Tagged: Flash Crash

New Answers

What’s the purpose of life?

We want simple answers to complex questions.  Such as when management asks why the stock price is up or down. Since elementary explanations are often incorrect, there’s been a loss of confidence.  “We broke through our moving averages” wears thin with the CEO.

I’ll give you a couple examples. Yesterday an energy master limited partnership trading on the NYSE announced an unchanged cash distribution for the first time in years. This company is known for steadily ratcheting up quarterly outlays to holders.

The stock tanked. Right?  Nope, it doubled the modest sector gains in energy yesterday. Maybe investors thought the company would trim the distribution?  Now we’re speculating because the opposite of what was expected occurred.

We’re also assuming price depends on rational thought, which if the feds now contending a trader spoofing the futures market with placed and canceled trades caused the Flash Crash, is the exact opposite of reality.  Do you know the SEC’s own trading data show at least 25 cancels for every completed trade in stocks of all market-caps (250 per trade in high dollar-volume issues), and over 1,000 cancels-per-trade in big ETFs?

Another company last week dropped sharply amid block volumes, prompting conventional stock soothsayers to conclude big holders were selling. Seems logical, right? If your stock trades 8,342 times daily on average your closing price is the 8,342nd trade.  It’s where the day’s music stopped and useless as a central tendency – and yet closing price is the de facto measure of action (we prefer midpoint price, by the way).

In the 1961 science fiction novel Solaris by Polish writer Stanislaw Lem – made into a 2002 movie starring George Clooney – Kelvin the protagonist questions his sanity. Seeing things that appear real but seem impossibly so, he begins to believe his entire journey may be occurring in his own mind.  To establish a reality baseline he performs some calculations. He reverts to the math.

Back to the stock above, the math showed the opposite of what reality appeared to say. Active value investors had been buyers. When buying stopped, traders abruptly quit lifting prices, prompting a brief plunge. Short volumes, which had jumped 40% in two days, sharply retreated at once, implying block prints reflected short-covering – by the very brokers who’d just filled buys for Value money.  The stock is now trading higher, which would be unlikely if big holders were sellers.

Ah for simple answers – but we don’t live in that world. Which brings us to today. Two vital macro events collide like matter in a particle accelerator: In the morning, we’ll get a first read on US GDP this quarter.  Then later the Federal Reserve via the non-apparitional personage of Janet Yellen will pronounce something about monetary policy.

Beneath the surface the market is on pins and needles. The Fed represents the supply of money, economic growth its cost.  The US dollar has been coming off decade-highs for days now, indicating some see growth drearier than hoped.  In the ModernIR 10-point Behavioral Index, sentiment is still weakly over neutral, meaning investors think whatever happens will be accommodative and therefore helpful to stocks.

But hedging is breathtaking – radically greater in the past five days than any other behavior. Investors are in fact in sharp retreat as price-setters. Effectively, everyone but the Fed has transferred the risk of being wrong to somebody else. Where that hot potato lands will determine the fate of equities. Moves either direction could be large.

Data suggest the economy will offer a limp pulse, perhaps wheezing in below 1% despite expectations from the Fed itself last December of 3%. If the Fed is off by 70% nobody there will get fired, which is good news for the jobless rate.

What’s it all mean? We pine for Easy, Simple. We’re sure as IR officers our shares stand out, and I hear all the time, “My stock is different.”  Like doctors studying angiograms we see the data and say, “You look like the typical patient to us. The good news is that means we’ve got answers.”

The great modern opportunity for the IR profession is the same presented to any generation, scientist, philosopher or explorer challenging convention.  We first face complex reality and then translate it into refreshing value for those we serve.

It’s not simple – but it’s exhilarating. So today, whatever your stock does in response to Janet Yellen’s invigorating oratory and the probable whiff from the economy, ask the question – why? – and if you’re still laboring along the flat earth of old-fashioned perspectives, stop.  Seek new answers. They exist!

Then the CEO will again ask you for them – a measure of value from those you serve.

Chasing Spoofers

Apparently the market is very unstable.

This is the message regulators are unwittingly sending with news yesterday that UK futures trader Navinder Singh Sarao working from home in West London has been arrested for precipitating an epochal US stock-market crash.

