Friday, April 10, 2009

The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans

"Anyone who is doing anything sensible right now is either losing money or is out of the market entirely." These are the words of a quant trader, who is seeing something scary in the capital markets. Scary enough to merit a warning that we could be on the verge of another October 87, August 2007, or January 2008.

Let's back up. I recently posted a chart which tracks equity market neutral strategies: in essence a cross section of quant funds for which there is public performance tracking. The chart is presented below.



There is not much publicly available data to follow what goes on in the mystery shrouded quant world. However, another chart that tracks the market neutral performance is the HSKAX, or the Highbridge Statistical Market Neutral Fund, presented below. As one can see we have crossed into major statistically deviant territory, likely approaching a level that is 6 standard deviations away from the recent norms.



What do these charts tell us? In essence, that there is a high likelihood of substantial market dislocations based on previous comparable situations. More on this in a second.

Why quant funds? Or rather, what is so special about quant funds? The proper way to approach the question is to think of the market as an ecosystem of liquidity providers, who, based on the frequency of their trades, generate a cushioning to the open market trading mechanism. It is a fact that the vast majority of transactions in the market are not customer driven buy/sell orders, but are in fact high frequency, small block trades that constantly cross between a select few of these same quant funds and program traders.

This is a market in which the big players are Renaissance Technologies Medallion, Goldman Sachs and GETCO. Whereas the first two are household names, the last is an entity known primarily to quant market participants. Curiously, the Philosophy section in GETCO's website exactly captures the critical role that quant funds play in an "efficient" market.
What’s good for the market is good for GETCO

GETCO’s strategy is to align our business plan with what is best for the marketplace. We earn our revenues by providing enhanced liquidity and efficiency to electronic financial markets, which in turn results in lower costs for market participants (e.g. mutual funds, pension funds, and individual investors).

In addition to actively trading, we partner with many exchanges and their regulators to increase transparency throughout the industry and to create more efficient means for the transference of financial risk.
A good example to visualize the dynamic of this liquidity "ecosystem" is presented below.



In order to maintain market efficiency, the ecosystem has to be balanced: liquidity disruptions at any one level could and will lead to unexpected market aberrations, such as exorbitant bid/ask margins, inability to unwind large block positions, and last but not least, explosive volatility: in essence a recreation of the market conditions approximating the days of August 2007, the days post the Lehman collapse, the first November market low, the irrational exuberance of the post New Year rally, and the 666 market lows.

The above tracking charts indicate that something is very off with the "slow", "moderate" and "fast" liquidity providers, indicating that liquidity deleveraging is approaching (if not already is at) critical levels, as the vast majority of quants are either sitting on the sidelines, or are merely playing hot potato with each other (more on this also in a second). What this means is that marginal market participants, such as mutual and pension funds, and retail investors who are really just beneficiaries of the liquidity efficiency provided them by the higher-ups in the liquidity chain, are about to get a very rude awakening.

Also, it needs to be pointed out that the very top tier of the ecosystem is shrouded in secrecy: conclusions about its state can only be implied based on observable metrics from the HSKAX and HFRXEMN. It is safe to say that any conclusion drawn based upon observing these two indices are likely not too far off the mark.

Skeptics at this point will claim that it is impossible that quant and program trading has such as vast share of trading. The facts, however, indicate that not only is program trading a material component of daily volumes, it is in fact growing at an alarming pace. The following most recent weekly data from the New York Stock Exchange puts things into perspective:



According to the NYSE, last week program trading was 8% higher than the 52 week average, which on almost 4 billion shares is a material increase. It is probably safe to say that the 1 billion in program trades last week does not account for significant additional low- to high-frequency trades originated at non NYSE members, implying the real number for the overall market is likely even higher. Some more program trading statistics: principal trading is running 21% above 52 week average, agency trading is 11% below average, while NYSE weekly volume is running about 9% below 52 wk average.

A very interesting data point, also provided by the NYSE, implicates none other than administration darling Goldman Sachs in yet another potentially troubling development. The chart below demonstrates the program trading broken down by the top 15 most active NYSE member firms. I bring your attention to the total, principal, customer facilitation and agency columns.



Key to note here is that Goldman's program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x. The implication is that Goldman Sachs, due to its preeminent position not only as one of the world's largest broker/dealers (pardon, Bank Holding Companies), but also as being on the top of the high-frequency trading/liquidity provision "food chain", trades much more often for its own (principal) benefit, likely in tandem with the other top dogs on the list: RenTec, Highbridge (JP Morgan), and GETCO. In this light, the program trading spike over the past week could be perceived as much more sinister. For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this.

Following on the circumstantial evidence track, as Zero Hedge pointed out previously, over the past month, the Volume Weighted Average Price of the SPY index indicates that the bulk of the upswing has been done through low volume buying on the margin and from overnight gaps in afterhours market trading. The VWAP of the SPY through yesterday indicated that the real price of the S&P 500 would be roughly 60 points lower, or about 782, if the low volume marginal transactions had been netted out. And yet the market keeps on rising. This is an additional data point demonstrating that the equity market has reached a point where the transactions on the margin are all that matter as the core volume/liquidity providers slowly disappear one by one through ongoing deleveraging.

Unfortunately for them, this is not a sustainable condition.

As more and more quants focus on trading exclusively with themselves, and the slow and vanilla money piggy backs to low-vol market swings, the aberrations become self-fulfilling. What retail investors fail to acknowledge is that the quants close out a majority of their ultra-short term positions at the end of each trading day, meaning that the vanilla money is stuck as a hot potato bagholder to what can only be classified as an unprecedented ponzi scheme. As the overall market volume is substantially lower now than it has been in the recent past, this strategy has in fact been working and will likely continue to do so... until it fails and we witness a repeat of the August 2007 quant failure events... at which point the market, just like Madoff, will become the emperor revealing its utter lack of clothing.

So what happens in a world where the very core of the capital markets system is gradually deleveraging to a point where maintaining a liquid and orderly market becomes impossible: large swings on low volume, massive bid-offer spreads, huge trading costs, inability to clear and numerous failed trades. When the quant deleveraging finally catches up with the market, the consequences will likely be unprecedented, with dramatic dislocations leading the market both higher and lower on record volatility. Furthermore, high convexity names such as double and triple negative ETFs, which are massively disbalanced with regard to underlying values after recent trading patterns, will see shifts which will make the November SRS jump to $250 seem like child's play.

For readers curious about just how relevant liquidity is in the current market, I recommend another recent post that discusses DE Shaw's opinion on the infamous basis trade, in which their conclusion was that establishing a basis trade, which is effectively the equivalent of selling a put option on market liquidity, ended up in massive financial carnage as the market rolled from one side of the trade to another. Is it possible that what the basis trade was for credit markets (most notably Citadel, Merrill and Boaz Weinstein), so the quant unwind will be to equity markets?

So when will all this occur? The quant trader I spoke to would not commit himself to any specific time frame but noted that a date as early as next Monday could be a veritable D-day. His advice on a list of possible harbingers: continued deleveraging in quant funds as per the charts noted above, significant pre-market volatility swings as quants rebalance their end of day positions, increasing principal program trading by Goldman Sachs on decreasing relative overall trading volumes, ongoing index VWAP dislocations. One thing is for certain: the longer the divergence between real volume trading/liquidity and absolute market changes persists, the more memorable the ensuing market liquidity event will be. At the end of the day, despite the pronouncements by the administration and more and more sell-side analysts that the market is merely chasing the rebound in fundamentals in what has all of a sudden become a V-shaped recovery, the "rally" could simply be explained by technical factor driven capital-liquidity aberrations, which will continue at most for mere weeks if not days. Sphere: Related Content
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185 comments:

Rufus Willy said...

TD-

All work and no play.... You are a machine. How are you posting 24/7?

Ezekiel said...

So as slow money, Im gonna want to go to cash for a few weeks and sit this fun little 6 sigma out?

