What’s the Real Volume, and Learning From Mistakes

NYSE Volume yesterday was 3.4 billion shares, following Friday’s relatively low volume 4.9 billion shares. Yesterday also marked the first day that Citigroup traded reverse-split (1-10). Large DMM’s on the floor played Taps at the open, and openly wept at the close. Clearly they were not happy with Citi’s decision to reverse-split its stock one for ten, and we surmise the NYSE couldn’t have felt much better.

This again illustrates two points we have been making for months.

–          The Exchanges’ needs and wants are vastly different than corporate issuer’s needs and wants.

–          Volume does not equal liquidity. Measuring the health of our capital markets by looking at trading in Citigroup (or any of the other HFT darlings) makes no sense (paid-for academic study authors, such as Jonathon Brogaard, take note, please).

Crossroads in Asia

We happened to stumble across this most excellent speech by the Chairman of the Australian Securities and Investment Commission: Exchanges in Asia: Trends and Perspectives.

(Incidentally, Mr. Aloisio also served as the CEO of the Australian Stock Exchange prior to his servings as Chairman of ASIC).

Some of his best points:

It has the opportunity to make the most of the growth opportunities outlined and to learn from developments in Europe and in the United States, but to take advantage of that opportunity it will require a close dialogue and close cooperation within each jurisdiction and regionally between: the operators of the exchanges, be they incumbents or new entrants; and the rule makers for exchanges, be they policy makers or regulators

Fragmentation has meant that investors are struggling to efficiently locate and access liquidity, and to identify the venues with the best prices. Many investors do not have visibility of all prices as the cost of consolidated data is prohibitive. This may lead to investors not receiving best execution, which may undermine their willingness to invest. Fragmentation may indirectly create impediments to capital raising.

Issuers and traditional investors need to be confident that HFT’s and dark pools are not creating disadvantages for traditional market participants, as any perceived disadvantages may lead issuers and investors to participate less in the market.

Evidence by some in the United States suggests that the level of internalisation and dark trading may have become too high (i.e. to the point it is impacting spreads on public markets). As a result of this order flow being directed through dark pools and broker internalisation processes before it is directed to displayed markets, the order flow that is displayed is sometimes described as being ‘toxic’, because it comprises largely informed order flow.

We need to balance the potential benefits to individual investors of trading in the ‘dark’ (e.g. managing market impact) against the public good of contributing to price formation on which everyone relies (even those executing in the dark).

A best execution rule is important to ensure participants do not place their own interests ahead of those of their clients (e.g. by exploiting information asymmetries or availing themselves of kick-backs at the expense of their clients).

Ensuring market operators cooperate in a multimarket environment is critical for market integrity. More fundamentally, the introduction of competition for trading services raises the question of whether those exchanges (incumbents) who perform a supervisory role for their markets can continue to do so or whether the supervisory role needs to be transferred to a new regulatory body or to an existing regulator. The potential for conflict where a market operator supervises itself and other market operators, which it competes with, may be too great and could affect confidence in the integrity of the markets.

 

We like Tony. We like executives who see the forest through the trees.

Where we left off 4:00pm EST:

INDU              12,684.68                                +45.94

SPX                 1,346.29                                  +6.09

CCMP             2,843.25                                  +15.69

Futures now at 7:00 am EST:

DJA                             +45 

SPA                             +6.0

NDA                           +13.25

Key Data out today:

 

08:30:              Import Price Index

10:00:              Wholesale Inventories

Since the prior close, some key stories:

 

–       Greek bonds higher, oil lower.

–       CME announced margin hikes on oil and gas after the close yesterday.

–        

–       Microsoft to buy Skype? Largest MSFT deal in 36 years?

–       Goldman lost money trading only 1 day last quarter (JPM was flawless, remember last week?)

–       Anemic volume on the exchanges cause river of tears.

–       ALLY Financial (you know..GM’s Bank) to buy ING Direct USA? Really?

–       58% of Americans want a third political party because Democrats and Republicans do a poor job or representing the American People (as opposed to corporations)

–       China Money Supply a Potential Time Bomb for Commodities (Bloomberg)

–       Pakistan will allow the US to question the Housewives of Bin Laden. The US can also question Na-Na in Atlanta as well.

–       OCBC in Singapore and Canadian banks are the world’s strongest.

 

 

Earnings:

 

Pre-market:  ACMR, DF, EBIX, ENER, EVEP, SSP, GEL, HELE, ISPU, NRGY, IVR, JASO, MDC, TNDM, NOG, PTY, WEN

After the Close: ALTH, ASYS, ARI, BKH, GMR, GSS, MDR, MCP, MALL, RICK, ROVI, SGMS, TWTC, URS, DIS

 

Significant Movers This Morning:

CRAY +8%, DF + 6%, EBAY +3%, IDTI +3%, MNKD -13%, ATPG -6%, AOB -5%, PANL -4%, AVNR -4%