On May 6, 2010, the global economy wore a lugubrious face. The Greeks had just turned their pockets out and said, “We’re bollocks, mate.”  (Thankfully, that problem has gone away.  Oh. Wait.) The Euro was on a steep approach with the earth. Securities markets were like a kindergarten class after two hours without some electronic amusement device.

By afternoon that day, major measures were off 2% and traders were in a growing state of unease. The Wall Street Journal’s Scott Patterson writing reflectively in June 2012, interviewed Dave Cummings, founder of seminal high-frequency firm TradeBot. Heavy volume was scrambling trading systems, Patterson wrote, leading to disparities in prices quoted on various exchanges. The decline became so sharp, Cummings told Patterson, that he worried it wasn’t going to right itself. If the data was bad, TradeBot would be spreading contagion like a virus.

Ah, but wait. Regulators now say mass global algorithmic pandemonium May 6, 2010 was just reaction to layered stock-futures spoofing out of Hounslow, a London borough featuring Osterly Park, Kew Bridge and a big Sikh community. If you think the Commodity Futures Trading Commission’s revelry over finding the cause of the Flash Crash just north of the Thames and west of Wimbledon stretches the bounds of credulity, you should.

Mr. Sarao is accused of plying “dynamic layering” in e-mini S&P 500 futures, a derivatives contract traded electronically representing a percentage of a standard futures contract. It’s called an ideal beginner’s derivative because it’s highly liquid, trades around the clock at the Chicago Mercantile Exchange, and offers attractive economics. (more…)

Lulled by Markets

Palo Alto is a great town.

While there sponsoring IR Magazine’s West Coast Think Tank last week we feasted at Evvia and Fuki Sushi. Denver’s got fine sushi. Our Sushi Den on South Pearl Street flat demoralizes Bryant Park’s Koi. Proprietors Toshi and Yasu Kizaki each day fly in hand-picked selections from the Tokyo fish market. You gotta get up pretty early to beat our fish. Fuki Sushi apparently rises at dawn. We ate to dullness.

Speaking of lulled, exchanges began introducing new SEC-approved Limit-Up/Limit-Down (LULD) single-stock circuit breakers Monday, smartly easing the program into effect. More will be added until the largest 2,000 are covered by late May and the rest of the market through August.

“It sounds simple, but for firms managing thousands of customer orders, you have to program how you’ll manage them, how you’ll deal with quotes and trades across 50 destinations, routing decisions and execution quality,” Chris Concannon, partner at high-frequency trading firm Virtu Financial, told Bloomberg reporter Nina Mehta.

Under LULD, stocks won’t be permitted to trade more than a certain percentage from their rolling five-minute average prices. The SEC mandated these changes after the Flash Crash of May 6, 2010, sent the S&P 500 plunging over a hundred points and the Dow Industrials a thousand points, before both rebounded, all in roughly twenty minutes. (more…)

Big Tick Talk

We all love soaring markets. When were you last dead sure what drove your stock up?

Today, a German court will decide if German taxpayers must back last week’s European Central Bank plan to buy Eurozone debt, which powered US equities to multi-year highs Sept 6. Stocks have moved higher since, with the dollar at May lows. What that court says may prompt stocks to swoop or swoon.

Thursday the 13th, Ben Bernanke speaks after the Federal Reserve’s monthly Open Market Committee meeting. That may boost stocks too, or disappoint them.

By the way, Friday I speak (having zero macro impact) to the IR council for MAPI, the manufacturer’s alliance, on “what lies beneath” market structure today. See you at the Intercontinental in Chicago.

Next week is huge. Options expire, quarterly rebalances to S&P indexes take place, and important European bond auctions go off – all between Sept 19-21. Correlation between the US dollar index and the S&P 500 is nearly symmetrical to late April’s when we warned clients of an imminent market retreat. Stocks then declined a thousand points over several weeks until the dollar in July began its longest slide since the Flash Crash. Beware risks.

In the data, evidence abounds. We’ve seen stocks curiously leap ex-dividend, whole peer groups shoot up 15%, and random shares move double digits up or down in two days without regard to the market or the peer group. Global statistical arbitrage – using math to calculate trading spreads globally – is rampant in behaviors, including the normally “rational” slice. As high as we’ve ever seen. (more…)

Trading at the Speed of Light

When you were a kid, did you lie on your back on the lawn and look for shapes in the clouds?

