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Power Trendlines

January 9, 2019

Power Trendlines

Market action is heavily dominated by algorithmic trading and programs. Nothing new about that and it’s a reality of the market environment. In December algos were blamed for the steep sell-off, nobody is blaming them during the massive bounce off of the December lows. Funny that.

Irony aside knowing where these algos live and where they change direction is a critical edge to decipher in today’s markets. One of the key tools we use to keep a tap on them are trend lines and in this brief video (recorded January 8) I highlight some of the fascinating ping pong action we’ve come to observe and respect in markets.

Note: News cycles and events may be triggers, but trend lines often give you a destination and potential key turning points of support and resistance. And finding these ahead of time can provide a significant edge.

Joe Saluzzi: The Markets Are Still Way Too Vulnerable To A Sudden Liquidity Disappearance

September 25, 2018

Joe Saluzzi: The Markets Are Still Way Too Vulnerable To A Sudden Liquidity Disappearance

HFTs remain a major issue

Joe Saluzzi, co-founder of Themis Trading LLC, outspoken exchange expert, and author of the excellent exposé Broken Markets, returns to give us an update on the state of high frequence trading — otherwise known as HFT.

In the past, Saluzzi has been a vocal critic of the dominant and parasitic role HFT algorithims play in today’s financial markets, siphoning off profits at the expense of the “dumb money” (i.e. retail investors) while undermining the integrity and stability of exchanges. Front running, spoofing, flash crashes — HFTs are the culprits behind them.

Saluzzi actually has some positive developments to note: namely that the obscene profits the HFTs used to make (i.e., steal) are moderating as the arms race in the industry has escalated and the players are increasingly competing with each other. Also, the SEC appears to be moving much faster now towards putting some material constraints in place.

But the unfair advantages that HFTs enjoy, as well as their threat to market stability, are still very real. If we don’t continue to fight to bring them under control, we risk a vicious downdraft during the next big market crisis should the algos instantly exit in a panic:

If the HFT algos get spooked and stop trading, then you got a major problem.

In times like this when there’s no storm out there, it’s time to fix the house now to make sure that when the storm comes the house doesn’t get knocked down. So how do you fix the house? By getting rid of the conflicts of interest, maybe adding more obligations for market makers, looking at those off-exchange venues which are considered ‘dark pools’ and learning what’s going on there, looking at all different types of the issues that continue to haunt us — most of which don’t become visible until they don’t pop up at the end.

…click on the above link to read the rest of the article…

Fake news, algorithmic sentinels, and facts from the future

April 17, 2018

Fake news, algorithmic sentinels, and facts from the future

The suggestion that social media outlets need to police so-called “fake news” rings true on its face. Who wants to read news coverage known to be false? But what rates as “fake news” will be harder to define than we think.

And, putting algorithms in charge of policing those vast information flows claiming to be news will almost certainly not solve the problem. In a piece reflecting on artificial intelligence (AI) on the 50th anniversary of the release of the film, “2001: A Space Odyssey” writer Michael Benson tells us that “[d]emocracy depends on a shared consensual reality.”

Well, actually everything we do in groups, whether it’s democracy or going to a hockey game, depends on shared consensual reality. And, therein lies the problem. We are now in a fight not over opinions concerning the import of agreed upon facts, but over the consensus itself—whether scientific findings can be trusted, whether corporate-owned media can be believed, whether “objective” reporting is even possible, whether the history we were taught is indeed the “true” history of our country and our world.

Which consensus prevails will be crucial to every facet of our society. It is true that consensus views are constantly being challenged by events. To the extent that events can be fit into consensus views, the consensus can survive. In fact, the consensus can be tweaked when necessary. The idea that free trade is always good has been tweaked in the past to admit that it is not good for everyone and that those who lose their jobs need special assistance. The consensus survived and free trade agreements continued to flourish.

Now, the consensus is vanishing. Large parts of society do not believe that the current system serves them well. Wealth is being shifted up the income ladder as middle- and low-income families find their wages stagnant or declining.

…click on the above link to read the rest of the article…

Quick Take: The Risk Of Algos

April 13, 2018

Quick Take: The Risk Of Algos 

“Mike ‘Wags’ Wagner: ‘You studied the Flash Crash of 2010 and you know that Quant is another word for wild f***ing guess with math.’

Taylor Mason: ‘Quant is another word for systemized ordered thinking represented in an algorithmic approach to trading.’

