Market Preparing For Some Crazy Action

SPY Out Of The Money Vol spiking relative to At The Money.

Two days ahead of OPEX, market is gearing for some fireworks. The chart demonstrates the vol skew on SPY over the last three days. Today we have seen net Call covering and net Put buying - this is what one would expect given the current SPY price is way above the equilibrium option price.

So Vol is dropping as it always tends to drop more quickly into OPEX, the skew is likely forcing near the money Vols down as dealers hedge OTM buying, also the net impact of the option action would mean net buying of underlying to delta hedge. With HFT taking away most of the market liquidity, could delta hedging be the primary culprit for the inexplicably stupid market move over the past week.

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Stop Trading

No, really. What's the point?

Even Bloomberg, who is apparently a fervent reader, is chiming in on this observation and providing their 2 cents on the aberration formerly known as a market:

July 15 (Bloomberg) -- The VIX rose with the Standard & Poor’s 500 Index, a sign from the options market that the steepest three-day rally for stocks since June is poised to end.

The Chicago Board Options Exchange Volatility Index, as the VIX is known, added 1.7 percent to 25.44 at 2 p.m. in New York. The S&P 500 gained 2.4 percent. They have moved in the same direction 6 percent of the time since January 2003, according to data compiled by Charles Schwab Corp. The S&P 500 reversed course the next day 66 percent of the time, including seven of the past nine instances.

“That is remarkable,” Randy Frederick, head of trading and derivatives at Charles Schwab in Austin, Texas, said of the tandem move by the S&P 500 and VIX today. “The VIX is expecting something here, either a pull back this afternoon or tomorrow.”

Both indexes rose on July 6. The next day, the S&P 500 retreated 2 percent. The volatility benchmark, known as Wall Street’s “fear gauge” because it almost always increases as stocks fall, reflects expectations for price swings for the next 30 days and is calculated from S&P 500 options that are one or two months from expiration. Higher levels signal more risk in equities.

The government’s weekly report on jobless claims tomorrow may be spurring concern among investors, Frederick said. The U.S. unemployment rate has increased to a 26-year high of 9.5 percent.

“We’ve had some unexpected numbers recently,” he said. “There is probably an anticipation that could happen again.” Consumer confidence unexpectedly declined this month, according to a Reuters/University of Michigan index on July 10.

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This Is A Fair And Efficient Market

In some parallel universe far, far away, this makes all the sense in the world. Probably in the same one where stocks are cheap. And if it is not obvious, the chart overlays the SPY and the VIX. The only way the VIX will retrace back to indicate the current broken market levels, is when the S&P hits 1,000... sometime in the next hour.

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JP Morgan: "High Frequency Predator Traders Feast Upon The Signals Of Others"

When JP Morgan discusses high frequency trading, people listen. When the head of JP Morgan's algorithmic product desk Carl Carries says that high frequency trading is merely a form of parastic market making, people should run for the hills (not in the least due to JP Morgan's proficiency in transforming theory to practice especially as it pertains to various daily trading patterns in the SPY).

"The print that a Dark Pool leaves in its wake does not signal an aggressive buyer or seller as would a sweep, so the information leakage is reduced accordingly. Reduction of information leakage minimizes adverse price movement created by predators like high frequency traders who feast upon the signals of others."

And a few more questions to add to the ever increasing roster of queries for the NYSE (Mr. Pellecchia- maybe the time has come to provide at least some answers?): some dark pools have banned use of third party algorithms in accessing them in order to prevent harm to their institutional clients. Why is this good for dark pools, but not NYSE?

Trader Magazine reports Pipeline Trading banned third party algo's from accessing its dark pool. http://www.securitiesindustry.com/news/-23514-1.html "Algorithm Switching Engine was introduced in October 2007, six months after Pipeline Trading banned third-party algorithms from accessing its own electronic block trading market.... Pipeline claims to be more effective than competitors in finding block matches because of its 50,000-share average execution size; large block orders are executed automatically without the possibility of sniffing out institutional interest with a small probing order."

