Wednesday, August 10, 2011


Did I ever share with you the story when my humble father received a call at home from the emergency room at the Royal Victoria Hospital about one of his psychiatric patients? We were getting ready to eat dinner when the phone rang and I overheard him: "Ah huh, hmm, I see, I see, OOOOKKAAAY, INCREASE THE DOSAGE!"

At the time I found it humorous and kept teasing him that "it must be really easy being a shrink, all you need to do is increase the dosage." He didn't find it funny at all. Just like I don't find any humor in these schizoid markets. The volatility this week proves to me that the wolves are hungrier than ever and are engaging in ever more deceitful, manipulative techniques to bring this market lower and scare investors to death.

Fear returned to Wall Street on Wednesday, sending the S&P 500 to another 4 percent decline, triggered by worries that Europe's debt crisis could engulf French banks and spill onto the U.S. financial sector. Trading was once again marked by sharp moves on heavy volume. For a fifth straight day, the Dow industrials fluctuated in a range of more than 400 points. And once again, it was banks that got pummeled.

Someone sent me an article by Jon Najarian, A Trillion Bytes of Data Friday Hides A Lot of Sins:
Last night over 14 months after the Flash Crash, US regulators finally sent subpoenas to HFT firms. In light of that and the games that were played last week, I offer more insights into HFT from my friends at Nanex, which supports what our HeatSeeker saw as the quants had their way with the markets to the detrement of all investor classes:

On Friday, Aug 5, 2011, we processed 1 trillion bytes of data for all U.S. equities, options, futures, and indexes. This is insane. A year ago, when we processed half of that, we thought it was madness. A year before that, when it was 250 billion bytes, we thought the same. There is no new beneficial information in this monstrous pile of data compared to 3 years ago. It is noise, subterfuge, manipulation. The root of all that is wrong with today's markets.

HFT is sucking the life blood out of the markets: liquidity. It is almost comical, because this is what they claim to supply. No one with any sense wants to post a bid or ask, because they know it will only get hit when it's at their disadvantage. Some give in, and join the arms race. Others leave.

Take the electronic S&P 500 futures contract, known as the emini, for example. This is, or used to be, a very liquid market. The cumulative size in the 10 levels in the depth of book was often 20,000 contracts on each side. That means a trader could buy or sell 20,000 contracts "instantly" and only move the market 10 ticks or price levels. Even during the flash crash, before the CME halt, when hot potatoes were flying everywhere, the depth would still accommodate an instant sale of 2,000 contracts.

Not anymore. On Friday, 2,000 contracts would have sliced right through the entire book. Not during a quiet period, or before a news event. Pretty much any minute of trading that day after the 9:54 slide. And it wasn't just Friday, the trend in the depth of book size has been declining rapidly over the last few week. What used to be the most liquid and active contract in the world, which served as a proxy for the true price of the US stock market for decades, is getting strangled by the speed of light, a weapon wielded by HFT.

Without going into detail at this time, we think we know one cause of the drop in liquidity. A certain HFT algorithm that we affectionately refer to as The Disruptor, will sell (or buy) enough contracts to cause a market disruption. At the same exact time, this algo softens up the market in ETFs such as SPY, IWM, QQQ, DIA and other market index symbols and options on these symbols. When the disruptor strikes, many professional arbitrageurs who had placed their bids and offers in the emini suddenly find themselves long or short, and when they go to hedge with ETFs or options, find that market soft and sloppy and get poor fills. Naturally, many of these arbitrageurs realize the strategy no longer works, so they no longer post their bids and offers in the emini. Other HFT algos teach the same lesson -- bids or offers resting in the book will only become liabilities to those who can't compete on speed.

In summary, HFT algos reduce the value of resting orders and increase the value of how fast orders can be placed and cancelled. This results in the illusion of liquidity. We can't understand why this is allowed to continue, because at the core, it is pure manipulation.
The person who sent me this article added his thoughts to this market mayhem:
Does this help explain why even the pros are getting slammed.

Gailbraith's Great Crash of 1929 notes how the volumes grew astronomically in Aug through Sept of 1929. Seems like another parallel to me - only worse now with all the HFT going on.

I have a friend who subscribes to some guy from Atlanta's trading program and he sits and watches his graphs on gold mostly ticking up and down and taking tiny movements second by second. Some way to spend his retirement!

I get nervous when markets make such big swings. History indicates that there is a good chance than some day, they just swing downward as no one has any fundamental confidence and the trading lacks any explainable or understandable trends.

What has happened to value investing? Is it all just a giant casino Ponzi scheme?

As for the future of the great American consumer, the attached note from Economists View helps illustrate why consumer demand will remain weak well into the future.
Roubini made a great statement the other day on Charlie Rose, right at the end of the panel discussion. Some US General stated that 75% of American males aged 17-24 could not qualify for military service because of insufficient education, drug addiction, criminal record or obesity. Maybe there is hope for the world when the Yanks are too stupid and fat to get in the Army.
I'm not so sure there's hope for this rotten world. I watch social degeneration going on in "sophisticated" cities like London, and worry that the world is going crazy. The leeches on Wall Street are cannibalizing each other, making record bonuses while millions are struggling with persistent unemployment. And the politicians seem hopelessly lost.

As far as markets are concerned, I was paying close attention to the VIX, TVIX, and XIV during Wednesday's volatile session:

You'll note the volume on the XIV was more than five times that of the TVIX, signalling that traders are betting that volatility will come down to normal levels after surging this week. You'll also note that the VIX, a gauge of market fear, did not take out the high of 48 recorded on Monday. In fact, today it settled at 43 but the high was 44.

Given the extreme volatility, low liquidity, I also think things will settle down over the next few weeks. If they don't settle down, you can be sure the Fed will move in quickly and INCREASE THE DOSAGE! Problem is more 'heroine' might kill the stock market addicts, dragging us all down with them.

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