(What’s He Done Now?)
Abe normally is responsible for the predictable sausage-grinding market action we all experience between 10amEST and 3:30pmEST. Yesterday he was a bit busier.
(Now before you read further, if you are the Najarians, or Guy Adami, please know that we love you guys and we are not trying to poke fun at your expense. You guys are the best thing that has happened to CNBC since Santelli. And well er… maybe Mand… wait that’s not important here! The point of this disclaimer is to tell you guys that we are among your fans. Having said that, we are about to use your contest to serve our own agenda to make important points. Please laugh?)
Themis Trading is about to enter the Option Monster “Trade Like a Monster” Fantasy Trading Contest Actual Contest Click Here. The 30-day contest starts November 1st, 2010, with the grand prize being Free Trading for Life (as long as your orders are VWAP orders that come through our extra special order-router. Kiss-Kiss). I DM’d (twitterterm) Guy Adami, and he says we can enter with our strategy!
Although we have been twitter-following TrendTradingToWin, GregHarmon, TechyTed, TheAussieGoldGuy, RuleTheFreakingMarketGuy, as well as our Aunt Ethel, for investment ideas, our strategy finally hit us! Well, it didn’t actually hit us; we actually got the idea from NASDAQ. You see there is this stock, Progress Energy (PGN). It is a sleepy little utility name; the kind your mom and dad would own for yield, because Uncle Sam has taken their old yield away to subsidize the Big Banks, but I digress here. PGN was trading nice and steady around $44.60, when out of nowhere, BLAM. Faster than George Costanza knocking down grannies and children to escape a kitchen fire, i.e. in milliseconds, some HFT algos shredded PGN from $44 down to $4.
Impossible, you say? Impossible because of the 10% circuit breaker?
I quote The Princess Bride: “You fell victim to one of the classic blunders – The most famous of which is “never get involved in a land war in Asia” – but only slightly less well-known is this: “Never go against an a Sicilian when death is on the line!” hahahahahaha…clunk.”
Yep. The algo still shredded PGN down 90%. Maybe the HFT algos were so colo-quick that their orders were like Nano-Costanza-quick, while the NASDAQ circuit breaker was on the Reverend-Jim-From-Taxi-What-Does-A-Yellow-Light-Mean speed usually reserved for the Public SIP. Who knows? The point is Circuit Breaker / Schmerket Breaker (when did I become Yiddish?). It took 5 thousandths of a second for the circuit breaker to kick in. Yet in that time, dozens of trades went off below $40. Most of the trades occurred on the NASDAQ, at $39, $38…then $34, $33, $32, $31, and $30…before lower-priced trades occurred ($29.75, $27.00, $22.00 followed by 3 trades at $4.57).
Now where am I going with this? Oh yeah. NASDAQ decided to break all trades greater than 15%. Why 15%? In SEC rules agreed upon on September 10th, NASDAQ reviewed and voided trades that occurred 5 percent lower than the trigger price for the circuit breaker (stock price between $25-$50). They canceled trades that took place before the circuit breaker kicked in that were $38.10 or lower. So, back to our entering the Trade like a Monster contest, starting November 1st, our Themis-Monster-Mashemup-Algo will be entering bids in NASDAQ on all NYSE listed securities, constantly floating at LastSale-14.999%. Capisch?
Maybe… just maybe… our markets are too fast when the trading is faster than the circuit breaker. I’m just sayin’…
Now normally, I would stop Themis Thoughts here, and just go into the news and earnings parts that you guys never read. But I can’t now. Abe Froman was busy. Some other market structure HFT-like newsworthy items are worthy of mention.
Nanex came out with their version of what caused the Flash Crash of May 6th: Nanex Explains What in Sam Hill Happened Here. And stand back. There is a chart:
Basically, as anyone can easily see above, a surge in quote traffic occurred when a sale of $125 million worth of S&P e-minis, followed by a sale within thousandths of a second of over $100 million of ETF’s (probably the same firm that got plugged in the e-minis laying off the risk in highly-correlated ETF’s, but that’s just my conjecture). But the interesting part is that NANEX says that there was this wicked mammoth explosion in quote traffic that occurred, not in tandem or coincidentally with the large selling outlined above, but before! 400 milliseconds before! Quote stuffing! Viola!
And finally, our third Abe Froman story centers around Chairman Schapiro, who in an interview with Reuters, claimed that investors will be confident, after the SEC releases its flash crash report, that our regulators understand what happened, and will fix it. The report will come in the next several days. See here: SEC says flash crash report will bring confidence.
Wow. Lots of Abe Froman today. I need a shower.
Where we left off 4:00pm EST:
DJIA 10,812.04 -48.22
S&P500 1,142.16 -6.51
NASDAQ 100 2,369.77 -11.45
Futures now at 7:30am EST:
DJIA 10,761.00 +11
S&P500 1,138.90 +1.10
NASDAQ 100 2,014.25 +7.00
Key Data out today:
09:00: Case Shiller
10:00: Richmond Fed
10:00: Consumer Confidence (now called Consumer Trepidation Index)
Since the prior close, some key stories:
- Futures fall early this morning and Abe Froman steps in to get ‘em back up.
- Ireland leads Jump in Sovereign Debt Swaps (Bloomberg).
- Michelin $1.6b rights offering causes stock to lose traction (sorry folks).
- RIM unveils tablet Blackberry Playbook.
- Airlines lower overseas on news China Air fined for price fixing.
- Dividend Deals Most Since 2007 as Leveraged Loands Heat Up (Bloomberg)
- Toys R Us to hire 45,000 seasonal workers for the Holidays; 1,000 of them to come from post-election unseated Democrats.
Pre-open: WAG, SUTR
After Close: LNDC, MLNK, SMSC, ZZ
Significant Movers This Morning:
CGNX + 13% (raises guidance), WAG +5% (earnings), ESI +7%, CXW +3.5% (raises guidance), RAX +6% (replacing ACF in S&P Midcap400), PAYX higher on earnings last night as well; NR -7% (converts offering), ENTR -6.5% (secondary), CDNS -2.5%, RLI -8%, AGNC -5.5%, JBL lower on earnings last night as well.