Posts Tagged ‘Hft’
Wednesday, August 8th, 2012
While we already presented, courtesy of Nanex, the modus operandi of the Knight berserker algo, there was one outstanding question. What was the bottom line. And no, not how much the loss on Knight’s Income Statement would be as a result of this glimpse into what really happens in the market: we already knew that would be $440 million. The question is what is the notional amount of stock that this algo bought in the 45 minutes in which it was operational. We now know: $7 billion. Or $155 million per minute. Or $2.6 million per second. Or, assuming the algo impacted just 150 stocks as previously reported, it was buying on average $17,333 in each name every second. Or, assuming an average stock price of the universe of 150 stocks of $30/share, the Knight algo lifted the offer roughly 600 times each second. For 45 minutes straight! That’s right – the market making algorithm of a designated market maker which is responsible for 10% of the order flow in the US stock market, entered a pre-programmed mode (because the computer was told to do whatever it did by someone, and not without reason) that saw it buy up $2.6 million worth of stock every second.
Now there has long been speculation that HFTs are a central planner’s best friend because they traditionally provide not only a floor to the stock market, but a gradual levitation bias especially in a low volume environment (as well as liquidity its advocates claim, but that is total BS – HFT only provides volume and churn – liquidity disappears at the drop of a bat when real selling pressure appears). They do this not because they are evil instruments of Bernanke collusion (although who knows) but simply because they accelerate and accentuate legacy momentum bias, which at least historically, has been up. Now in the aftermath of the Knight debacle we can also extrapolate what would happen if, say, reality were to creep in one day, and all those mutual and hedge funds which have carbon-based life forms making the buy and sell decisions suddenly decided to sell. Well, at $7 billion in 45 minutes, or 1/10th of the trading day, this means that had the Knight algo been running all day, it could have bought $70 billion worth of stock. Throw in the remaining flow routers, aka DMMs in the market which account for the remaining 90% of order flow, and we get a total of $700 billion in vacuum tube mediated purchasing power.
In other words, this is the market “worst case” shock absorber, or inverse escape velocity, that Bernanke has at his disposal if things turn sour. That said, with hedge funds, aka fast money, holding about $3 trillion in unlevered assets, and about $6-9 trillion with leverage (ignoring plain vanilla slow mutual funds), and one can see why not even the HFT levitation bid would be sufficient to offset a wholesale market dump.
There is one last open question remaining on Knight: what discount did Goldman extract out of the firm to rid it of its residual position which as the WSj explains declined slightly from its peak as “traders worked frantically Aug. 1 to sell shares while trying to minimize losses due to a software problem, ultimately paring the total position to about $4.6 billion by the end of the trading day” (one wonders if the market would have just blown up if the Knight algo were to run in reverse, and just take out layer after layer of bids to unwind the inventory asap). We now know thanks to the WSJ:
Knight avoided that scenario by agreeing in the early morning hours last Thursday to sell the portfolio to Goldman Sachs Group Inc., after rejecting an offer from UBS.
The terms sought by the banks reflected how dire Knight’s situation was: UBS wanted an 8% to 9% discount on the position, according to people familiar with the matter.
The equities trading desk at UBS, headed by Mike Stewart, bid for the portfolio around 6:30 p.m. Wednesday, people familiar with the discussions said. Mr. Stewart was a former colleague of Knight Chief Executive Thomas Joyce’s at Merrill Lynch. The talks with UBS fell apart later that night.
Goldman ultimately negotiated buying the portfolio at a 5% discount, or about $230 million less than the value of the stocks, the people said. That amount, not previously reported, represents more than half the loss Knight disclosed on Thursday that it incurred as a result of the technology errors.
The deal with Goldman allowed Knight to move ahead. Last weekend, Knight negotiated a rescue package with six financial firms that injected $400 million in capital in exchange for securities that can convert to ownership of 73% of the trading firm.
And now you know why having cash on your balance sheet in a ZIRP environment may well be the best investment, because just like Goldman, one never knows just where a slam dunk distressed opportunity could come from in exchange for an immediate 5% pick up.
More importantly, the Goldman deal demonstrates what the true liquidity cost is in this market when one wishes to do a wholesale stock transaction (either BWIC or OWIC): it is not less than 5% and tops out at 9%.