Mike ‘Wags’ Wagner: ‘Just remember Billy Beane never won a World Series .’ – Billions, A Generation Too Late

My friend Doug Kass made a great point on Wednesday this week:

“General trading activity is now dominated by passive strategies (ETFs) and quant strategies and products (risk parity, volatility trending, etc.).

Active managers (especially of a hedge fund kind) are going the way of dodo birds – they are an endangered species. Failing hedge funds like Bill Ackman’s Pershing Square is becoming more the rule than the exception – and in a lower return market backdrop (accompanied by lower interest rates), the trend from active to passive managers will likely continue and may even accelerate this year.”

He’s right, and there is a huge risk to individual investors embedded in that statement. As JPMorgan noted previously:

“Quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets.

While fundamental narratives explaining the price action abound, the majority of equity investors today don’t buy or sell stocks based on stock specific fundamentals. Fundamental discretionary traders’ account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double the share a decade ago.”

As long as the algorithms are all trading in a positive direction, there is little to worry about. But the risk happens when something breaks. With derivatives, quantitative fund flows, central bank policy and political developments all contributing to low market volatility, the reversal of any of those dynamics will be problematic.

…click on the above link to read the rest of the article…

Our Brave New ”’Markets”’

July 30, 2017

Our Brave New ”’Markets”’

How HFT algorithims risk a massive sudden sell-off

One thing is clear: These aren’t your daddy’s markets anymore.

Why?  Because about 10 years ago the Rise of the Machines (aka high frequency trading algorithms) completely altered the terrain of what we call the ‘capital markets.’

Let’s look at this as a before and after story.

Before the machines, markets were a place that humans with roughly equal information and reflexes set the prices of financial assets by buying and selling.  Fundamentals mattered.

After the machines took over, markets became dominated — in terms of volume, liquidity and pricing — by machines that operate in time frames of a millionth of a second. The machines and their algorithms use remorseless routines and trickery — quote stuffing, spoofing, price manipulations — to ‘get their way.’

Fundamentals no longer matter; only endless central bank-supplied liquidity does. Because such machines and their coders are very expensive and require a lot of funding.

The various financial markets are so distorted that I first resorted to putting that word in quotes – “markets” – to signify that they are not at all the same as in the past.  In recent years I’ve taken to putting double quote marks – “”markets”” – in attempt to drive home their gross distortion.  Not only are todays “”markets”” something the human traders of a generation ago would fail to recognize, they’re no longer a place where human actions of any sort have much of a remaining role.

Why care about this? Two big reasons:

  1. Such “”markets”” are easily manipulated by central banks and other state actors by virtue of their automated responses to liquidity injections. Are the markets going down when you don’t want them to?  Just use any one of several highly leveraged means of signaling to the computers that it’s time to buy instead of sell.  Common leverage points include the Japanese Yen-to-USD price level, selling VIX to lower volatility, and buying massive quantities of index futures ‘all at once.’

…click on the above link to read the rest of the article…

America’s “Soaring” Gasoline And Oil Demand Was Just An Illusion: How The EIA Fooled The Algos

July 3, 2016

America’s “Soaring” Gasoline And Oil Demand Was Just An Illusion: How The EIA Fooled The Algos

When it comes to “real-time” measurements of crude demand and supply, the data is notoriously bad (and perhaps, according to some, intentionally manipulated). We pointed this out most recently in early March when we that according to IEA data, crude oil production exceeded consumption by an average of 0.9 million barrels per day in 2014 and 2.0 million bpd in 2015. Of this 1 billion barrels which the IEA said was produced but not consumer, some 420 million are said to be stored on land in OECD member countries and another 75 million can be found stored at sea or in transit by tanker somewhere from the oil fields to the refineries. This means that as of this moment, about 550 million “missing barrels” are unaccounted for “apparently produced but not consumed and not visible in the inventory statistics.”

However, it is not only data at the annual level that is flawed: monthly, and especially weekly data is just as, if not even more distorted. In fact, as Bloomberg’s oil energy analyst Julian Lee asks, “could it be that the U.S. demand that’s helped drive a near doubling of oil prices since mid-February was illusory?”

Lee is referring to a major discrepancy in DoE reporting which through the Energy Information Administration, produces two sets of U.S. demand data that drive sentiment and influence trading. The first shows monthly figures. They’re two months out of date, but they give the most accurate assessment of what’s going on in the world’s largest oil-consuming country.

The second set of numbers come out each Wednesday, giving preliminary estimates for the previous week. For crude markets these weekly figures – though less reliable – are arguably more important, largely because they’re bang up to date.

…click on the above link to read the rest of the article…

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