Kid Dynamite said...

i used to work on the program trading desk of the top program trading firm at the time. I can tell you that the GS numbers (over a billion shares Principal) you are reporting are unlike anything i've ever seen: one example would be a huge amount of index arb - perhaps an unwind or reestablishment of an entire book: but that's clearly not the case.

also, Program Trading (sorry, i don't know exactly how much you guys know) doesn't necessarily mean black box quant stuff - in fact, MOST of what my desk traded was not... but again, the report illustrates this: customer facilitation includes principal risk bids, and "principal" is where the black box stuff would show up.

you can expect distortions in these numbers around 1) options expirations and 2) big index reweights (quarterly SPX, annual Russell) - but neither of these happened the week of march 30- april 3rd.

perhaps it's some bizarre quarter end phenomenon - i'll be honest, i haven't been following the NYSE program numbers lately.

-KD

TPC said...

My playbook:

let the banks report their fictitious "better than expected" earnings over the coming two weeks and then get massively short as the industrials and the other weak legs report their earnings. By that point we should be fantastically overbought and sitting on the precipice where the market is ripe for a nice dose of reality. All I know is - the higher we go on these completely fake bank earnings the harder we will fall into the summer months.

Sell in May and go away might never ring more true than it will in 2009....

Charles Amadeus said...

Great post, thanks for sharing this.

Anonymous said...

i think i just peed my pants ... I am scared....

Anonymous said...

It's settled, this is the absolute best financial blog on the web! Great post.

Anonymous said...

Well written and insightful, but your link to Greenlight's "Technical talk" is odd. They're on the "plenty of liquidity" side.

Anonymous said...

Tyler, I love your blog but you are obviously way wrong here. Jim Cramer and all the people on CNBC are so happy we're in a new bull market and they are never wrong.

Tyler Durden said...

the greenlight link is automatic and contextual. have not read it but hopefully it presents a compelling case.

Chitown Bob said...

A long way to say this is a low volume rally supported by $11B+ of money flowing into mutual funds. In poker they call these players dead money

Anonymous said...

Tyler.....

Thank you for ALL of your insightful posts. You are a machine.

Jan

eh said...

The market is going up until it isn't. That's all I know.

jg said...

Fascinating and compelling story!

I have confidence in my long-term short bets, but these damn irrational rallies have been stopping out a decent proportion.

But, it seems the end is near.

We need the hard cold reality of a big, fast market crash, a la Oct. '29 or '87 -- not the slow bleed jobs that we've had -- to wake up the sheeple.

C'mon crash!

Max Leverage said...

I suspect the Working Group is aware that the stock market is running on vapors. These manipulations in broad daylight (the delays on stress testing, the obviously bogus WFC earnings) are an attempt to ward off a major crash which is in the cards for next week.

Anonymous said...

All I can say is you are stuck with a large number of SRS with value approaching 0 real fast. What was your entry price, and what is your exit strategy Tyler?

eh said...

Confirmed: First-Half Budget Deficit $1 Trillion

The government has put Madoff in jail, but come on...What is the US of A itself if not a huge Ponzi scam? Does anyone seriously believe this debt will ever be repaid?

Anonymous said...

Dead money is a perfect description.

Thanks for the articles Tyler. A lot scarier than Grimm's fairy tales - Poe perhaps?

Beanieville said...

Papa Bear George Soros says the danger has passed and he's back into retirement. Bear Hibernation forever. http://bit.ly/3QOpVb

Anonymous said...

Very nice Tyler. Watching Fight Club tonight in honor of your analysis...LOL

TES said...

Tyler -

I'm a naive reader* with some probably very dumb questions:

- What specifically in the graphs demonstrates your point about illiquidity ... i.e., that most of the quants/program traders other than GS are basically sitting on the sidelines?

- How does the observation that program traders close out their positions every day and the slow money does not make the arrangement a Ponzi scheme? Is it that the retreat of the big money liquidity providers leaves the slow money long an illiquid market ... too illiquid to get out of without major dislocations? Does this relative illiquidity explain why a (GS) PPT could drive the market higher in recent weeks?

- Are you suggesting that for some of the quant players (i.e., GS), are in a sense maliciously driving up prices either to support the Administration's "sunny days ahead" posture or, more maliciously, to yank the rug out and profit on the short side? Or is the latter just a happy consequence for GS of doing their patriotic duty?

- If GS has driven the market higher, won't they continue to do so until they complete their recently announced equity offering?

You do absolutely incredible work.

Thanks.

* I'm a lawyer who worked briefly, miserably and horribly as an investment banker at Lehman Brothers in the late 90s. I quit to become a TV writer as my former cubicle mates went on to become MDs (and PMDs!) at GS and found hedge funds. Ah, well.

Anonymous said...

best site on the internet, but it's becoming increasingly difficult to tell what's at stake for you, tyler, and whether we are all getting played.

how about a little background on you. i get the anonymity thing, but what's your deal?

Joe said...

Larger bid/ask spread due to decreased liquidity and a market failure will play nicely into the reinstatement of the 'modified' uptick rule.

Beanieville said...

Anonymous,

Forget his deal, why are you so concerned? The bear market is ova.

Anonymous said...

The overnight gaps have been ridiculous. SPY trades like an ADR. The historically oversold conditions of early March were ripe for this kind of manipulation. The rally seems very coordinated with the news flow out of Washington and banking sector, too coordinated. How much of that principal GSCO trading is actually the Working Group?

TES said...

Beanieville -

The bull or bear? Based on TD's analysis?

Anonymous said...

~

Prolly won't really get moving until after the multi-billion dollar Goldman stock issuance is filled.

http://online.wsj.com/article/SB123932742279007541.html

Tyler Durden said...

good questions: the charts are either a leading or lagging indicator (depends on one's view, although if they are in fact leading in this case as i suggest, they are a much better indicator of mkt distress than the VIX (lagging) whose corp risk levels recently have been totally distorted by gov't intervention, with a result being sovereign CDS levels widening) of the liquidity levels perceived by the market and demonstrated via public disclosure. additionally, based on anecdotal evidence the fast trade money has retreated almost entirely at this point.

you are correct in your other questions, however as to your questions about what i suggest i will have to say you should make your own conclusions based on the presented facts.

Beanieville said...

TES,

No, not based on TD. I think we'll see SPY 87 this month. However slight, we could see SPY 94 this month. That would mean GAME OVER for bears.

Anyways, some are drawing too much out of Thursday's huge gap up and rally move. It moved the way it did because of a particular chart pattern that ended up pulverizing the bears. Of course, the lower pre-holiday volume makes it even more dramatic.

Anonymous said...

All that verbiage and quant-speak to get to the unremarkable conclusion that the market will be "both higher and lower on record volatility"?

I knew that just by looking at a chart of the S&P over the last 6 months and the VIX: Up. Down. Up. Down. Volatile.

All due respect, but that sounds like the kind of vague non-prediction I can get from any of the talking assclowns on CNBC.

arnoldsimage said...

thank you for all the hard work and the countless hours you give us. arnold

Kristjan Velbri said...

Can anyone here explain to me why TZA is acting so strange lately? It was doing fine a few months ago but now the movements are increasingly strange. Is it being manipulated or is this just the way leveraged ETFs end up after a few months of normal behaviour.
Your advice is much appreciated.

Omaha said...

Who is John Galt? Who is TD?

I'm buying June 100 SDS calls monday. If the black swan comes to pass, I'll donate 10% of the gains to the charity of TD's choice.

Anonymous said...

TD, your observations may be correct, but if you follow them through to the ultimate conclusion you'll understand why it doesn't matter.

The US stock market is too big to fail. It is our bank, our life insurance, our retirement plan, our college savings fund, the retirement plans of our police forces and our firefighters. It's our hopes and dreams and worst fears all rolled up in a big ball. That's how this depression is different from the 30's. This time the stock market can't be allowed to drag along the bottom for a couple of decades, or even for 5 years.

Inflation of course is worse, but it's like a force of nature in the eyes of the public. Everyone will get their payoff and they'll gripe about the fact that it buys nothing. But that's minimal compared to the outrage they'd feel in an outright default. When it comes to theft, people think in nominal terms, not real terms.