Keep that in mind, because if and when the day when VWAPing in and out of positions is no longer possible, each and every fund will have no choice but to assume a guaranteed 5% minimum (up to 9%) haircut on one’s entire portfolio of allegedly liquid stocks.
We dread to think what the wholesale implied liquidity premium is on less liquid products than stocks, which nowadays is virtually everything…
* * *
Finally, we leave readers with yet another transformative animation from Nanex, after our first rendition of the “rise of the machines” back in February left many speechless, and which recently appears to have been rediscovered by some of the slower elements in the blogosphere. Why: because it’s pretty, and we feel like it. And because it once again confirms that only vacuum tubes with infinite balance sheets should be gambling in this loaded market.
Tags: 6 Million, Advocates, Algorithm, Berserk, Bias, Central Planner, Collusion, Debacle, Glimpse, Hedge Funds, Hft, Income Statement, Levitation, liquidity, Notional Amount, Programmed Mode, Speculation, Stock Price, Us Stock Market, Volume Environment
Posted in Markets | Comments Off
Thursday, May 10th, 2012
On the surface, the fact that NYSE short interest was just reported today to have risen to 13.1 billion shares as of April 30 could be troubling for the bears, as this just happens to be the highest short interest number of 2012. Indeed, an increase in short interest into a centrally-planned market is always disturbing, as it opens up stocks to the kinds of baseless short covering melt ups that simply have some HFT algo going on a stop hunt as their source, that we have seen in the past several weeks. Naturally, it would be far easier to be short a market in which Ben Bernanke managed to eradicate all other bears, especially when considering that a year ago the Short Interest as of April 30 was virtually identical.
However, courtesy of some recent discoveries by Bloomberg, we now know that his very pedestrian way of looking at short exposure is simply naive, as it ignores all the synthetic means that hedge funds truly express their position these days, mostly in attempts to avoid observation, and to magnify their balance sheets in any way possible. In other words: epic abuse of leverage, but not simply on the books, but through repos, Total Return Swaps, and various other shadow “shadow” P&L enhancement techniques. To wit from Bloomberg:
Citadel Advisors LLC and Millennium Management LLC said their assets soared ninefold when tallied under a new rule that requires hedge funds to disclose investments financed through borrowings.
Citadel, run by Ken Griffin out of Chicago, reported $115.2 billion of regulatory assets in a March 30 filing with the U.S. Securities and Exchange Commission, compared with $12.6 billion of net assets. Millennium, founded by Israel Englander, disclosed comparable figures of $119 billion and $13.5 billion as of year-end.
In short sales, investors borrow assets to sell them in anticipation that they can be repurchased at a lower price later and they can pocket the difference. Hedging includes the purchase of offsetting positions to limit risk in a trade.
While some fund managers only gave information on their gross assets, 31 of the 50 largest also disclosed their net assets in a separate section known as the client brochure. For these advisers, gross assets of $949 billion were more than double their net assets of $422 billion.
That indicates hedge funds may be using as much leverage as they did prior to the 2008 financial crisis. On average, hedge funds held total assets that were double their net capital as recently as 2007, said Daniel Celeghin, a partner at Casey Quirk & Associates LLC, a Darien, Connecticut, adviser to asset managers.
Not all of the difference between net and gross assets may be explained by leverage, because the SEC’s gross number also includes proprietary stakes that money managers hold in their own funds as well as assets that don’t get charged a management fee. The SEC’s calculating method can lead to double counting of assets at funds, such as Citadel, that include multiple entities.
“If you are heavily levered, obviously that will result in you having a larger gross asset number,” said Gary Kaminsky, a principal in the business advisory services group at Rothstein Kass, a Roseland, New Jersey, accounting firm that audits hedge funds. That’s because, under the SEC approach, “all that matters is what’s on the asset side of the balance sheet,” Kaminsky said.
Hedge funds are relying less on margin loans from prime brokers, the securities firms that provide credit and facilitate trading, and more on repurchase agreements, leveraged exchange- traded funds, and derivatives such as total return swaps, according to Josh Galper, the managing principal at Finadium LLC, a Concord, Massachusetts, investment research and consulting firm.
