Having never gone to a Neighborhood Pumpkin-Carving, we were wistful when squirrels promptly devoured the face off our finished product (marked “easiest” in the booklet of pumpkin-carving patterns we purchased). Ah well. What some consider a jack-o-lantern others see as a meal.

Speaking of scary, for those keeping record we note more currency-driven events to explain to your executives. First, the European Central Bank last week threw down the red carpet for Greek lenders, so the dollar dived and stocks soared on changes to perceived risk and anticipated further global currency-printing. On Halloween, Japan intervened to weaken the yen by buying other currencies, so the dollar strengthened (less supply, same demand) and markets plunged. On Nov 1, fear of setbacks on the Greece deal drove risk managers back to the dollar, pushing it up and stocks down more.

US markets should be proxies for fundamental value and forward multiples of collective corporate cash flows. Not meters for currency fluctuations. Happy Halloween.

Speaking of meters, there is Tom Peterffy, immigrant, billionaire, and architect of automated trading. Peterffy ranked 236th on Forbes’ list of the 400 richest in 2009, fruits of long labor revolutionizing how stocks trade. Peterffy, founder of Timber Hill and Interactive Brokers, pioneers in automated multi-asset-class electronic trading, believes automated trading goes too far. Continue reading →

Observe. Orient. Decide. Act. OODA.

This is how Pipeline Trading describes its predictive analytics for helping buyside customers identify large-block trading opportunities.

For those of you who missed the news that rocked The Street this week, Pipeline, a dark pool, was fined $1 million by the SEC for misleading clients about the nature of its liquidity.

Were you harmed? Check to see if your shares trade at Pipeli—

Oh. You can’t. It’s a dark pool. You don’t know if your shares trade there unless Pipeline’s orders route to your listing exchange.

Of Pipeline, SEC Enforcement Director Robert Khuzami said in a statement: “Investors are entitled to accurate information as to how their trades are executed.”

Pipeline offers a platform where institutional customers like mutual funds can find “natural liquidity,” or real orders from other buysiders. What’s more, Pipeline provides execution algorithms that mimic how high-frequency traders try to project price and volume in order to place profitable trades ahead of moves. If the buyside can beat HFT at its own game, then instead of being victimized, it can also generate alpha – market-beating returns on trades. Continue reading →

Whew, we’re back to good.

That seems the attitude about market gyrations in August. Prices recovered. Heck, we should’ve skipped the mess and stayed on the Cape.

Across our client base, we saw few rational-price changes between Aug 1 and Aug 12. Rational investors were not responsible aside from stop losses triggering reactions. Trading data do indicate sizeable shifts in assets by global risk managers.

We talked about that last week. Responses to currency fluctuations. Institutions transferring risk by moving money continuously via electronic markets from bonds, to equities, to derivatives, to currencies. With fear of a currency meltdown rising, risk managers engaged in random, computerized, global buying and selling to discourage everyone from running to the same side of the boat and capsizing it.

We’re convinced that techniques developed after 2008 were employed to blunt this “tail risk” crowd behavior. That’s the chance that everybody does the same thing at the same time, destroying global portfolios in a mad rush. Computers randomly bought and sold. The lack of a trend reduced the risk of a rout. Continue reading →

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 →

Would you rather ride your road bike in the sun or the rain?

What if riding in the sun means peddling across Death Valley in the summer, while the rain is a passing shower in the Italian Dolomites?

Context is essential. Let’s apply the same thinking to decisions about stock-repurchases and dividends. Conventional wisdom has long held that both actions appeal to the kinds of stock buyers who hold securities and count on fundamentals.

No argument there. But ponder the third dimension in the IR chair. The first dimension is your story – what defines and differentiates your investment thesis. The second is targeting the kind of money that likes your story. The third dimension is the state of your equity store.

Your equity is a product, competing with other products, with unique supply and demand constraints. If you suppose that your story is correct for a particular buyer without considering whether the buyer can act on interest in your story, you’re leaving money on the table. So to speak.

For instance, if I want four Keith Urban tickets at Pepsi Center in October for no more than $50 each, I’m already sold on the investment thesis – “Keith Urban puts on a good show.” What if there are only two tickets available at $50? Well, I’m not the right buyer for the investment thesis, then. Continue reading →