Trader Magazine reports that ITG has banned third party algo's from accessing its dark pool POSIT. http://www.tradersmagazine.com/issues/20_275/100083-1.html "Investment Technology Group, for the second time, has banned broker-dealers from accessing its POSIT crossing system via algorithms.... ITG chief executive and president Robert Gasser told analysts on the day of the decision that 'third-party dark aggregation has not been beneficial to our institutional POSIT constituency.'... Heckman told Traders Magazine that some brokers offering customers algorithmic access to POSIT appeared to give preference to their own or other liquidity through the algos. He said that adversely impacted the order flow POSIT received."

hat tip Richard

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VWAP Reversion Programs Picking Up Ahead Of Russell Rebalance

And just in time for Russell small/micro cap reindexing tomorrow, IWM outperforming SPY as traders buy Russell and sell the S&P.

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Louis Gerstner: Kill The Casino Wall Street Has Become

In an interesting overture to killing the current casino culture that is enveloping capital markets, none other than IBM former CEO Louis Gerstner is recommending taxing short-term (less than 1 year) capital gains at 80%. While such a proposal is sure to kill 90% of participants in the capital markets casino which lately trade only on an intraday basis and nobody cares about fundamentals that may justify a long-term buy or hold (simply because anything long-term in this economy will ultimately result in a 0 valuation). From Bloomberg:

“If you buy something -- a stock or a bond -- in the morning, and you sell in the afternoon, the tax probably ought to be 80 percent,” said Gerstner, also a former chairman of Carlyle Group, the world’s second-largest private equity firm.

“If you hold it for six months, maybe it ought to be 60 percent,” Gerstner told Bloomberg Television.

“We do have a greed or an inefficiency that comes out of excessive focus on the short term,” said Gerstner, who bemoaned an investment climate driven by quarterly earnings and a 24-hour news cycle. He was an executive at American Express Co. and RJR Nabisco Inc. before joining IBM.

Some other revolutionary ideas by Gerstner:

Gerstner, who approves of generous compensation for executives who add shareholder value, called for an end to golden parachutes for failed managers. “We have to see an elimination of pay for people who get fired and then wind up with these huge payments,” he said.

Gerstner acknowledged that Wall Street executives he knows wouldn’t like his plan for higher taxes on investment gains.

“They wouldn’t like it at all,” Gerstner said. “Wall Street is driven by transactions. That’s what they live by. They don’t live by long-term investment decisions.”

A good example of the short-term trading culture is today's market action, where the S&P has gone from down 3 points to up 17 points (an intraday 20 point swing on nothing!) on a plethora of bad economic news, simply as a result of manipulated futures purchasing by visible and invisible hands, to preempt potential panic selling as a result of the impending termination of Ben Bernanke from his current post, compliments of several non-conformist Congressmen. Presumably Goldman is cheering Summers impending appointment to the former's post by buying every share it can find (as well as TSYs, Oil, Gold, and the dollar: we are back to global market beta = 1.000).



And while Gerstner's proposal is truly revolutionary, there is no way in hell that micro trade focused Goldman Sachs, which is back to its hedge funds swing and momentum trading days, would ever allow this to become actual policy. With Larry Summers happy to have Ben keep his chair warm for at most a few more months, one can be certain that Wall Street's power interests will soon be maintained in perpetuity or until the S&P hits 0, whichever comes first (in the next 2 years). Sphere: Related Content

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Quants Hoping For Resistance Break Out On No Volume

Deja vu all over again: failed green shoot, no volume, high beta break out, one or two brokers gunning the SPY (here's looking at you 85 Broad): the tried and true script over the past 3 months seems to have a little life left in it still, with all rational cash players sitting on the sidelines as always, doing Starbucks breaks every hour and waiting for the release of RenTec's results indicating Medallion made double the combined negative "return" of REIF and RIFF (and JPM torn between trading for the latter and its own Highbridge).



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VWAP Reversion Programs Win The Day

The 4 or 5 computers that were trading with each other today all executed perfectly according to the "regress to VWAP" program. If you were a human (presumably, since only a few East Setauket machines do serious OCRing here), and you thought you had any edge trading this market, you were a fool. Play again though, and better luck tomorrow.