“Leverage is down across the board from the perspective of borrowing from a prime broker,” Galper said in a telephone interview. “It’s tough to measure how much embedded leverage funds are using.”
In other words, while the chart above is useful generically, the reality is that a true picture of outright bullish or bearish appearance is now impossible to be gleaned courtesy of precisely the same synthetic instruments that nearly destroyed the financial system in the fall of 2008. Funds will do anything in their power to systematically boost their leverage at the gross level, while leaving their net leverage appear innocuous, and then spin how gross is not net, even as their Prime Brokers onboard all the risk: after all who bails them out if things go wrong? Why, you do.
And who benefits if they are right? Here’s who, together with an AUM breakdown based on the old and new methodology:
Tags: Anticipation, Balance Sheets, Bloomberg, Borrowings, Citadel Run, Comparable Figures, Enhancement Techniques, Hedge Funds, Hft, Israel Englander, Ken Griffin, Millennium Management, Net Assets, Nyse Short Interest, Recent Discoveries, Regulatory Assets, Return Swaps, Securities And Exchange Commission, Ups, Year End
Posted in Markets | Comments Off
Tuesday, August 16th, 2011
Terminator 3: Rise of the Machines
by Jeffrey Saut, Chief Investment Strategist, Raymond James
August 15, 2011
I was in Chicago last week seeing portfolio managers (PMs), doing media “hits,” and presenting at seminars for our retail investors. The most ubiquitous question I received was, “Who is selling all this stock?” Clearly that’s a valid question since the parade of PMs on CNBC insisted they are not selling stocks, statistics show hedge fund managers are already pretty “light” on stocks, the international institutions I talk to are so underweight U.S. equities it is doubtful they are selling, and order flows show retail investors aren’t really selling individual stocks either (they are, however, liquidating mutual funds). So who’s selling? I think it is the “machines,” driven by high-frequency trading (HFT) and Exchange Traded Funds (ETFs). As defined by Wikipedia:
“In high-frequency trading, programs analyze market data to capture trading opportunities that may open up for only a fraction of a second to several hours. High-frequency trading uses computer programs and sometimes specialized hardware to hold short-term positions in equities, options, futures, ETFs, currencies, and other financial instruments that possess electronic trading capability.”
Exacerbating the situation are ETFs that are leveraged 2:1, or even 3:1, which if bought on margin implies 4 to 6 times leverage. Moreover, when ETFs buy or sell, they do so across the spectrum of stocks within their universe with NO regard for the fundamentals of any individual stock. So yeah, I think it is the “Rise of the Machines” that has compounded the “selling stampede” that began on July 8th, and hopefully ended on August 9th with what a technical analyst would term a long-tailed “bullish hammer” candlestick chart formation. If correct, that would make the stampede 23 sessions long. Recall, stampedes typically last 17 – 25 sessions, with only 1 – 3 session pauses/corrections, before they exhaust themselves. It just seems to be the rhythm of the “thing” in that it takes that long to get participants either bullish, or bearish, enough to act. Obviously, in this case, it would be bearish enough. Consistent with this thought, it is worth noting that in July retail investors liquidated $23 billion worth of U.S. stock mutual funds for the largest liquidation since October 2008’s $27 billion. My sense is even more liquidation is taking place this month.
Yet, it is not just mutual fund liquidation indicating the selling skein is over. Corporate insiders are buying shares at the highest rate since the March 2009 bottom; at last week’s lows the dividend yield on the S&P 500 (SPX/1178.81) exceeded the 10-year T’note’s yield (read: historically bullish for stocks); and if you believe 2012’s consensus earnings estimates, last Monday the SPX was trading at a PE under 10x with an Earnings Yield of ~10%, leaving the Equity Risk Premium around 8%. Ladies and gentlemen, those are valuation metrics not seen in years. To that value point, since the first Dow Theory “sell signal” of September 1999, I have opined the equity markets were likely going into a wide-swinging trading range akin to the 1966 – 1982 affair where an index fund made you no money for 16 years. In December 1974 the D-J Industrial Average (INDU/11269.02) made its “nominal” price low of 577.60, but its “valuation” low (the cheapest the INDU would get on a PE, book value and dividend basis) didn’t occur until the summer of 1982. Fast forward, I have argued the “nominal” price low for this 11-year range-bound market took place in March 2009 and have added, “I don’t know when the ‘valuation’ low will come.” But maybe, just maybe, if next year’s estimates are right, and we don’t go into a recession, we may have made the “valuation” low over the past few weeks.
