with reserves at the Fed loan them to each other.  The Fed last raised it June 29, 2006 to 5.25%, marking a pre-crisis zenith. As the housing market trembled, the Fed backpedaled to 4.25% by December 2007. On Dec 16, 2008 the Fed cut to 0.00%-0.25%, where it remains.

Since the Fed began tracking these rates following departure from the gold standard in 1971, the previous low was 1% in June 2003 as the economy was trudging up from the 9/11 swale. The high was 20% (overnight!) in May 1981.  It’s averaged about 5%.

Now for almost ten years – the life of the benchmark US Treasury – there has been no rate-increase. Since 2008, it’s been close to free for big banks to loan each other money. Backing up to Nov 30, 2006, the Fed’s balance sheet showed bank reserves at $8.9 billion, lower than (but statistically similar to) $11.2 billion at Nov 29, 1996. But at Nov 27, 2015, the Fed held $2.6 trillion of bank reserves, an increase of 29,000%.

Lest you seethe, this money was manufactured by the Fed and paid to banks that bought government debt and our mortgages.  It didn’t exist outside the Fed.

The construction of the financial instruments held by Ronin Capital describes how these polices have affected market activity.  First, the pillar of the asset base is government debt, the most abundant security in the world (a commodity – something available everywhere – cannot be the safest asset, by the way).  Governments need buyers for debt so rules manufacture a market. All the big banks hold gobs of government debt.

Second, Ronin holds equity swaps, equity options, options on futures, and currency forward contracts which collectively are 34% greater than underlying equity assets. We infer that Ronin makes money by leveraging into short-term directional trades in options and currencies. It’s worked well. It did in real estate too ten years ago, until mortgage-backed derivatives devalued as appreciation in the underlying asset, houses, stalled.

Ronin Capital, big banks, derivatives, currencies, equities and interest rates are interlaced. When money lacks inherent worth, speculation increases. Government debt is today’s real estate market underpinning massive leverage in today’s mortgage-backed securities, the sea of derivatives delivering short-term arbitrage profits.

To see the potential Fed rate increase Dec 16 as but a step toward normalization is to misunderstand the foundation of capital today. Raising rates to 0.25%-0.50% is good. But it’s at least 29,005% different from raising rates to 5.25% in 2006.

You don’t have to grasp all the mechanics, IR professionals. You do have to understand that if fundamentals have been marginalized by arbitrage the past seven years, wait till the calculus in arbitrage changes.  It’s happening already. We saw a steep drop in shorting the past two weeks. Sounds good, right? But it means borrowing is tightening.

Don’t blame Ronin Capital for adapting.  In fact, forget blame, though it’s apparent where it lies. Let’s instead think about the implication for our task in the equity market. It’s about to get a lot more interesting, and not because of fundamentals.

The good news is that it’s never been more vital to measure your market structure and report facts to management. This is when IR careers are made.

Relativity and Dollars

How do you prove relativity?

When Einstein proffered the preposterous suggestion that all motion is relative including time, people clearly had not yet seen Usain Bolt. Or what happens to stocks after options-expirations when the spread between the dollar and equity indexes is at a relative post-crisis zenith.

Let me rephrase that.

As you know if you get analytics from us, we warned more than a week ago that a reset loomed in equities. Forget the pillars on which we lean – Behavior and Sentiment. Yes, Sentiment was vastly neutral. Behavior showed weak investment and declining speculation –signs of dying demand – all the way back in mid-August.

Let’s talk about the dollar – as I’m wont to do.

There is a prevailing sense in markets that stocks are down because earnings are bad. No doubt that contributes. But it’s like saying your car stopped moving because the engine died, when a glance earlier at the fuel gauge on empty would have offered a transcendent and predictive indicator.

Stocks are down because money long ago looked a data abounding around us. From Europe clinging together through printed Euros, to steadily falling GDP indicators in the US and China, to the workforce-participation line in US employment data nose-down like it is when economies are contracting not recovering, there were signs, much the way a piercing shriek follows when you accidentally press the panic button on your car’s key fob, that stuff didn’t look great.

We know institutional money didn’t wake up yesterday, rub its eyes, and go, “Shazzam! Earnings are going to be bad!” (more…)

Stocks, dollars and Newtonian physics

Isaac Newton posited 334 years ago in his third law of motion that mutual forces of action and reaction between two bodies are equal.

I wonder what he’d think of the relationship between the US dollar and equities, where this small action produces that decidedly unequal reaction.

After the Federal Reserve acted to shore up bank balance sheets by buying long bonds and mortgage-backed securities last week, the dollar trampolined and markets dropped like Newton’s apple.