Nanex finds Charlie Brown and unicorns in trading data. Or maybe goblins and Jack the Ripper. IR professionals should know about Nanex. In Boston last month, I asked for a show of hands from IR folks who’d heard the name. No one had.

Nanex is the electronic microscope for markets, zooming in on trades and quotes in thousandths and millionths of a second. They find shapes, patterns. What Nanex calls crop circles.

These are footprints of algorithms. On September 15, 2011, at 12.48.54.600 hours Eastern Time, Nanex discovered that in one second of trading in YHOO, encompassing some 19,000 quotes and 3,000 trade-executions, a number of trades matched at quotes that didn’t exist until 190 milliseconds after the trades occurred. Nanex termed this apparent evidence of time-travel in trades “0.19 fantoseconds.”

Sure, laugh it up. When asked what might limit it, Illinois Institute of Technology HFT expert Ben Van Vliet responded: “The speed of light.” (more…)

Among the eight panelists pondering how to forestall another Flash Crash, my favorite quote comes from Columbia professor and Nobel winner in Economic Sciences Joseph Stiglitz, who said in a 2008 paper: “Dollars are a depreciating asset.”

Potent statement. I invite you to consider its ramifications some other time, however. Let’s discuss what the Flash Crash Panel’s recommendations mean to the IR chair. They will affect how your stock trades.

We read all fourteen ideas. They range from charging traders for excessively posting orders and cancelling them, to setting limits on the permitted up/down movement of stocks and imposing circuit breakers for all securities save the most thinly traded. The panel clearly aimed at addressing investor uncertainty through controlling outcomes. If stocks are constrained to ranges, and algorithms to supervision, incentives are adjusted to encourage this, and fees imposed to stop that, the net result will be less uncertainty, the panelists hope.

The net result will be a market suited only to passive index money. If that’s what you want then you’ll be happy. If you want vital markets, where investors can differentiate your shares from other stocks, then a market built around rigid conformity is not for you. (more…)

Nobody Wants to See You Naked

Should we ban nakedness?

The SEC thinks so. Continuing a raft of rules in response to the Flash Crash, the commissioners voted last week to restrict “naked access,” or trading at somebody else’s terminal.

Executives and IR professionals, you’ll get questions. Your shares are affected by these rules. What do you know about naked access, and is stopping it good? (more…)

Boy, when it rains, it pours. Three years ago when we began grousing about how Reg NMS was turning equity trading into a foot race, people thought we’d been hitting the Hookah. Now it’s on 60 Minutes.

Along with Larry Leibowitz from the NYSE and Minoj Narang of Tradeworx, 60 Minutes interviewed Joe Saluzzi from Themis Trading (read their white papers about trading). Joe was on my panel about modern trading at NIRI National in 2009. Few people are better at explaining the peccadilloes of a market structure based on price and speed.

Here again is the problem, simplified to its most basic elements: Trades must meet at the best bid or offer. The participants able to get to the price fastest will always set the price. And because the exchanges and regulators alike have embraced a “maker/taker” model in place of the old auction and automated quotation systems, transient money is always setting your price. Yes, it requires the presence of something else underneath it, as the Flash Crash illustrated. But the structure, not the behavior, is the problem. The behavior is precisely what one would expect from the existing structure. (more…)

The lawyers doing the writing at the SEC are good. The 104-page novella the Commission released last week with the Commodity Futures Trading Commission gallops readers spritely to an inconclusive denouement.

No offense intended. For anybody versed in trading markets, the report is logical and easy to follow. We agree with the description of underlying trading activity, even so far as the report’s conclusion that real buyers and sellers are about 10% of the market. There are charts that look somewhat like our models of market structure, illustrating trading share by market center (we do it by behavior). (more…)

Thursday and Friday this week we’re in New Orleans sweating it out and moderating a Rapid Fire panel on hot topics at the NIRI Southwest Regional Conference. Karen and I plan to eat beignets and drink Sazeracs too. Probably after.

Recently Kate Welling at Weeden & Co. interviewed Prudential’s vice-chairman, Mark Grier about being public in 2010. I read it and asked if we could highlight it here. It’s critical knowledge for IROs and public-company execs now. (more…)