Whether that “valuation low” thought is correct or not, I am fairly confident the selling squall has compressed stocks so much a short-/intermediate-term bottom has been, or is being, made. To wit, over the past week I have repeatedly stated the equity markets were epically “oversold.” To be sure, finding a session as bad as last Monday’s, when less than 2% of all the stocks traded closed “up” on the day, one has to go back to May 1940. At that time, the markets believed the world was ending when the Germans punched a ~60 mile wide hole in the Maginot Line and poured into France. Another way to look at last Monday is to measure how far the SPX is below its 50-day moving average. While not as massively compressed as in the 1987 Crash’s 5.5 standard deviation, at 4.3 the SPX is very oversold as can be seen in Figure 2 on page 3 from our brainy friends at Bespoke Investment Group. Additionally, the astute Lowry’s organization writes:
“This week will go down in the record book as one of the most manic of all time, with four alternating negative and positive 90% Days, each generating changes in the DJIA of more than 400 to 600 points. There is nothing even close to this frenzy in the 78 year history of the Lowry Analysis. The causes of the week’s mass confusion will be debated for years to come, but the immediate question is, what should investors do now?”
“As of Friday’s market close, all of the requirements of Buying Control No. 1 were completed, calling for a 25% invested position. The 2nd stage of the buying program will be completed if Buying Power rises ten points to 391 or higher, confirmed with a ten point drop in Selling Pressure to 358 or lower.”
While we agree with Lowry’s, and have recommended the cash raised last February/March gradually be recommitted to stocks, we think there will be a bottoming process over the coming weeks. In all my talks last week, I likened the current decline to those of October 1978 and October 1979 (Figure 1 on page 3). Both of those “stampedes” came out of the blue with no fundamental reasons. Following the initial selling-climax low, there was a sharp rally that peaked with a subsequent retest of those “climax lows.” The 1978 bottoming process took seven weeks to complete, while in 1979 it took only four weeks. Still, while the stock market’s bottoming process should take weeks, many individual stocks have probably already bottomed. That sense was reinforced last week with our fundamental analysts’ comments on names like: Linn Energy (LINE/37.86/Strong Buy), EV Energy Partners (EVEP/$66.21/Strong Buy), Healthcare REIT (HCN/$45.88/Outperform), First Potomac Realty (FPO/$12.99/Strong Buy), CenturyLink (CTL/$34.61/Strong Buy) to name but a few.
Tags: Candlestick Chart, Chart Formation, Chief Investment Strategist, Cnbc, Exchange Traded Funds, Hft, International Institutions, jeffrey saut, Options Futures, Portfolio Managers, Retail Investors, Rise Of The Machines, Selling Stocks, Technical Analyst, Term Positions, Terminator 3, Terminator 3 Rise Of The Machines, Ubiquitous Question, Valid Question, Wikipedia
Posted in ETFs, Markets | Comments Off
Thursday, February 17th, 2011
by Trader Mark, Fund My Mutual Fund
Before ZeroHedge there was this renegade blog called Fund My Mutual Fund. ;) One of my oldest stories was about the disappearance of the broadest figure of money supply called M3. [Sep 19, 2007: What is M3 and Why Do You Care?] This figure was helpful for us armchair economists to figure out what is going on in the inflation world, but within 2 months of Bernanke’s appointment to the Federal Reserve head, this figure was discontinued. (insert grassy knoll here) Even more bemusing was the reason – cost. (seriously) This from a government that runs trillion+ deficits, and a Fed with (literally) unlimited pockets (as they have shown the past few years). This is not the only thing that has disappeared [Apr 23, 2008: Barry Ritholtz on Disappearing Economic Indicators] … and we won’t even get into all the ‘adjustments’ our official government statistics have absorbed over the years, to make sure they end up more sunny side up. [May 10, 2008: Finally Some Mainstream Reports are Figuring Out the Spin from Government] Look the bottom line is, information that is not convenient tends to go away or get “adjusted” until it burps correctly in the U.S.