Pundits blamed dismal economic data. Yet we saw money market-wide shifting from equities September 16 with quad-witching. Before the Fed offered a dim economic portrait. If money was reacting, it sure had a funny, proactive, organized way of showing it.

Today and Monday, the dollar weakened and stocks zoomed skyward in a Newton-flummoxing frenzy to reclaim paradise lost. How many believe this is rational investment behavior? If you do, there’s a solar-panel plant in California that might interest you. (more…)

Soft Dollars and Investor Relations

A note on trading today: The dollar dropped out of the gate this morning, buoying stocks. Talk about soft dollars. The price of shares is a construct of the Fed at present.

Anyway, after sharing the Hyatt in downtown Seattle with the Kansas City Chiefs (convincing victors Sunday), we returned to Denver Monday, body-scanned once but otherwise briskly processed through airport security. So we’re a day late with The Map.

Speaking of body scans, the SEC’s current insider-trading probe is poking at the squishy Wall Street practice of rebating trading costs with “soft dollars.” We should know about soft dollars in the IR profession. Chances are, the last sizeable institutional position taken in your stock involved them. (more…)

The derivative we need is a weather swap. The Winter Olympics would pay a premium for that spare snow lying around unused on the east coast.

Speaking of derivatives, the dollar retreated today, and US equities rebounded. We all want it to be about investing. Commentary everywhere today polished bullishness to an economic sheen. But that won’t make it reflect reality. Money keeps buying short-term love because the direction of the dollar is like a blacksmith’s bellows on equities. (more…)

Money for Nothing

How much does free money cost?

Everything, apparently.

The play Hamilton by Lin Manuel Miranda has grossed over $620 million, seventh all-time on Broadway but still a long way from Phantom of the Opera, Wicked, and Lion King, theater’s billion-dollar trio.

Hamilton is about Alexander, our first Treasury Secretary and the man behind the first bank of the United States, now the Federal Reserve Bank, which concludes its Open Market Committee meeting today.

Hamilton’s generous pen proliferates in the Federalist Papers, required reading for any serious defender of the republic.

In Federalist 78, Hamilton wrote that while it’s a republican axiom that the people may alter or abolish the Constitution if it’s inconsistent with their happiness, no momentary inclination laying hold of a majority of constituents justifies departure from it unless or until the people have by solemn act approved it.

My governor here in CO issued an order shutting down the economy, citing the emergency powers in Article IV Section 2 of the CO Constitution. I read it.  There are no emergency powers. It says the governor is the chief executive.

I sent a note to his chief of staff, Eve Lieberman, saying that not only had the governor construed meaning from the Constitution that it doesn’t contain, but that he also had overlooked Article II, which among other things says that all political power derives from the people, and that all persons have certain natural, essential and inalienable rights, among which may be reckoned the right of enjoying and defending their lives and liberties; of acquiring, possessing and protecting property; and of seeking and obtaining their safety and happiness.

If the governor suspends these by decree and uses the power of the police to enforce it, is he suspending the Constitution and imposing martial law?

I didn’t get an answer.

I’ve got a point about markets, the Fed and this country post-Pandemic. Stay with me.  You may disagree, but I’ll say it anyway.

People with political power and the best intentions reasoned that we could not have sick and dying people. Maybe that’s the ultimate ideal. It’s not in the US Constitution or any of the 50 state Constitutions.

It should not evade the collective conscience of this free people that the rule of law was suspended.  What should we do next time?  The political power, if not the will, is ours.

Let’s get to The Fed. The only reason we could realize the high self-actualized ideal of switching off the economy was because of the promise of free money.  If the Fed couldn’t write the checks, the economy couldn’t shut down.  Period.

I’ve told this story before: When we visited her hometown of Lake Jackson, TX for a school reunion, the fathers of two of Karen’s high-school classmates related vignettes to me about their grandfathers from the 19th century.

The grandfathers were about 12 years old each when their sharecropper parents told them, “We can’t afford you.  Here’s a lunch and our last silver dollar. Seek your fortune.”

Both went west. One become a big West Texas rancher, the other a wealthy Galveston mercantilist. Both sent their kids to school, and they in turn sent theirs to college.

And those kids were these fathers, now in their 70s, both college-educated, wealthy retired Dow Chemical executives.

The Fed’s balance sheet is now $6.6 trillion, laden with government debt, private mortgages, and soon high-yield-debt-backed Exchange Traded Funds, even facilities buying municipal debts, underwriting direct-lending to businesses and consumers.

