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The Big Short is a Great Movie, But…
The Big Short is a Great Movie, But…
Paris — Michael Lewis is the chronicler of Wall Street. He takes the complexity behind which the inhabitants of the financial world hide and weaves a tale that is both understandable and compelling. Starting with the classic “Liars Poker” (1989), Lewis has produced a number of books about the financial markets including “Flash Boys: A Wall Street Revolt” (2014) and “The Big Short: Inside the Doomsday Machine” (2010). Working with director Adam McKay and some great actors and screen writers, Lewis has managed to produce what is perhaps the most accessible and relevant treatment of the mortgage boom and financial bust of the 2000s, and the subsequent 2008 financial crisis.
The beauty of “The Big Short,” both as a movie and a book, is that it provides sufficient detail to inform the general audience about events and issues that are not part of everyday life. Wall Street is a secretive place, but “The Big Short” manages to convey enough of the details to make the story credible as a journalistic effort, yet also enormously entertaining. Lewis does this with two essential ingredients of any film: a simple story and compelling characters.
Images of greed and stupidity are presented like Italian frescos in “The Big Short,” pictures that are memorable and thought provoking. Indeed, what many people know and remember years from now about the 2008 financial crisis will be shaped by creative efforts such as “The Big Short” for the simple reason that Lewis has simplified the description into a manageable portion. Unlike hedge fund manager Michael Burry (played by Christian Bale), most people lack the patience and expertise to sift through and understand reams of financial data.
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The HFT “Treasure Map” – Presenting The Rigged Stock Market’s Full “Latency Abritrage” In One Chart
The HFT “Treasure Map” – Presenting The Rigged Stock Market’s Full “Latency Abritrage” In One Chart
Last week, when poring through the SEC’s complaint over ITG’s criminal frontrunning of client order flow in a “experiment” prop trading group within its Posit dark pool known as “Project Omega”, we clearly laid out the “criminal fraud” that allowed the original dark pool to make money without any risk, and explained why HFT’s never lose money.
Only, in this particular case, the fraud was so egregious, even the SEC had to step in and slam ITG with the biggest fine on record for a private Wall Street exchange (at least until the fine about to be levied at Credit Suisse’s own dark pool, the biggest in the US, Crossfiner is revealed).
The reality is that most HFTs do not engage in such brazen criminal activity – most act within the confines of the law. And yet, as Virtu has shown year after year, they never lose money. How can the two coexist?
Simple: the answer is that in the aftermath of Reg NMS, and the terminal capture of regulators by those who benefit from market fragmentation, regulators blessed a two-tier market, one in which HFTs can frontrun non-HFT order flow and not be worried one bit about the consequences.
The technical term for this gross aberration of market fairness and efficiency is latency arbitrage, and it is best shown on the following annotated “map” courtesy of Nanex’ Eric Hunsader, laying out the embedded, and regulator blessed, latencies between the three big New Jersey exchange centers: Mahwah (NYSE), Secaucus (BATS), and Carteret (Nasdaq) for everyone but the top tier – the High Frequency Traders, whose only advantage is having the millions to spend both in one-time collocation setup as well as recurring microwave/laser fees to obtain faster data access which thenallows them to frontrun everyone else and generate massive returns on their investment. Returns that are due only to done thing: frontrunning.
What the map clearly shows is the unprecedented timing advantage HFTs have not only over the Securities Information Processor (SIP), which is used by virtually all non-HFT participants, who pay millions for real time feeds.
What In The World Just Happened To The New York Stock Exchange?
What In The World Just Happened To The New York Stock Exchange?
Do you believe that the New York Stock Exchange shut down because of a “technical glitch” on Wednesday? At 11:32 AM on Wednesday morning, trading on the New York Stock Exchange was halted due to “internal technical issues”, and it did not resume until 3:10 PM. Officials insist that there is no evidence that a cyberattack caused the technical problems even though hactivists had hinted that something may happen the night before. Adding to the suspicion is the fact that United Airlines and the Wall Street Journal also experienced very serious “technical glitches” on Wednesday. Others found it very curious that trading on the NYSE was halted just after Chinese stocks had absolutely plummeted the night before. In fact, Hong Kong’s Hang Seng Index experienced the largest one day decline that we have witnessed since November 2008. So is there more going on here than meets the eye?
Overall, the Dow was down 261 points on Wednesday, and the Dow and the S&P 500 both closed below their 200 day moving averages. Iron ore had its biggest daily price drop ever, and the price of oil continued to decline. But it was the stunning shut down of the New York Stock Exchange that made headlines all over the world…
The New York Stock Exchange, United Airlines and the Wall Street Journal have all fallen victim to a series of massive technical glitches within hours of each other.
NYSE halted all trading for ‘technical reasons’ at 11:32am and only reopened at 3:10pm – but says the problem is an internal one and not the result of a cyberattack.
It comes as tens of thousands of United Airlines passengers were stranded at U.S. airports on Wednesday morning after all of the carrier’s flights were grounded nationwide due to a computer system glitch.
The Wall Street Journal was also left unable to publish after its systems came under attack and has been forced to switch to an alternative site design.
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How Much More Extreme Can Markets Get?
How Much More Extreme Can Markets Get?
These charts help us understand that a top is not just price, but a reversal in extremes of margin debt, valuation and sentiment.
In blow-off tops, extremes of valuation, complacency and margin debt can always shoot beyond previous extremes to new extremes. This is why guessing when the blow-off top implodes is so hazardous: extreme can always get more extreme.
Nonetheless, extremes eventually reverse, and generally in rough symmetry with their explosive rise. Exhibit 1 is margin debt: NYSE Margin Debt Hits a New Record High (Doug Short)
Note the explosive rise in margin debt in the past few months:
At tops, soaring margin debt no longer pushes stocks higher. I’ve marked up an excellent chart by Doug Short to highlight the diminishing returns of more margin debt at tops.
It’s clear this same dynamic of diminishing returns is in play now, as margin debt has skyrocketed while the S&P 500 has remained range-bound, with each new high being increasingly marginal.
Exhibit 2 is China’s Shenzhen stock exchange. The price-earnings ratio (PE) is a useful gauge of sentiment: when sentiment reaches extremes of euphoria, PEs go through the roof:
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