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200 DMA Is Next SPY Support Level

Watch as programs protect the 200 DMA in the SPY.



Intraday below: bounce right off the 200 DMA (white line)

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SPY Low Volume Breakout Rejected

First time in over a month where 1-2pm intraday low volume breakout has been rejected by the market.



The high/low beta pair trade is not working out too well either: IWM underperforming SPY substantially. Hey Credit Suisse, how is that $20 bn+ ETF basis trade working out for you today?

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Intraday Charting

Crikey, the VIX is on fire intraday, and is on the verge of channel breakout.





Curiously, the combined drop in the Dow and Gold, indicate that the market is actually completely unchanged from the perspective of the Dow's weight in gold.



Lastly, market makers will do everything they can do it seems today to prevent the SPY to drop below its June lows: the white line, which has proven a significant resistance level.

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Market Down Big On Normal Volume

The easiest way to refute CNBC, it seems, these days, is by presenting the facts. Contrary to repeated statements from the likes of Pisani that the market is down on small to no volume today, maybe the GE-subsidiary talking heads are thinking they are still stuck in Friday. Whereas the Friday major move up (especially in the last minute of trading - TM and All Rights Reserved, JPMorganChase ETF department) was, indeed, on abnormally low volume, today's selloff in the SPY is tracking exactly the average volume for the ETF.

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Intraday SPY and IWM Indications Of Interest

JPM trading nearly 50% of advertised SPY volume; MS trading over 60% of advertised IWM.





Indicative snapshot of SPY trades.

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Credit Not Buying The Equity Rally

The credit market is worse for the day at 124.5/126, +0.5bps wider, while equities are stuck doing their own thing as always. (although seems today 3.30 was the sell program activation moment for a change).





In the meantime someone is punishing the TICK, with a concerted effort to buy everything to prevent the drop.



Wonder who that M16 someone is....(all times PDT)



Hat tip HQ preferred customer extraordinaire Sphere: Related Content

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Morning Market Ramp, Simi Valley Edition

DUDE: Terrific, JPM SPY Trader. But you haven't told me how we run the market up as it looks weak this morning?

JPM SPY TRADER: That's the simple part, Dude. I start buying the SPYs, I grab shorty and beat his shares out of him.

JPM SPY Trader: ...Huh?

DUDE: Yeah. That's a great plan, JPM SPY Trader. That's fucking ingenious, if I understand it correctly. That's a Swiss fucking watch.

JPM SPY Trader: Thaaat's right, Dude. The beauty of this is its simplicity. If the plan gets too complex something always goes wrong. If there's one thing I learned in Nam--

etc.

***

Here come the usual market gunning suspects, in 5,000 share lots traded every 50 miliseconds.

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The 3:59pm Clockwork Mega-Volume Rip Into The Close

Not quite a repeat of Friday, but close enough for government work (pardon the pun).

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The Mysterious Purchaser Running Out Of Cash

After an explosion in early market volume for both cash and futures, the "buyer" seems to be running out of cash as the market has flatlined, which apparently has served the necessary and sufficient purposes on the day of the biggest industrial company's bankruptcy in history. And as sellers anticipate taxpayers to buy a few more trillion shares of 100x P/E stocks over the next few months, they have remained firmly out of the picture.



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RenTec's Prime Brokers Keeping Very Busy

JP Morgan and Deutsche Bank continue dominating the trading in the most popular index hedges, SPY and IWM. Aside from these trading outliers, all is good, as consumer confidence spikes, and while retail sales continue dropping, the whisper, the promise, the hope, of at least one more sale at (or within +/-30% of) MSRP is in the air.



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Parallel SPY Channels

And, as always, the VWAP is the low intraday bound.

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The Mysterious Case Of The Vanishing Bull Volume

Some volumetric observations: the chart below demonstrates a "cumulative volume divergence from average" histogram. Recently, on up days, the volume has been significantly below average, and yet accelerates above average on down days. Another observation: on down days, the VWAP for the SPY is the magical barrier that simply refuses to be breached. Today for example, the ramp into the close occurred despite that the volume pushing the SPY higher was again below average toward the end of the day.

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