So when push comes to shove, our government will use Goldman and others like them to sustain the stock market, at any cost. It's just dollars. And if the players don't like their marching orders, well then, as Mr. Obama said, it's pitchfork time.

sweet! said...

Without question--best financial blog on the net.

Anonymous said...

TPC, Tyler Durden and others:

Question that's been bothering the hell out of me - if everyone is expecting the bull to continue on the bs earnings of the banks, then I have a feeling they may be stepping to the sidelines for something much worse coming out of earnings season for at least one bank.

I don't know, but my gut says opposite, i.e., market going down, is going to happen one of these days. I have inside baseball knowledge on CRE, and it is a fucking nightmare, for the REITs, for everyone involved.

It hasn't even entered the second inning in that ball game. Combine that with worldwide recession/depression. Are we just walking out of this cause WFC - who's books are insolvent - claims to have made record profits.

Just that claim alone should require you to call bullshit!!! Record profits!! ARe you fucking kidding me? Because of refis??

Look, give me a cold, sober assessment of the books, how much capital is needed assuming 35% writedowns and 15% unemployment, and then I'll believe the rally.

Until then, this is just complete bullshit. I levered in pretty heavy during the bear rally Thursday, guess we'll just have to see Monday. SDS and SRS.

FischerBlack said...

So GS paints the tape ahead of its capital raise, quants move to the sidelines without leverage, vanilla cash comes oops-ing out of money markets, the banks leak record earnings, and the market trends to break all VWAP dislocation records. That's a freakin' bull story if ever I've heard one.

I've been thinking we might see INDU at 9K before this thing runs it's course. To me, now it sounds more like 10K or 11K. I hope nobody bets junior's college money on SDS calls!

Anonymous said...

Fisher Black, I think what Tyler is stating though is that it's going to end sooner than anyone thinks, much sooner.

Even the bottom-tiered liquidity providers have got to be saying "what the fuck" after a 25% run on nothing but more fucking bad news.

Can CNBC be that stupid. I know most investors I talk to say the same thing.

tippi canoe said...

mucho gracias for pulling the curtain just a little more open so mine eyes can see, T.

max et al,

perhaps we should consider one mo variable:

4/15 = TAX DAY

how many people you think that waited til this last weekend to do their taxes are invested in equities you think?

considering the events of the last 12 months, how much more inspired to do you think they would be to let's say creatively reduce their tax bill if say the DJ were at 7500? how about 7000? how about 6500?

that might be a very illuminating chart.

p.s. to any anonjoe's out there who think this simply a battle between the bulls and the bears is missing the point.

that's like saying the vietnam 'conflict' was simply a civil war.

wake up little suzies.
lift up your eyelids a little bit, whatever side you choose.

TPC said...

The government knows how bad things are. They know that many of our largest banks are technically insolvent and need to be recapitalized badly. That capital is unlikely to come from taxpayers now that people have bailout fatigue and Timmy is concerned that the PPIP might not work the way he had originally hoped. So, what are they gonna do? Jam stock prices higher, trounce earnings expectations for the next few weeks and then we're gonna get a flood of liquidity raises from the banks over the next 3 weeks. That way they can try yo recapitalize based on their independent "strength" rather than having to go hat in hand to the taxpayer. There are certainly plenty of suckers out there now who would give money to WFC based on their "record" (haha) quarter. This will buy the banks more time while they pray that a miracle occurs.

Too bad none of it matters. The mountain of CRE, CC and Alt-A resets are going to overwhelm the banks and consumers for the coming 12-18 months no matter what the government does.

Anonymous said...

TPC, I'm anon at 6:23 and 6:33. Just want to get your feeling that this may all happen much sooner than everyone thinks.

People are getting wise here. Very fast. Thanks to yourself and the good folks at zero hedge. love your blog, btw.

BobbyG said...
This comment has been removed by the author.
Anonymous said...

http://www.marketwatch.com/news/story/liquidation-big-portfolio-triggers-turmoil/story.aspx?guid={9562090F-2CC0-4EE2-ACBF-2688F60061DA}

"Big liquidation triggers hedge-fund turmoil
Some compare upheaval to LTCM collapse; market-neutral funds are hit hard"

Advant Guard said...

A nit: "the quants close out a majority of their intraday positions at the end of each trading day"
By definition, all intraday positions are closed out by end of day; that's what makes them intraday. If you delete the word intraday the sentence makes more sense.

Second, no market crash until Goldman makes their stock offering. My recommendation: don't buy what Goldman is willing to sell you.

BobbyG said...

IIRC, I recently heard Simon Johnson say that the major banks were really "worth" about 1 - 5 cents on the dollar. Essentially that they are in fact insolvent. Recall that WAMU was sold by the FDIC to Chase for 1.6 cents on the dollar (i.e., dived the $1.9 billion acquisition price by their net "assets" at the time). That's classic "Bad Paper." Bad Paper (e.g., charged-off debt) has typically traded at between a fraction of a cent to about 4 cents on the dollar.

So, yeah, I think the administration knows just how bad things really are, and are terrified that the public truly gets clued in, owing the the mass panic that might ensue.

TPC said...

Personally, I don't see how this all goes down before the end of the month. If GS and the gov't want to keep a bid under this market until the stress test results and what I believe will be capital raises then they'll prop this pig up as long as they need to. I would love to pile all of my money onto the short side, but there is no way in hell I will get in front of the bank earnings after the scam that WFC just pulled. I think most investors will feel the same way. Don't be shocked when JPM, C or BAC pre-release early next week. The government has been fooling around with this market for months now and they'll continue the games as long as they need to in order to improve the chances of the bank plan working.

I'm 100% cash for now. I'll be rooting for higher prices in the coming weeks. The higher we go the harder we'll fall when this government mockery ends....

Anonymous said...

TPC, and I'm just sounding this out for you, but doesn't that seem to be the trap - GS will price their stock offering Monday before open.

I mean, can BAC go up 30% on JPM's earnings and another 30% on GS' earnings. Why the fuck would they release that info early regarding the puff piece on WFC.

It's just not making sense. WFC news was not needed at all, they could just lie as currently scheduled.

I think there may be a butterfly released sooner than we all think, and I mean this month.

TPC said...

This is all speculation, but the environment for raising capital now is certainly better than it was a month ago. It makes perfect sense in fact. The banks will pre-announce one by one as they did in early March and the stocks will all get a little bump (not necessarily 30% per day). So for instance, WFC announces a huge share offering in a week on the same day that Citi says they're going to break even (vs an expected loss) and the two announcements balance out. It's a win win for the banks and the gov't.

I guess my main point is no one is going to press on the short side considering the potential strong earnings out of the banks....At least none of the people I talk to are willing to jump in front of this freight train....

col jessup said...

agreed TPC & BobbyG.

thing is though is that many americans have already watched 'A Few Good Men' on cable at least once or twice already.

and O don't got jack on Jack.

http://www.youtube.com/watch?v=8hGvQtumNAY

tippi canoe said...

here's another clue for those PPT prognosticators out there:

4/29 = GDP announcement plus the added bonus of the 30 yr auction announcement.

another potentially illuminating chart: plot the long bond Tdays on the DJ.

and remix.

Anonymous said...

TPC, true enough. Maybe I'm just talking my book because I levered up a bit on SDS and SRS into the Thursday close. About $70 on SDS and $35 on SRS.

I just get this feeling that something bad is around the corner and I know you said that investors you talk to don't want to step in front of the train, but I think as this piece tells us, most of us are on the bottom rung and the train is just going to where it's gonna go.

FischerBlack said...

Anon at 6:33 -- I know what Tyler's point is, do you know what mine is?

I don't think it's smart to play the rational hand (especially a directional trade) when the market has already proven it's deep in the Twilight Zone.

Not that I'm long, mind you. The only play I'm making is Desktop Tower Defense. All you smart guys can take sides. I'll pick up some premium when the VIX makes new highs and have myself a nice quiet summer.