The cost of free money is bigger than you think.  It’s the lost spirit of a 12-year-old on his own.  It’s liberty and the rule of law.

And free money is worth less than you suppose. My grandparents and parents never had mortgages or car payments and they concluded life with wealth as blue-collar farmers and ranchers. My grandfather bought his first house for $500.  Built his next on two acres for $5,500, sold that one in 1980 for $55,000.

I bought my first house for $370,000.  Sold that first house for $800,000.

Inflation. If we keep creating money to solve problems, it buys less and less, so you need more and more until there isn’t enough to retire on and we need unemployment of 3% instead of 10-12% just to keep it all going. And checks from the Fed for any crisis.

We are bleeding ourselves dry, ostensibly for our financial health, just like doctors once bled patients to make them well.

The stock market will buy free money – until suddenly it doesn’t. Japan stopped believing (despite rock band Journey’s anthemic counterargument).  The stock market there, the Nikkei, was nearly twice as high in 1990 than it is now.

It takes almost unimaginable character today to hand somebody a lunch and a dollar and say you’re on your own.  Yet it’s the strait and narrow way to wealth.

It’s never too late to change what we’re doing.  Can we give up free money and become rich again?

Roll Call

Apr 21, yesterday, is Texas A&M Aggie Muster.  Aggies everywhere gather to say “here” for Aggies lost in the past year, a roll call. It’s more poignant this time for my Aggie, Karen, and the many friends and family hailing from College Station.  Gig’em, Aggies.

Speaking of Texas, let’s talk oil.  We’ve been saying for years that volatility during the next crisis, whenever it came, would be exacerbated by Exchange Traded Funds (ETFs) and lead to large failures.  It’s now happened in oil, which freakishly settled Monday at $37 below zero.

Oil prices are predicated in the USA on futures contracts for West Texas Intermediate (WTI). Overflowing storage facilities mean few parties want to take delivery of oil. That pressures prices.

But oil isn’t worth nothing. It’s not worth less than nothing. That futures went south of zero is a product of the supply/demand distortions ETFs introduce.

Futures are themselves derivatives that obligate one to action only if held to settlement. ETF investors are not buying barrels of oil. They’re buying the PRICE of oil.

But they’re really buying derivatives that represent derivatives that represent the price of oil.  The massive oil ETF, USO (always among the most active stocks, it yesterday traded a billion shares, one of every twelve, leading the market), currently claims assets of $3 billion comprised heavily of June and July WTI contracts.  It’s down 80% in a year.

We’ve explained before that ETFs work similarly to, say, buying poker chips.  You pay cash to the house and receive chips of equal value. The chips represent the cash.  The difference with ETFs is there’s an intermediary between you and the house.

So the intermediary, the broker, pays the house for the chips and sells them to you.  Suppose the intermediary, the broker, gave energy futures as payment for the chips, rather than cash.

Then the value of the futures plunged. ETFs compound the damage. The broker is out the value of it collateral, futures, and you’re out the value of your chips, which also collapse.

The broker may stop transacting in the ETF because it’s out a lot of money. Now you can’t find a buyer – and you suffer even more damage.

This happened.  Interactive Brokers said it lost $88 million, its portion of the excess losses by its customers, some of whom lost everything in their accounts. The firm’s CEO said in a CNBC interview yesterday it had exposure to about 15% of the May WTI futures contracts behind the damage, meaning some $500 million more exists.

And the damage yesterday to the June WTI contract, the next in the series, was as impactful.  Massive Singapore futures broker Hin Leong, which moves physical commodities, filed for bankruptcy. It had been in business since 1963.

Banks most exposed to Hin Leong’s billions in obligations:  HSBC and ABN Amro.  We’ve long said we thought HSBC was a counterparty at risk in a financial crisis, on exposure to derivatives.  ABN Amro lost big already, on Ronin Capital’s March failure.

The biggest derivatives counterparties though are all names you know: JP Morgan, Goldman Sachs, Morgan Stanley, BofA, Citi (which has vastly more derivatives exposure via swaps than anyone).  They may be fine – but the world relies on these firms to make every meaningful market, from helping the Fed, to trading ETFs.

We’re leaving out a key piece of the story. The big way ETFs cause trouble is by distorting the market’s perception of supply and demand. In 2008, securitized mortgage derivatives bloated the appearance of demand for real estate.

USO owned some 25% of the subject oil futures contract. Yes, we’ve got too much oil (remember peak oil? Cough, cough.) because travel died. Sure, we know supply exceeds demand.