As the world leaders, other countries look up to us. We have taught them well… the Chinese are getting very inconvenienced by the data coming out of their property index reports. Now let’s be honest, just about anything coming out of China has to be taken with a dump truck worth of salt, unless you are a CNBC commentator. Or HFT computer which must react to data in 1/4000th of a second. So in no way am I implying this report was very accurate…. even with the best of intentions trying to measure a country so vast, with such variances in development would be difficult. But it was watched by both the masses of people (who apparently were getting frustrated with what they saw) and outside observers, considering the genesis of the Chinese economy is “property building”.
Solution to a report where you don’t like the answers?
No more report. That will teach the statisticians to put out data the central command does not like.
- China’s statistics agency said it will stop publishing the country’s much-watched official index of national property prices, scrapping a set of data whose accuracy was widely questioned but which also had become a rallying point for public anger over rapidly rising housing prices.
- The announcement Wednesday, part of a broader revision of property-price data by the National Bureau of Statistics, fueled already widespread frustration and skepticism about the quality and transparency of economic data in the world’s second largest economy.
- It came just a day after the statistics bureau published a lower-than-expected inflation reading based on a revised formula for the consumer-price index that economists criticized as lacking transparency.
- The move is likely to make it harder for executives and investors to gauge national trends in China’s property sector, a huge driver of its economic growth and of global demand for steel, cement, and other inputs.
- The national property-price index has been criticized for understating the severity of the country’s property bubble by diluting the large rises in big cities with tamer changes in smaller ones. It will now publish only separate data for the 70 cities that made up the index, and it will use a new method of calculating property prices that only looks at housing, not commercial property.
- The bureau’s previous property data series relied on information from a survey of transactions, conducted at a local level. Those transactions were meant to be representative, but the series was widely criticized by analysts and the general public for failing to reflect the sharp increases in housing prices in recent years.
- Analysts have long complained about flaws in China’s official data—a problem common in developing countries—but the issue has taken on added global importance as the Chinese economy has become the world’s most important engine of growth in recent years and a major factor in global markets.
- Last week, the International Energy Agency complained that it was unable to make a reliable forecast for China’s oil demand this year because of what it called “huge uncertainties with respect to official data.“
- Chinese officials have acknowledged the need to improve. Indeed, according to a U.S. diplomatic cable published by WikiLeaks, Vice Premier Li Keqiang—widely expected to take over in two years as premier—told the U.S. ambassador in 2007 that China’s GDP figures are “man-made” and therefore unreliable.” (which is why it is laughable watching U.S. investors move trillions of market value based on all these figures, as if gospel …)
- This week’s statistics changes, which come as Chinese consumer and property prices are under intense global scrutiny for signs of inflation and asset-bubble pressures, drew sharp criticism from some analysts. “It’s just like changing the scale of a thermometer, and then telling a patient they no longer need to take medicine for their fever, and the whole family cheers that the illness is cured,” Xu Xiaonian, a professor of Economics and Finance at the China-Europe International Business School, said on his personal microblog Wednesday.
- ………people don’t trust the numbers because the National Bureau of Statistics “is extremely non-transparent when they make revisions…They just don’t tell you what they are doing, or they tell you in a way that raises more questions than it answers.” He said the lack of transparency reflects the political culture in China, which is still closed and secretive.
- Under the new method, the bureau will instead rely on data from online property registries maintained by local authorities, initially in just 35 cities. The remaining cities will continue to use the survey method but will switch over as they develop their own online property registries.
- Many local observers felt the timing of the changes was just too convenient for Beijing.
Copyright (c) Trader Mark, Fund My Mutual Fund
Tags: Armchair, Barry Ritholtz, Best Of Intentions, China, Cnbc, Commentator, Disappearance, Dump Truck, Economic Indicators, energy, Federal Reserve, Government Statistics, Grassy Knoll, Hft, Money Supply, Mutual Fund, oil, Property Index, Renegade, Sunny Side, Trillion Deficits, Variances, World Leaders
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off