Anonymous said...

Fair enough, stay off margin and see what happens. As expected from the playbook, Bloomberg now reporting that GS equity raise "may pressure" others to follow.

How fucking phoney does it get.

Anonymous said...

Am I missing something or do the charts end around March 2008? I see you are trying to pull up 11/05 to 4/09, but everything seems off by a year.

Andrew said...

TD,

I've been wondering about what I saw in terms of recent money flow per the WSJ website, and I have a bad feeling that this post explains it. You can see what I'm talking about in the screens below...

http://www.screencast.com/t/4rzEwjJY9

http://www.screencast.com/t/B8aPSETKYr

Massive amounts of money moving out of the financial sector today despite massive moves up in the stock price....

Does your scenario syncing with such abnormalities?

Triathlon Trader said...

"So GS paints the tape ahead of its capital raise, quants move to the sidelines without leverage, vanilla cash comes oops-ing out of money markets, the banks leak record earnings, and the market trends to break all VWAP dislocation records."

Bingo!

GS called the top. Don't forget to turn out the lights when the last retail investor leaves.

TES said...

Tippi -

I'm pretty sure 4/15 doesn't factor. Any tax loss selling for 2008 would have to be done in 2008.

kfunck1 said...

Considering projections of -0.37 EPS, C breaking even would be the nail in the coffin for me as far as any rational transparency. This would also suck, since I'm an accounting major, and would feel like I just wasted a ton of time studying.

FischerBlack said...

Anon 7:46 -- You're missing something, namely the 'Dec 31, 2008' tick just before the first three months of 2009.

FischerBlack said...

It's a stupid Bloomberg thing. Totally counter-intuitive, just like the good mayor himself.

tippi c. said...

TES -- my post on 4/15 had nothing to do about taxpayers selling their stocks.

it had everything to do about their willingness to pay their taxes.

hope this makes it a bit more clear.

Anonymous said...

Any one follow the Full Moon in Trading Extreme Moves - Well Thursday
April 9 --FULL MOON - Top of the MOVE !

kerel said...

Whatever the outcome, it's an interesting time to be alive. All the more so thanks to your remarkable work Tyler. I salute you. (and that's the first time I've saluted ANYBODY) Runnin' back to my foxhole as fast as I can.

kerel said...

Whatever the outcome, it's an interesting time to be alive. All the more so thanks to your remarkable work Tyler. I salute you. (and that's the first time I've saluted ANYBODY) Runnin' back to my foxhole as fast as I can.

Anonymous said...

The dislocation will occur on 4/23/09 per Martin Armstrongs data.
http://www.contrahour.com/contrahour/2007/03/free_martin_arm.html?no_prefetch=1

aviat72 said...

Though I admire Tyler's blog, I am not sure why he is coming to such dire conclusions based on the evidence presented.

We are not in a normal markets. Normal markets do not lose 50% of their value in 6 months. They also do not rally 28% in 1 month. Market neutral strategies which essentially rely on a regression to mean statistical values do not work in such markets consistently. Note the spike in performance in September when there was severe dislocation post Lehman. At that time these funds bet right. OTOH this year the funds bets were wrong.

The example of VWAP on SPY which Tyler is using is great illustration of why the regression to the mean is not working in this dislocated market. I am quite sure that the SPY would have similar deviations from its VWAP when it was collapsing. That is why market neutral strategies are seeing big swings in results (on both sides) in this dysfunctional market.

I also feel that Tyler is paying too much emphasis on the high frequency liquidity providers. If most of their trades are intra-day anyway, their end of day contribution should net out. Intra-day we are likely to see some more price volatility but that does not necessarily imply massive movements in closing prices. I am not sure how the liquidity (and financing) issues in the credit market (DE Shaw basis report) are a good analogy for lower intra-day liquidity provided by High Frequency trading in equities.

Tyler needs to elaborate a bit more on how he believes the dynamics of the processes will work to justify his conclusions. The evidence presented does not lead directly to Tyler's strong conclusions; there are some missing links which Tyler needs to fill in.

Mike Frager said...

As in every major financial crisis the DOW will probably drop to being worth about 1 ounce of gold. I don't need a fancy computer to tell me that.

elditto said...

I bought SPY puts Tues, got killed Thur even though was a little hedged. I still have them going in to Monday. That is a great insight and a little scary. Basically, us little guys don't stand a chance? I could be a fool, and I'll follow the trend as I can, but I'm still not very bullish.
"Blinding ignorance does mislead us. O! Wretched mortals, open your eyes!" Leonardo da Vinci. WFC, GS, BAC
I still don't see how all this debt, printing and manipulation can be good for the economy, hence good for America.

UrbanDigs said...

"I'm pretty sure 4/15 doesn't factor. Any tax loss selling for 2008 would have to be done in 2008."

Of course, but what about the traders and those that need to raise the funds to pay their taxes? I mean, I assume some people will have some taxes to pay and that money has been in stocks since beg of year. The play is sell before year end if its a loss, offset and previous gains, buy back the stock in JAN, and then rise wave until you need more cash to pay your taxes.

when i was trading full time that wasy the schedule anyway for PA.

Brandon said...

Stocks are not distributed to the public to make the public rich. Stocks are distributed to the public to make Wall Street rich.

The public, retail investors pension funds, 401kers are effectively flat broke and will be for a long time. It's simple to see how this ends. Pretty soon it will be every I-banker going head to head for the last few nickels of real money.

Anonymous said...

The I-banks won't stop until they get access to social security funds. That is their ultimate goal.

Beanieville said...

Brandon,

I don't agree with ya. The public CAN get rich from wallstreet's distribution.

John Galt said...

A fantastic posting! The one thing that stood out to me:


"One thing is for certain: the longer the divergence between real volume trading/liquidity and absolute market changes persists, the more memorable the ensuing market liquidity event will be."

Which makes me wonder if the bank reports and further 'stall' in a resolution to the automotive companies will allow this to go beyond any historical norm and set up a market killer event (like the asteroid that killed the dinosaurs) where the NYSE circuit breakers engage in the last two hours of trading and the lack of bids keeps the market from re-opening.

I figure GS gets its new issue out and earnings then they short themselves via their Caribbean operations to profit from the implosion.

Anonymous said...

I have a very basic question that I am hoping Tyler or some other knowledgeable poster could address.

What exactly is the connection between a stock market disconnected from fundamentals and the lack of quant trading profitability? In fact, is it a mistake to conflate quant trading with market neutral funds. Assume (which I think is a correct assumption) that there is a disconnect between fundamentals and market price, or that the market is moving higher due to ridiculous extrapolations of tenuous data points. If market neutral strategies are based on fundamentals, then it makes sense they would not work in an environment where fundamentals are ignored, but why don't quant models work in such an environment? I thought the whole point of quant trading, at least the Jim Simmons variety, was that they ignore fundamental analysis? One poster said all the quant models are based on reversion to the mean. If that is the case, why would they work during November through February and not work during the last 5 weeks? Perhaps the answers are obvious or are clear from Tyler's original post and I am just not sophisticated enough to understand them, but if anyone can answer this question, I would really appreciate it.

Anonymous said...

Dear Tyreless Tyler,
Thanks for all of your great work.

I am a "retail" investor (slow $), and some of your posts go so far over my head that my hair doesn't even move. Thus, I want to try and summarize my understanding of this post and eagerly await your clarification.

SUMMARY:
Two of the top three market-makers have left the building, leaving GS alone on the top floor to play with the elevator controls.


Please correct any misunderstanding.

Thanks

John

Tyler Durden said...

I can not confirm or deny but you can find out for yourself how Goldman's program trading trends thru the NYSE public disclosure and compare with the chart data presented. There are many other nuances as well

gamingthemarket said...

Tyler, thanks to your work we know there is $1,400T sitting in interest rate swaps, mostly split between N. America ($775T) and Europe ($555T). This OTC market dwarfs the cash equities market. I can't find a global market figure, but NYSE Euronext is $31T. So the regulated stock market is roughly 2% of the size of the unregulated derivatives market--as of last year.