Demand from derivatives of derivatives is extended reach to an asset class – which inflates its price.  I submit:  WTI May futures traded to -$37 Apr 20 because ETFs grossly inflated the price despite its apparent weakness. When books were squared and inflationary “financial” demand from ETFs removed, oil was worth 200% less than zero.

Said another way, when money in ETFs not wanting to take delivery of oil didn’t even want its price, we discovered that demand implied in futures misrepresented reality.

Thank you, ETFs.

Barclays shuttered two oil instruments. A dozen more are at risk.  USO is at risk. The roll call of the threatened is lengthening.

Where else are ETFs inflating prices relative to underlying demand? Well, the greatest instance of asset-class extension is in US equities. Especially the FAANGs – FB, AAPL, AMZN, NFLX, GOOG (and the pluses are MSFT, AMD, TSLA, a handful of others).

These bellwethers have weathered better than the rest in a global shutdown.  But they all depend on consumer-discretionary income. People have to be working to pay for subscriptions, and businesses must be operating to spend advertising dollars.

The drums are drumming. I expect we’ll see some even more surprising ETF failures before the roll call is done.  The sooner we’re back to work, the quicker the drumbeat ends.


I rest my case, and it only took 15 years.

On Dec 29, 2009, we wrote in this very blog we’d then been clattering off the keyboard since 2006: “Now, why would you care about Iron Condors, IROs and execs? Because once again something besides fundamentals affected market prices.

Has the market ever offered more proof than now of the absence of fundamentals?  SPY, the S&P 500 Exchange Traded Fund (ETF), is up 27.3% since Mar 23 after falling 34.1% from a Feb 19 peak.  It’s still 19% down but, boy.  That’s like a Patriots Super Bowl comeback.  And what happened?


I’ll explain.

Note: We’re going to discuss what’s happened to the market in the age of the virus at 2p ET today, and it’s free and open to anyone. Join us for an hour:

What I mean by nothing is that the virus is still here, the economy is still shut down.  Quarterly earnings began with the big banks yesterday and they were bad and Financials fell.  The banks are the frontlines of the Viral Response (double entendre intended).

Many say the market’s expectations are improving. But we have NO IDEA what sort of destruction lies beyond the smoky wisps floating up from quarterly reporting. Future expectations are aspirational. Financial outcomes are rational facts.

And do they even matter?

Consider the Federal Reserve. Or as people are calling it on Twitter, the Freasury (Fed merged with Treasury).  The Fed is all-in, signaling that it’ll create plenty of money to replace shrunken consumption (why is that good if your money buys less?). It’s even buying bond-backed ETFs, which are equities (we’re Japan now).

The market’s reaction to Fed intervention cannot be said to reflect business fundamentals but rather the probability of asset-price inflation – or perhaps the analogous equivalent of enough poker chips for all the players including the losers to stay in the game.

It’s a reason for a 27% rally in equities. But it’s confusing to Main Street, as it should be.  We’ll have 20 million unemployed people (it’s coming) and capital destruction in the trillions of dollars when we sort out the mess in our consumption-driven society.

Yet the market doesn’t seem to depend on anything. That’s what I mean by nothing.  The market does its thing, rises and falls, shifts money from Real Estate to Tech and back, without respect to the virus or fundamentals. As investors flail to describe the unexpected.

Stocks dependent on consumption like Consumer Discretionary, Energy, Materials, led sector gainers the last month.  These include energy companies like Chevron, Exxon and Valero that sell gasoline to commuters. Chipotle, Starbuck’s, Royal Caribbean, selling stuff to people with discretionary income. Dow, Dupont and Sherwin-Williams selling paint, chemicals, paper.

They’ve soared, after getting demolished. And nothing has changed. Sure, Amazon, Zoom, Netflix, the chip companies powering systems behind all our stay-at-home video-use are up, and should be.

But the central tendency is that the market plunged down and bucked up, without data to support either move.  That’s what I’ve been talking about so long. The market is not a barometer for rational thought.

It IS a barometer for behaviors, one of which is rational.  And we’ll explain what this image means when you tune to the webcast. (Click here for larger version.)Active Investment - Mar 2020 Correction

Think of the risk in a market motivated by nothing.  In Dec 2019 when we described the market as surly furious, the steep decline had no basis. During it, pundits tried to explain the swoon as expectation of a recession. Stocks roared to epic gains after Christmas 2018.

Nothing motivated either move.  That was a stark illustration of market structure form trumping capital-formation function.

Now stocks have zoomed back up 27% off lows, and everything is still wrong, and the wrongness doesn’t yet have defined parameters.

