Why are markets dropping like the thermometer at 8pm on Pike’s Peak?

Debt chaos, sour economic data, sure. We’re not market prognosticators, we track behavioral data. Under the skin of the news at market level, institutions shifted to managing portfolio risk about July 21. These events were observable. Algorithmic execution changed, and we saw what started it and what followed.

Large diversified asset managers swapped out of equities. That means they assigned the risk in portfolios to others through agreements that traded risk for safety at a cost. Why not just say “investors sold to manage risk”? It’s not accurate and it won’t be reflected in settlement data.

Of course, hedging produces a range of consequences too. Those underwriting hedges themselves hedge the risk they assume. That prompts speculating in whatever instruments are being used to hedge the hedges. The idea is to offset every point of exposure – like double-entry accounting, a credit for every debit.

Consider the Treasurys market – the one in peril till today. Primary dealers ranging from Banc of America to Goldman Sachs make markets in Treasurys. Average daily trading volume in Treasurys is more than $500 billion. Bond trading in total in the US averages more than $950 billion daily and nearly 80% is government securities.

Continue reading →

It’s a question that burns in the minds of IROs daily. No, not that one. This one: “Will an ISO post to the Nasdaq if the TIF modifier is one other than an IOC?”

Sentences like that are why alcoholism remains widespread. It’s also the reason IR folks don’t want to know how markets work. Too complicated.

Yet if we’re brutally honest, we know we should understand more. I mean, you can’t claim to be a great Yankees fan and not know the rules of baseball.

The sentence above from Nasdaq Reg NMS FAQs says: If I’ve chosen to fill my order up to the designated number of shares at a set price without leaving the Nasdaq to check for better prices elsewhere, suppose the time to complete the order is something besides “immediately or forget it.” Will that order be accepted at the Nasdaq?

This is how markets work. If you want homework, Google “Rule 611 Reg NMS.” Continue reading →

What if some mathematical calculations in the market are just there to get a reaction?

Traders have not to my knowledge named them “Charlie Sheen.” But alert reader Walt Schuplak at the Market Intelligence Group in New York sent an item about rogue algorithms. Our friend Joe Saluzzi at Themis Trading wrote on it yesterday.

Joe explains that certain trading practices create arbitrage opportunity. Profiting from divergence isn’t bad of itself, Joe notes. But if the chance to profit is fostered where divergence could not or would not occur on its own, it raises fundamental questions.

Bloomberg writer Nina Mehta wrote today about the Australian government’s initial rejection of the Singapore Exchange’s effort to buy the Oz stock market. Singapore is a shareholder-owned exchange. The Deutsche Bourse is public. Same with the InterContinental Exchange, throwing in with the Nasdaq on a bid for the NYSE, both of which are public too. The London and Toronto markets are run by public companies. BATS may IPO. Continue reading →

Happy New Year! Good to be back after a two-week break from The Map. Karen and I spent Christmas in Texas, where there remains a general lack of fear of federal government.

I’m glad when winter solstice passes, that shortest and gloomiest of days. After that, we’ve rounded the corner from darkness toward light no matter what winter yet holds.

But in trading markets, darkness thrives. Monday in the Wall Street Journal, Jacob Bunge, who covers the exchanges, wrote that 34% of trades in December matched up off the exchanges in “dark pools,” doubling from last year. Why is money streaming off exchanges in search of darkness, and does it mean your shares aren’t priced right?

Let’s clarify “dark pools.” There are trading facilities like Liquidnet, Pipeline, ITG Posit and Aqua that offer twists on paths to more share-supply. They’re like the Millionaire Matchmakers of trading, finding liquidity love for willing parties. But these independent platforms and their broker-dealer counterparts at Credit Suisse (Crossfinder), Goldman Sachs (Sigma X) and Barclays (LX) command about 12% share. Continue reading →

Last week in Miami, I took part in a panel discussion about modern trading realities. The weather Thursday was like it is in Denver now, about 60 degrees. Those of you south or north who need to warm up, come visit. I clocked some hours on the bike Saturday and Sunday. It wasn’t sunburn weather, but on bikes in December at 5,000 feet? Life’s good.

Getting back to trading, how come some investors rail at churn trading, while others love machine intermediation? Somebody must be wrong, right? Continue reading →