Can we assume a good chunk of those swaps are waiting for the Fed to raise rates? If this is true, it seems we're in a very precarious situation. On one hand the Fed has to print money until the end of days, and on the other roughly 75% of the world's total liquidity is trading swaps on the rates. Is this correct?

Also, it seems that the tri-party repo system has broken down. This might be the prime reason of lower intraday volume, and what appears to be institutional abandonment of index ETFs like DIA/SPY/Qs. Any thoughts on this theory?

I'm trying to figure out what the end game is. Right now these conflicting issues don't make any sense to me. You've opened the door to a very complicated maze, and I'm lost inside searching for enlightenment.

poolparty said...

How the hell do you find VWAP charts on stocks and ETF's?

Great Post.

Anonymous said...

You are truly a hero, Thank you.

Anonymous said...

I just joined GETCO...FML.

Anonymous said...

"It's settled, this is the absolute best financial blog on the web! Great post."

Absolutely agree. This is hands down the best financial blog on the web. Tyler, thank you for continuing to fight the good fight!

Anonymous said...

This is quite an excellent blog. Gives me that inside circle feel, well, without being in the inside. Anyway, I maybe a little out of my league here but here are my two cents.

I got long on SKF on monday before earnings and got wacked a bit but it doesn't matter cause my RSUs offset it. On dshort.com there's the bear quartet. In the beginning the markets trended down like a standard bear market, but then in October after the lehman failure, our current bear trended down to great depression levels: http://dshort.com/charts/bears/four-bears-large.gif

From what I gather here, it sounds like there will be another major leg downward and it's coming up soon. That's what the charts and data indicate to me.

Unfortunately the manipulators may have goofed. As any bank not reporting on par with WFC earnings should tank since our expectations are set much higher now.

tyler too said...

"As any bank not reporting on par with WFC earnings should tank since our expectations are set much higher now."

aka the law of exponentially diminishing returns
ha!
your league seems to quite on point
tyler @ 11:56
many thanks for the 2 cents
they may prove more than their worth very soon.
let's see shall we?

Anonymous said...

Dude! This raises the blogging bar. Well done.

tyler too said...

and speaking of good ol' martin, any 1 wanting a brilliant history lesson on currencies & interest rates wrapped in an enigma should really read his latest jailhouse missive:

http://tinyurl.com/c5tkcb

"I cannot stress enough that the level of volatility that we are experiencing during this financial crisis is just well beyond even that experienced during the early stages of the Great Depression and is more akin to the collapse of Rome. That is a stark comparison tells me this decline is nothing to fool around with. However, the likelihood of either Europe or America following prudent economic policy to save our free economies is about as likely as me running for President."

if you decide to click, don't miss the waterfall...

Beanieville said...

Bears' Last Stand. Dow 11,000 end of 2009! Psychic Monte Farber saw the future. Goodbye FAZ, you're going to heaven. Listen now. Or click here.

Anonymous said...

Beanieville, you are a fucking idiot.

Anonymous said...

I saw this posted on cobra's blog.

http://cobrasmarketview.blogspot.com/2009/04/net-institutional-buying-selling.html

Anonymous said...

there is a high likelihood of substantial market dislocations based on previous comparable situations. More on this in a second.

where are the charts to compare against what you describe?

Anonymous said...

@Beanieville

You tipped your hand when you said, "anyways". You're out of your depth.

Anonymous said...

You are all a bunch of bafoons.

Would you like to know the business address for 'The Fight Club' ?

85 Broad Street, New York, NY 10004

Anonymous said...

Just to share with the community, I've recently become a fan of Steve Keen after reading a piece he did on how the money creation process really works named "Roving Cavaliers of Credit".
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

It's a must read. And an eye opener. It was quite refreshing to see that there is someone who really understands how all of this works. All of his posts are must reads.

Slow Money said...

"You are all a bunch of bafoons."

What is a bafoon? Is that some super secret trader term that only the smart money knows?

thanks in advance.

Slow Money

Anonymous said...

Honestly, I couldn't care less about any of this stuff. If the market tanks, that would be a healthy and appropriate response.

Anonymous said...

A Bafoon is a big smart money trader who's getting played. Fool.

http://vixandmore.blogspot.com/2009/04/chart-of-week-vxv-and-systemic-failure.html

"The quick takeaway is that according to the VXV, structural volatility and systemic risk peaked on November 29th and has been in a decline ever since."

Simon said...

What a pile of tosh.

Any chance that this can be written in English so that we can understand?

Anonymous said...

Simon,
The blogger, Tyler runs a little quant fund out of his basement. (Computerized trading fund, about 10 parallel i7 machines is my guess). He and his little MIT buddies did not properly account for velocity in his algorithms and his quant has taken a turn for the worst.

He's now in the fear mongering business cause he need to get this 'bish turned around.

Good luck buddy. Been there, done that.

You gotta tweek this guy:
http://en.wikipedia.org/wiki/Integral

FischerBlack said...

@Mike Frager:

As in every major financial crisis the DOW will probably drop to being worth about 1 ounce of gold. I don't need a fancy computer to tell me that.

Dow/Gold can be 1:1 with gold at $8k an ounce.

Which seems more likely: Dow drops to 1K or government blows up the currency propping it up?

Gentlemen, place your bets.

tyler too said...

"85 Broad Street, New York, NY 10004"

broad & pearl makes a wonderful setting for fight club actually.

brick streets wide intersection like a stage.

fincher would love it.

wanna go down there in the rain & throw down tyler@6:51,8:04,9:53
bare knuckle style???

Max Leverage said...

Anon @ 9:53

If this call is as timely as the C short squeeze call, I don't care if he's Blankfein posting hot tips between meetings.

Anonymous said...

His conclusion may or may not be right, but it definitely doesn't follow from the reasoning he provides. Yes, some quant funds are likely to die out as the deleveraging of the market takes place... but thinking there is a single short-term liquidity provider with any public tracking is absolute folly. The fact is that the amount of capital needed to run a high frequency liquidity provider is so small, that it is done under a prop umbrella nearly 100% of the time.

Effectively, you haven't even decided to look at the right firms for this. GETCO is huge in this space, as you say, but Goldman? RenTech? Both are much bigger in the Stat Arb world than the liquidity provision world. Citadel is huge in the high frequency liquidity provision world. I could name half a dozen or more hedge funds and prop firms that do this more and better than those... and here comes the true explanation for the drastic increase in NYSE Member program trading volume...

The NYSE Members were late to the game, and are trying to play catch-up. For the past few years something like 80% of all trade volume on US markets has been algorithmic. That drastic increase by NYSE member firms is a result of the fact that the high-frequency quant trading space has been the only consistently profitable trade in the past couple years, and the larger players are finally starting to realize that.

Now, you worry about quants trading with themselves... but you're not viewing this from the mentality of a quant equity trader. Here you go: the goal of a liquidity providing quant equity trader is to make ZERO profit. If he makes more, that's great, but as long as he doesn't lose money, he simply increases his volume and makes money on liquidity provision rebates from the exchange. Effectively, as the role of the specialist dies out due to volume on ARCA, BATS, etc overtaking floor volume on the NYSE, the quant funds will step in to take the reins.

So, what I'm saying isn't that there is no chance of a huge market drop in the near future, what I'm saying is that there are much better explanations for some of your observations.

Anonymous said...

Anon @ 11:18

Please provide a better explanation for the VWAP discrepancies.

Tyler's explanation makes perfect sense out of that. Do you have an alternative one.

This "incredible decreasing liquidity" fits the goofiness we're seeing in the markets today. You think we've "turned the corner" and this is headed in the right direction then you are a fucking idiot. How many states can't refund taxes? Unemployment is going to head towards 12-15%. And we get this news everday.

Great time to get in the market. lol.

Anonymous said...

Anon @ 11:42

First, taking too much stock in retail-investor signals like the VWAP is silly. That said, I wasn't denying the fact that the S&P is still overvalued. I predict it will tap somewhere in the 500s sometime this year before starting any possible sort of true rebound.