I don’t know which instance is most stark. Maybe it doesn’t matter. Come ask questions today at 2p ET at our webcast on market structure during the age of the virus.  I would love nothing more!

Many Tiny Trades

All 20 biggest points-losses for Dow Jones Industrials (DJIA) stocks in history have occurred under Regulation National Market System.

And 18 occurred from 2018-2020. Fifteen of the 20 biggest points-gains are in the last two years too, with all save one, in Mar 2000, under Reg NMS (2007-present).

It’s more remarkable against the backdrop of the Great Depression of the 1930s when the DJIA traded below 100, even below 50, versus around 20,700 now and small moves would be giant percentage jumps. Indeed, fifteen of the twenty biggest percentage gains occurred between 1929-1939. But four are under Reg NMS including yesterday’s 11.4% jump, 4th biggest all-time.

Just six of the biggest points-losses are under Reg NMS (we wrote this about the rule). But ranked second is Mar 16, 2020. And 19 of the 20 most volatile days on record – biggest intraday moves – were in the last two years, and all are under Reg NMS.

Statistically, these concentrated volatility records are anomalous and say what’s extant now in markets promotes volatility.  Our market is stuffed full of many tiny trades.

Volume the past five days has averaged 9.9 million shares per mean S&P 500 component, up 135% from the 200-day average.  But intraday volatility is up nearly 400%, trade-size measured in dollars is down 30%.

That’s why we’re setting volatility records. The definition of volatility is unstable prices.

I’m delighted as I’m sure CVX is that the big energy company led DJIA gainers yesterday, rising 22%.  But stocks shouldn’t post an excellent annual return in a day.

CVX liquidity metrics (volume is not liquidity!) show the same deterioration we see in the S&P 500, with intraday volatility up 400%, trade-size down 47%, daily trades up over 240% to 196,000 daily versus long-run average of about 57,000.

Doing way more of the same thing in tiny pieces means intermediaries get paid at the expense of investors.

Every stock by law must trade between the best national visible (at exchanges) bid to buy and offer to sell.  When volatility rises, big investors lose ability to buy and sell efficiently, because prices are constantly changing.

Regulators and exchanges have tried to deal with extraordinary volatility by halting trading.  We’ve tracked more than 7,500 individual trading halts in stocks since Mar 9 – twelve trading days.  Marketwide circuit breakers have repeatedly tripped.

Volatility has only worsened.

In financial crises, we inject liquidity to stabilize prices.  We can do the same in stocks by suspending the so-called “Trade Through Rule” requiring that stocks trade at a single best price, if the market is more than 5% volatile.

Trade size would jump, permitting big investors to move big money, returning confidence and stability to prices. We’ve proposed it three times to the SEC now.

Investors and public companies need to understand if the market is working. Let’s define “working.” The simplest measure is liquidity, which is not volume but dollars per trade, the amount one can buy or sell before price changes.  By that measure, the market has failed utterly during this tumult.

Let’s insist on a market capable of burstable bandwidth, so to speak, to handle surges.  Suspending Rule 611 of Reg NMS during stress is a logical strategy for the next time.

Let’s finish today by channeling the biblical apostles, who came to Jesus asking what would be the sign of the end of the age?  Here, we want to know what the sign is that market tumult is over.

At the extremities, no model can predict outcomes.  But given the nature of the market today and the behaviors dominating it, the rules governing it, we can inform ourselves.

This market crisis commenced Feb 24, the Monday when new marketwide derivatives traded for March expiration.  In the preceding week, demand for derivatives declined 5% at the same time Market Structure Sentiment topped.

We had no idea how violent the correction would be. But these signals are telling and contextual. They mean derivatives play an enormous role.

We had massive trouble with stocks right through the entire March cycle, which concluded Mar 20 with quad-witching.  Monday, new derivatives for April expiration began trading.

It’s a new clock, a reset to the timer.

You longtime clients know we watch Counterparty Tuesday, the day in the cycle when banks square the ledger around new and expired derivatives. That was yesterday.

That the market surged means supply undershot demand. And last week Risk Mgmt rose by 5% and was the top behavior – trades tied to derivatives, insurance, leverage. Shorting fell to the lowest sustained level in years. Market Structure Sentiment bottomed.

It’s a near-term nadir. The risk is that volatility keeps the market obsessed with changing the prices, which is arbitrage. Exchange Traded Funds depend on arbitrage (and led the surge in CVX).  Fast Traders do too. Bets on derivatives do.

The tumult ends in my view when big arbitragers quit, letting investment behavior briefly prevail.  We’ll see it. We haven’t yet.  The market may rise fast and fall suddenly again.