Be Optimistic That Good Can Come From Bad

Have you all been following the NYC sanitation-department-snow-storm-response story? Video has surfaced of supervisors in cars drinking beer on the clock, instead of managing crews (the video has been mysteriously overwritten somehow). Crews were ordered to stay out and slow down, so that Bloomberg would “see how much we are needed, and then there will be plenty of overtime for everyone.” Four hundred workers called in sick as a result, with an additional one hundred calling in due to “emergency”. Folks died.

But there is a bright side! The garbage that has been piling up in NYC has actually broken the fall of a man attempting to commit suicide (click here for story). You can’t make this up.

Let’s switch gears. Have you all seen the NYT article on HFT over the weekend? Appropriately published on January 1st 2011 was an article in the Business Day section of the New York Times, titled The New Speed of Money, Reshaping Markets (click here to view). The article does an incomplete job of presenting a glimpse of the state of today’s markets, and it sheds no new light, and it doesn’t talk about reshaping current markets; it does rehash some of what we have all read in other articles over the past year.

It happily quotes Direct Edge’s O’Brien on how the markets are fair, as we all can now trade in seconds from a computer or by tapping a phone screen, yet it doesn’t talk about the business of collocation meaningfully. It doesn’t call out Direct Edge for flashing orders, despite virtually every regulator, broker, and industry participant’s outcry over the practice. It doesn’t call out the powerful owners of Direct Edge, with respect to their influencing the ethical behavior of its utilizing flashing. It doesn’t address regulatory-  capture. It doesn’t address the sickening lobbying. It correctly mentions how some HFT turned off on May 6th, yet it doesn’t mention that the HFT that stayed on, playing hot potato, is what insanely moved the markets. It doesn’t address, most importantly, the complex web of conflicts of interest in the system now. Brokers and HFT firms own the venues in which stocks trade.

The points it does make:

–          Direct Edge, a company of 90 employees, is an exchange that competes with what was the large duopoly of NYSE and NASDAQ. Direct Edge trades about 10% of all US equity shares daily. It is a warehouse in NJ the size of several football fields filled with servers. It’s business is virtually completely designed to cater to high frequency traders. Goldman Sachs, Knight, Citadel, the ISE, and JP Morgan own it.

–          The exchanges have all gone warp speed because their HFT customers have demanded it. (The biggest customers of course owning stakes in the exchanges).

–          The automatic algos zip in and out of markets, seeking to capitalize on momentary mispricings and arbitrages between the multitude of trading locations, and make fractions of a cent each time.

–          New strategies involve artificial intelligence, and reading news, and acting automatically on what it reads.

–          The capital deployed to technological infrastructure is immense. Datacenters like the NYSE’s Mahwah have cost hundreds of millions of dollars. A new datacenter for the CME houses its futures and options trading platform, and charges $300,000/year/rack, which is proof how the HFT strategies and speed have migrated across all asset classes, such as derivatives, and not just equities.

–          Spread Networks has built a new 825 mile fiberoptic line from Chicago to NY, at a cost of $1 billion, to save 3 milliseconds in time for its clients. Hibernia Atlantic is doing an even larger project under the Atlantic ocean between Nova Scotia and England.

–          Some folks think the markets are too fast. The SEC is looking at the idea of a speed limit.

–          May 6th showed that HFT can turn off.

–          Bill O’Brien of Direct Edge thinks that the fast execution times, and his firm’s success, mean that the markets are fairer than ever.

The article’s best points are:

–          Direct Edge still flashes orders!

–          Bart Chilton, a CFTC regulator, hammers how we are not looking at the myriad ramifications of technology!

–          Michael Durbin, who has built HFT systems for Citadel, and has written a book on high frequency trading, thinks that rules need to be strengthened to curb some disturbing practices.

–          Well over 30% of shares are traded in “unlit” markets, without the scrutiny given to public markets!

–          MIT’s Andrew Lo, widely quoted and consulted with regard to all things concerning high- speed financial engineering and technology, makes the best point of all. “Sometimes, too much technology without the ability to manage it effectively can yield some unintended consequences. We need to ask the hard questions about how much of this do we really need. It is the Wild, Wild West in trading.” Mr. Lo suggests a need for a civilizing influence. “Finally,” he says, “it gets to the point where we have a massive traffic jam and we need to install traffic lights.”


We now enter 2011 officially. We are a full 8 months from May 6th, yet the main issues that have been heightened by that day’s events have not been addressed. Our markets have become even more fragmented. They have also become even faster. And everyone has become so accustomed to mini flash crashes, that they don’t get mention anymore. HFT firms, exchanges, and large brokers pay lobbyists to stall rule-making, buy off government support, and protect investments of billions of dollars already thrown at a short sighted, and destructive game. They are all counting on the fact that everyone is so jaded and numbed by their poor behavior that they will tune out. So, what to do? Don’t tune out. Care. Be optimistic. Be vocal.



Where we left off 4:00pm EST:

INDU               11,577.51                                +7.80

SPX                 1,257.64                                  -0.24

CCMP              2,652.87                                  -10.11

Futures now at 7:30am EST:

DJA                             +84

SPA                             +6.60

NDA                            +22.00

Key Data out today:


10:00:              ISM Manufacturing

10:00:              ISM Prices Paid

10:00:              Construction Spending


Since the prior close, some key stories:


–       Megamillions is $300 million!

–       NYT article on HFT (weak; they should have called us and/or ZeroHedge!)

–       B of A to take $2 billion charge.

–       All asset classes are up this morning: Stocks, futures, dollar, copper, oil, palladium, cotton, soy, wheat, baseball cards, private Facebook stock, salt, optimism, as well as the Sun.

–       Fiat may boost Chrysler stake to 51% before the IPO this year. Duh.

–       Facebook raises $500 million from the Russians and Goldman.  Great now someone can tag me in a picture before I actually post the picture, due to imminent Facebook HFT technology.

–       Giants done. Favre done.

–       Obama studies Regan years for guidance on how to get his agenda through Congress.

–       UK closed, but the rest of Europe up nicely. Nikkei, Shanghai, Russia, and Canada also closed.

–       Tech M&A to increase in 2011: watch these companies as targets: FFIV, APKT, RVBD.

–       Barron’s 10 large caps to own for 2011: XOM, UAL, JPM, ABX, WMT, CSCO, PFE, GM, ETR, PEP

–       SIA – Nov global semi sales $26B v $26.3B m/m, +14.4% y/y.  Year-to date sales through November were $271.8 billion, up 34.0% from the like period of 2009 when sales were $202.8 billion.  Sales by region: Americas -1.6% m/m, Europe: +2.5%, Japan -0.9%, Asia Pacific: -1.4%

–       Illinois has just days to close a $13 billion deficit.

–       While Europe is used to government slowdowns as a way of life, America gets a taste of what is to come with the Snowplow Slowdowns.




Pre-market:  None


After the Close: None



Significant Movers This Morning:

IPXL + 6%, PAR +5%, SGEN + 5%, ODP +5%, BAC +4%, CTB +4%, LYV – 6%