My point was that Tyler is confounding a couple of very different trading strategies, and using facts from one (Stat. Arb) to draw conclusions about another (High Freq Quantitative trading). What RenTech or Highbridge does and what GETCO does is so completely different it's insane to put them in the same ballpark.

There's no secret that Stat. Arb has been blowing up in the past couple of years... but to suggest that the fact that a lot of Stat. Arb. strategies (equity market neutral) are failing is in any way indicative of the fact that the high frequency strategies are failing is pure insanity. The fact is that the real liquidity providers (unlike the Stat Arb world) are having wild success.

The equity market still has room to fall... but that's because of fundamentals, not because of liquidity problems.

Anonymous said...

@10:23

Bingo! I'm not in the rain Jethro, I'm tunneled to you from the sunshine as you well know.

The antiderivative gets the uninitiated every time. Even hardened systems had a tough time dealing with that plummet.

Good luck my friend. If you do survive you may have a algorithm that Mr. Simons would want to see, that is after you work the bugs out. LoL! ;)

Anonymous said...

Max Lev @10:48

Do you understand the story that the charts posted are telling?

Calm rational analysis my friend and you will find the answer that you are seeking.

Anonymous said...

Anon @ 12:07

Thanks for the reply, I agree 100% on the fundamental picture as well.

I am not a quant, nor have I played one on TV.

Tyler's post seems reasonable and the explanation simple enough, so I'll trust his thoughts on this as he has given me no reason to doubt his analysis as of yet.

If he is incorrect or misconstruing something, I'm sure he will supplement this post.

Anonymous said...

Sheeple, remember these dates:

2009.3... 04/23/09

2011.45... 06/18/11


The messiah Tyler has spoken to you from the blogisphere. For the love of all things sacred, stay out of the stock market or ye shall perish!

A new study has discovered that the new depression has made human flesh highly susceptible to spontaneously combustion! Especially those who may be predisposed to 'getting burned' by the market. For the love of pete, stay away!

Anonymous said...

With articles like this all over the MSM:

http://www.time.com/time/business/article/0,8599,1890560,00.html

Time: "More Quickly Than It Began, The Banking Crisis Is Over"

I say there is going to be a ridiculous unsustainable rally for the next week or two.

HB said...

I read that "time" article. I thought the article was written with complete sarcasm. I think it was suppose to be a joke.

Anonymous said...

@ 12:03

U take a narrow definition of 'provide' -- this means receive ECN/exchange rebates, and take it from there. you are wrong in terms of bigger picture -- if slower mkt neutrals r not active, whole rebate schema will fall apart, unless they trade against retail/dumb order flow.

The scary part of liquidity thesis is that most professional traders and market participants have no clue how the architecture of the mkt place works and they can mistake a major structural beam with a window trim. Something like Cox did when he decided to ban shorts and blew up Citadel, et all. They look at historical data and use absolutely meaningless data to come up if useless at best heruistics. And we are talking about professionals who are in biz for many years.

Also i am sure TD's hierarchy of liquidity providers is fluid: it is of course true that the top 2 layers change on a conistent basis based on who is leveraging and deleveraging at any given moment in time.

Anonymous said...

Remember the date 04/23/09.

The Time article was not a joke even though it reads like one.

"The experts at the Treasury had been thrown off the scent and consequently had missed the fact that there was not need to test what is already working well. The same holds true for the Geithner plan to take toxic assets off bank balance sheets. It is academic now. What banks are earning from the difference between the cost of capital and the income from lending is now great enough for the banking system to be self-sustaining again. "

Bring out the Rally Monkey. Shorts are in the hydraulic vise this time around and getting every last oz of juice squeezed out of them, Tyler included.

Hedgies have to exchange paper with retail before we really head down, then hang on to your hat Wilson.

We have the 23rd to look forward to, right T, and T2? How's that Cu trade working out 4u guys?

drkathe said...

This article also provides meaning to the ridiculous increase in AA after horrible earnings along with the same w MOS. I absolutely could not believe my MOS call option would make money after their bad earnings. But I did take the money & run.

Also, w VIX trending down, I am pulling back from fundamental analysis for now. Something else is supporting the market & Tyler's analysis may be it.

Anonymous said...

Here's a crude analysis of recent NYSE program trading patterns and GS's role.

Since the beginning of the year, GS has accounted for no less than 19% of total weekly program trading in any given week (week ending 1/9) and as much as 35% (week ending 2/20). The average YTD is about 24.5%.

YTD, the correlation between GS % of program trading volume and weekly closing price of SPX is negative .036.

A random sampling of 2008 program trading volume statistics found no instances in which GS accounted for more than about 15% of the weekly program trading volume.

This is an incredibly naive analysis, but the obvious inference for the whole period doesn't seem to be that GS's rising participation in the market has function to prop it up.

That said, for two of the past three weeks of the rally, GS's % of program trading market did spike to over 26%. (Data for last week isn't available yet.)

It's also not obvious from the data that absolute levels of program trading (which I take TD to imply can be used as a measure of overall liguidity) are shrinking. An anecdotal comparison of YTD volume with random samples from 2008 does not reveal a consistent decline.

Fish Gone Bad said...

I have found the best way to survive being wrong in a volatile market is to not be on margin.

HB said...

OK I give what happens on april 23, 2009

Anonymous said...

HB @4:12pm,
Joking?

Martin Armstrongs predictions.

Marty Armstrong has predicted market crashes right to the day.

Do people like 'Tyler' and his crack team at GS formulate markets and panic around Marty's longstanding predictions??

Look at section 'The Economic Confidence Model in 2.15-year intervals'

http://www.contrahour.com/contrahour/2007/03/free_martin_arm.html?no_prefetch=1

A SeekingAlpha article not written directly by Tyler:
http://seekingalpha.com/article/103613-on-martin-armstrong-s-it-s-just-time

I call BS.

Anonymous said...

anon @ 4:47

You mean that ZH is trying to beat Martin Armstrong to the punch?

In effect leverage his Intellectual Property and claim it as their own by using some cock-a-mayme market neutral theory? No?

Anonymous said...

To "Anonymous who said "Here's a crude analysis of recent NYSE program trading patterns and GS's role." this is an example of folks taking statistical data and look for the trees in the forest -- none can be found.

If GS takes over 26% of PT volume on NYSE, shares steadily increasing from beginning of the year -- if this doesn't mean that props are trading with props, what else will? ITG reports of a 17% decline in commission revenues due to volume shift from traditional money managers to lower priced DMA mostly used by systematic traders confirms that as well.

Now the same poster assumes that volume equals liquidity. It does not! High one sided volume doesn't constitute liquid market, just on opposite. In liquid markets, large trades can be executed with minimal, consistent with long-term-averages, market impact. Trading costs in the past few weeks could be the highest since late Sept to Nov of 08 period. Individual names moving 10%, 20%, 30% and more a day (look at Textron spike on unsubstantiated takeover rumors) is not what happens in liquid markets.

Statistics, apparently can deceive some but not all. Death rate is 100% for those who died and 0% for those who survived. Need evidence for that?

Anonymous said...

Anonymous April 10, 2009 6:57 PM said...

"Big liquidation triggers hedge-fund turmoil
Some compare upheaval to LTCM collapse; market-neutral funds are hit hard"
Last update: 6:46 p.m. EDT Aug. 9, 2007


the article you referenced was from August 2007

tyler too said...

to unduly focus on armstrong's predictions is to miss the genius of armstrong's writings.

same with ZH.

same with anyone actually.

mix and match and learn and think for yourself.

Anonymous said...

BS... market is going higher, no big drops anytime soon, including this Monday

Anonymous said...

T2,
Nice ego. Trust me, you'll never be in the same category as Marty. Not in genius nor principle. Very few are that far up the food chain.

Best of luck.

The Contrarian said...

I have been reading the recent postings of Martin Armstrong - Destroying Capital Formation: Economic Suicide - http://jsmineset.com/index.php/2009/04/06/martin-armstrongs-most-recent-thoughts-on-gold-and-general-equities/ He is looking at a probable cascade in equities down to about DJIA 4000 and S&P500 falling to 460 this northern summer. His economic confidence model has a turn date of 19th of April. See how his work matches yours.

Anonymous said...

as someone who has worked in PT (program trading) for 3 major brokers in the last 12 years, I have to note that the NYSE PT stats do not include high frequency trading. Those are baskets traded by the PT desk either principally (risk bids, guaranteed vwap, efps, or index arb). All high frequency trading isnt reported in that manner, so good try. The consiparacy theory doesnt work. The 1,152.7 figure could simply be a couple big risk trades which were taken down over the week or a sizable EFP (exchange for physical). While the risk trades could have a delta to them and be involve rebalancing from Quants, many other types of accounts use these trades (mutual funds, transition managers, and pension funds). Further the can just be an efp which would have none as the customer was transitioning from futures to a basket or back. Further, these numbers have been around for years and each desk reports them differently. And with regard to Quants trading, I think you are referring more to Stat Arb strategies then the Quant accounts that PT desks deal with. The accounts that you are referring to can trade on their own through DMA (direct market access) which isnt Program Trading. Or they can use futures.

Anonymous said...

Hey if M. Armstrong is so smart why is he in jail?

If you're really smart you never go to jail. Somebody that works for you instead goes to jail.

Anonymous said...

Only through disaster can we be resurrected. It's only after a fund's lost everything, that it's free to do... umm.... well, free to shut down I guess.

chrispycrunch said...

Your hard work and analysis is mind-bloggling, impressive, and appreciated.

May I look at the $VIX to confirm your prediction? I see VIX falling, not rising. Would this give some pre-indication of what is to come?

http://stockcharts.com/charts/gallery.html?$VIX

del said...

Interesting insider stuff here that as an academic social scientist I've often wondered about but didn't know about, but at least in the comments section I'm also noticing some crummy academic social science . . . e.g., "when stocks fall by x% the stocks/gold ratio always (N=3?) goes to y . . ."

So as long as mediocre social science is on the table, what about the mediocre social science that says don't fight the Fed (much less the conspiratorial Fed) and/or don't fight the Yield Curve? See Pu Shen, "Market Timing Strategies that Worked" and/or Resnick and Shoesmith, "Using the Yield Curve to Time the Stock Market."

Why can't things just go on until the Fed changes course?

The Contrarian said...

Re: Martin Armstrong. There is a difference between smart and cunning. Let us see what happens this April.

traderedart said...

This is why you study charts, not fundamentals.
Are you telling me that after a 1500pt rally the market is wrong?
Look again at your equity charts in a month or so, then modify your analysis.
Bear market rallies are hard and vicious. Bear markets spare nobody.
I'm long the market since 6500, and so far I've been right.
Why would I sell here?

The Contrarian said...

Charts only map the trend, they do not plot the turn. If liquidity dries up, whatever the cause, the markets will turn down. I am waiting for a re-test of the market lows.

Hold your shares if you like. Even if there is a re-test of the lows the market will come back and any losses will disappear. Your only loss will be an opportunity loss, just as mine is now.

del said...

I agree that liquidity matters, but isn't the Fed committed to providing it at all costs?

I'm just trying to get a handle on what Tyler et al. are predicting here . . . note that, almost by definition, the "Black Swan of Black Swans" wouldn't be "another" anything, and while I'm 93% in cash myself I think many folks who are long could easily handle, to quote Tyler, "another August 2007, or January 2008."

Minh said...

Terminator 2 collapsed when its internal liquid velocity (V as in MV=QP)was reduced to zero. Is this article a hit-piece like Schwarzenegger's bullet ?

Where is the external source of heat ?

Anonymous said...

blog is usually good but this bad analysis and poor quality of information is a real discredit to yourself.

it seems like you haven't been around that long. take it slower

Anonymous said...

and in the last days will come ungodly men, wicked of heart, unloving, unkind, walkers after their own lusts, uncaring, indifferent to human suffering, mockers of all that is graceful, hell beings, devoid of conscience, reprobate, incapable of love.

Anonymous said...

Minh,
"Terminator 2 collapsed when its internal liquid velocity (V as in MV=QP)was reduced to zero."
-->Right on Minh, T's algorithm did not properly deal with V and he's stuck at the bottom of the V that is on the chart. LoL.

"Is this article a hit-piece like Schwarzenegger's bullet ?"
-->Yes, it's just a little tippi for the Tippi Canoe.

Where is the external source of heat ?
-->Maybe friction caused by bears rubbin' bulls the wrong way?

Anonymous said...

A different perspective

http://aaronandmoses.blogspot.com/2009/04/this-aint-no-april-fools.html

hooligan said...

I equate this blog to an explanantion of part of the big bang theory against "let there be light". What is disturbing is that GS is the only player left in the market, with its operators either "last men standing" or probably more accurately, the proof that market prices are easily manipulated by fear and greed bullies. What would happen to your models if the next prices was the weighted average of market cap and traded cap divided by outstanding shares? Probably a fairer value, so let's not go there hey?

Stock Market Club said...

Fantastic post. I just found your blog and will post up links for you!

Anonymous said...

All rallies start on low volume; all rallies are started by "fast liquidity providers"... who else is going to start a rally? Retail investors?

The pryamid labelled "market liquidity ecosystem" is upside down in my opinion. The big guns are the base of the market, and when they start a rally, their game plan is to get momentum going in price which will then suck in money from the other liquidity provders, fund and eventually retail.

The idea is for the big guns to sell their last long share to the stupid retail investors, those who realize long after most there is a rally.

Then they start shorting to the REALLY stupid retail investors until retail money flow is basically used up. And then? Down goes price in the absence of any bid.

Hit bottom and repeat.

Anonymous said...

Liquidity is leaving the market. I can tell for a fact that major public pension plans are canning their sec lending programs for various reasons. One being the collateral pools are under water and now will have to MTM the differnece in thier annual reports. This amount is going to be staggering and makes most funds believe (rightly so) they are getting paid very little to take that kind of vol risk on the total portfolio. A good many major plans are slowy unwinding the programs. This will have major implications for market liquidity going forward.

RH

Anonymous said...

Interesting charts and stats but I agree with the other posters who feel that the conclusions may be not so well thought out. As someone pointed out, I think you need to draw a better distinction between stat arb strategies and liquidity providers, i.e. between those betting on certain statistical phenomena versus those generating revenues from providing the market with liquidity. It's true that as you move towards high-frequency trading, certainly more and more of your business revolves around liquidity provision. And yes these things are certainly related in some sense and some firms have figured out how to blend the two. But, they are still separate phenomena - one is a market inefficiency whilst the other is a compensated service to the market.

Your point seems to be that stat-arb has not worked well this year (true) and so these strategies are being scaled back (true), and there is overlap between those doing stat-arb and providing liquidity (true), and therefore there will be less liquidity in the market (plausible), and that therefore the market will drop. I follow all points up until the last - can you please expand on why you feel the first points imply the last?

Other related questions for you/readers:
- I heard that very high-frequency mean-reversion strategies underperformed by quite a bit in Feb. Any thoughts as to why this happened?

- As other readers pointed out, EVERYONE and their grandmother are going into high-frequency trading. What are the implications for the market/liquidity/quant strateiges etc.?

Anonymous said...

Can someone explain how to find historical Program Trading Purchases and Sales PDF's on the NYSE website? The best I have been able to come up with is to search for Market Analytics & Planning which brings me to this page:
http://www.nyse.com/cgi-bin/google.pl?site=nyse&output=xml_no_dtd&client=nyse&access=p&proxystylesheet=nyse&getfields=description&filter=0&q=market+analytics&x=14&y=8

This doesn't help much. I am looking for a link to the page that lists all of P&S PDF's historically (be date). I know it is probably something easy that I am not seeing and will feel like an idiot after someone shows me...but oh well. Thanks for your help.

Keep up the good work TD.

VA Voter said...

TD,

I'm new to this blog and thoroughly enjoyed this post and all the comments.

I closed out a naked long on SKF mid-day Thurs.

I am unfamilar with the strategy where Anonymous at 4/10, 11:46pm said he hedged SKF with RSU.

I realize SKF is more volatile than RSU but would like to learn more.

Can someone help?

Anonymous said...

A number of you have mentioned concerns regarding financial "news" headlines and their effects on the markets.

The media is a powerful tool - and make no mistake, it is being wielded as such. Events such as the "8:45 AM call", JournoList, etc. can bring us such things as this:

http://directorblue.blogspot.com/2009/04/msm-complicit-in-full-court-pr-push-for.html

How many here honestly think those same tools aren't being used to push good or bad economic news on demand?

Zen said...

Thanks for the blog, but why is the first chart from early April, and how does the second chart show standard deviations? I don't see it.

Anonymous said...

HOLY CRAP!!!!
Look at this chart
http://screencast.com/t/qu2iDVbBl4P
Guy is right - Stay away from market!!!!

Anonymous said...

Anonymous @ 6:07pm - Pardon my ignorance, but what does the Capital Markets Liquidity (MM) Index ($CPMKTL) purport to show/measure?

Anonymous said...

The scaling of the chart also seems kind of weird . . . their appear to be reference lines at 30 and 70, but is there something black-swan-y about breaking through 30 . . . have we never been below 30 before?

Anonymous said...

Another view of CPMKTL
http://www.tinyurl.com/cs4rwu

Darth Trader said...

I wouldn't try to get in front of this market to short it, wait for a couple of down days. People love to try to pick tops, (it's how they think they can control it). I bet the Powers in Control will wait for the 50dma to cross the 200dma to the upside before they sell everything in sight again. This may take months.

ForYourHealth said...

great post. The current situation is clearly, in George Soros's words a reflexive market.

Anonymous said...

Clearly, most people here do not understand what high frequency trading is all about. As long as liquidity premiums stay volatile, liquidity providers such as GETCO are going to print money. Everyone knows stat-arb is going to die out over time (except for the rare case). The smart guys are going to build their own high frequency execution platforms so they can arb the flow trade, and then run prop strategies with internal money. I can think of at least 20 firms that have this structure off the top of my head.

If you think the high frequency brains are clustered in banks (like Goldman) you are flat out wrong. Welcome to 2009.

Stephen said...

Couple of points. The market movements since the beginning of January have all come on low volume. A gallon of water is an insignificant amount when poured into a lake, but when poured into a bucket, it makes a difference. Same situation with market liquidity, smart money is mostly on the sidelines while it's the quant funds and some hedgies left to slosh the markets around with the market makers in the middle. Before I confuse everyone, let me point out, GS, Getco, Rentech, Citadel are all market makers in and of themselves and the current market scenario has them net short gamma. The reason volatility has lifted into a smile pattern (where OTM puts and calls have higher vol as people are betting on large moves in either or both directions) is because customers are buying OTM puts and calls, in turn, the market makers are selling these options and delta hedging their daily exposure - put and call option sellers are short gamma. That's why you see huge movements at the end of the day, MM's have to adjust for the day's moves. Some of them adjust more frequently which is why you may see odd movements throughout the day. But like he said and the articles discuss, short gamma requires you to chase the market, buying strength and selling weakness.

The chart detail is merely meant to show that quant volume is dropping while their share of total volume is growing. This shows that they are deleveraging, but not as quickly as the rest of the market, leaving their programs as the primary movers of the market, but you all have already ascertained this from the article. While the market makers help facilitate liquidity, which is extremely important, the quants are the market makers on speed. They are looking to snipe spreads wherever they can find them and due to reduced volume they have moved from being part of the mortar that holds the markets together to being the driving force behind movements; basically their programs are trading against each other looking to snag spreads.

Anonymous said...

If funds are not prone to redemption, meaning they are proprietary, what is causing the liquidity issues for the top tier of the liquidity providers?

Anonymous said...

RE GS leading prog trading vols - To me, it's a valid outcome to Lehman's going down. GS and LEH were the biggest global ProgTraders out there. When LEH went down and the US equities trading arm was sold to BarCap, a lot of volume went to GS. BarCap did NOT buy the global program operations (and they are busy hiring right now to build this out), so for a lot of clients, they will go to the next broker who can deliver global basket trading.

Trading program orders is ONLY given to brokers where clients believe the broker can deliver the minimum price change in the markets AND settle effectively. Trading out global baskets is a nasty, complicated, high volume and commission challenged business (i.e. only big players with decent systems/processes can apply here, otherwise you lose money). As an IT specialist who worked in this space for many years, I'm not surprised that GS are leading the volumes.

Anonymous said...

I think the big downward move in HSKAX in December 2007 is actually a big dividend not being adjusted for correctly. Also, the HFRX index is a notoriously bad proxy for market neutral strategies in general. They are only a reasonable indicator when the shit hits the fan.

Steve said...

That's very bold, predicting a market crash in one week. Either you know something else that indicates real urgency, or your prediction is a bit flamboyant. The evidence presented does not in itself seem to point to urgency. But we shall see.

Your HSKAX chart is basically trading in a 10% range over 3+ years. What would cause the deleveraging? Is it quant fund investors redeeming shares? Is it carry trades unwinding? The yen has been weakening again this past quarter, so the pressure is off that carry trade.

As long as housing prices are going lower, banks are insolvent and the recession continues.

Anonymous said...

Hey anon, he has nowhere said a market crash, he said huge vol potential either up or down. big difference between the two concepts. learn to read

sheepdog said...

Why are "double and triple negative ETFs" highly convex?

Anonymous said...

This time is different, for sure. Inflation will be laid upon inflation, layer after layer until people are driven to gold. We must break from the Newtonian cycles of boom-bust that are precipitated by debt. The elite are playing the part of "the stick" because people respond more to pain than pleasure. It must be done this way because in the power equation, the process must be bottom-up this time. Thus the government plays the role of "the stick" from the top.

We have been supply driven since the apple was shoved in our faces ..... top-down. This now changes.

I can now buy a single toothpick from a merchant across the globe using a debt free store of value ..... simply with a mouse click, in an instant. Instant liquidity has now married with debt-free store of value.

The only historical problem with gold was the logistical qualities that were greatly hampered by a fixed peg. The peg had to go in favour of real-time valuation. The next challenge was simply to find a simple way to "split the gold" by weight.

You cannot pour new wine into old wineskins - Jesus Christ

You cannot pour new wine into old wine skins.

Anonymous said...

Interesting that my own technical analysis came up with the same prediction. That is, the major indexes will rebound until they hit the former support trend line. The old support trend line will become the new resistance line for the major indexes.

My next prediction after that: Once it becomes obvious nothing will stop the market from crashing, the US dollar will begin crashing. The statements made after the G20 pretty much clinched this already, but the avegage Joe doesn't know anything about it yet. Hyperinflation will catch many off-guard, and this will increase the momentum of the crash so that it happens very quickly.

Next: Between 12 and 28 states begin making plans to secede. Martial law is implemented to maintain control, 20,000 troops are deployed domestically, but this fails miserably and is just for show. The start of the 2nd civil war begins. Food shortages drive the unprepared into the cities where they are preyed upon by their own kind. The crash is much worse than what happened to Argentina or Russia, due to starvation and violence.

Shanky said...

Wow. I like the PPT call. Glad i stumbled uppon this. Will bookmark and continue to follow for sure. excellent work.

Anonymous said...

No matter what anybody says - stick with your instincts. I think they are spot on. I've been thinking for a long time that modeling programs are being used to achieve the desired result. I know for a fact that the government is using modeling programs (I watch congressional hearings).

I don't know why anybody would be in the market at this point. There is absolutely zero reason to believe that anything associated with either Wall Street or Washington DC is honest.

techperson said...

Why did the liquidity event never happen? How about a follow-up?

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stock market said...

Interesting post. Very informative and well written. I can use this as a guide as a trader.

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