Saturday, July 25, 2009

The Flash Trading Org Chart

Zero Hedge will attempt to categorize all the relevant players in FlashTradingGate. This is the initial focus of Senator Charles Schumer's recent campaign for market equality and transparency. As we will undoubtedly miss critical connections between these and other pertinent industry players, we solicit readers' insight as we develop this org chart: we invite readers to send emails to: with any input.

For a sense of services provided by Direct Edge, Here is the Direct Edge fee schedule.

And here is the July 2007 commentary by Goldman Sachs and Citadel when the two firms purchased a 19.9% stake each in Direct Edge.

"Direct Edge has quickly become a major market center for U.S. equities by virtue of its innovative market model and competitive pricing schedule" said Greg Tusar, Managing Director, Goldman Sachs.

"Goldman Sachs is a fantastic addition to the Direct Edge partnership," said Mathew Andresen, Co-Head of Citadel Derivatives Group. "Volumes have grown significantly in recent weeks and we expect that trend to continue as Direct Edge becomes a more important liquidity destination for the marketplace."

For some other, more recent and relevant perspectives by Goldman's Greg Tusar, who has been abnormally vocal about another aspect of HFT, pre-trade monitoring, read here.

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HFT And Goldman Sachs Boiling Point: NYT And Max Keiser

Great recap piece in the New York Times on whether or not Wall Street is picking the pockets of "non-club" investors (read - the guys who do not generate 80% returns with a Sharpe > 5.0 - can someone explain how risk/return works again). The consensus sure looks good for class action lawsuit lawyers.

The piece also recognizes the tremendous contribution that Zero Hedge's readership has had in this ongoing debate, once more highlighting the interactive nature of new media and how crowdsourcing is the new dominant paradigm for Media 2.0.

Here is the link.

Even the New York Stock Exchange itself is acknowledging the HFT media campaign.

For anybody new to the site, please check out the Zero Hedge glossary for all the relevant articles on specific topics.

Additionally, should it be odd that Direct Edge, the company in the eye of the Flash hurricane with its ELP program, has the following reported ownership structure:

Yes. Direct Edge is an independent broker-dealer owned by a consortium that includes the International Securities Exchange (“ISE"), Knight Capital Group, Inc., Citadel Derivatives Group, The Goldman Sachs Group, and J.P. Morgan. Knight Capital Group was originally the sole owner of Direct Edge and the firm was spun off in the third quarter of 2007 when Citadel and Goldman made investments. With a 31.54% stake, the ISE is currently the largest shareholder of Direct Edge, followed by Knight, Citadel, and Goldman, each with 19.9%.

And here are the latest ruminations out of Max Keiser, who takes on a curious angle in his most recent Goldman Sachs attack:

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Friday, July 24, 2009

The New Model?

It seems 1-2's and Marla's post earlier could not have come at a more opportune time. In a presentation by Andrew Gluck of Advisor Products, the author touches on some starkly comparable points (and, usefully, those with acute ADHD may find this presentation a tad more palatable, hehe, just kidding Marla) in the context of the epic paradigm shift occurring in the media world. Zero Hedge explicitly agrees that while the course of new media is still very much uncharted, the inherent conflicts of interest at the nexus of mainstream media and its providers of funding (not to mention bloated leverage and CDS levels in the 20pts upfront even in these artificially tight times), will make the survival of legacy media products increasingly more impossible.

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Critical Response Against High Frequency Trading Starts Generating Momentum

Zero Hedge recently had some choice words against a subset of HFT, namely Flash Trading, and as even Irene Aldridge confirmed earlier, there is something very wrong with this critical component of program trading. It seems our admonitions have not fallen on deaf ears. In a startling development of anti-establishmentarian activism, Senator Charles Schumer has asked the SEC to ban Flash Trading in its entirety, as it "gives high-speed traders an unfair advantage over other investors."

From Bloomberg:

Senator Charles Schumer asked the U.S. Securities and Exchange Commission to ban “flash orders,” saying the transactions give high-speed traders an unfair advantage over other investors.

Nasdaq OMX Group Inc., Bats Exchange Inc. and Direct Edge Holdings Inc. hold these orders for milliseconds, giving their customers the opportunity to gauge demand before traders on other exchanges get the chance to bid, Schumer said in a letter to SEC Chairman Mary Schapiro. Brian Fallon, a spokesman at Schumer’s office, confirmed the authenticity of the letter.

“Flash orders allow certain members of these exchanges to obtain access to order flow information before that information is made available to the public,” Schumer wrote. That allows “those members to use rapid trading programs to trade ahead of those orders and profit from advanced knowledge of buying and selling activity,” he added.

The implications of this development are immense: if politicians are willing to take a major chunk of out exchanges' primary revenue streams, one may even hope that they won't stop there but will in fact continue much higher in the food chain and start investigating the perpetrators of real market malfeasance.

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Unjustified Optimism In Theory And Practice

This one falls into the category of one picture is worth a thousand optimistic promises. Original source compliments of Out of The Frying Pan (and Innocent Bystanders.)

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Market Rips, Short Interest Plunges

This is so much more than just a short covering rally. Oh wait, it's not. 72.19% drop in Short Interest across securities, compliments of stock loan-cum-TARP bailout recipients. So you see, if you are a taxpayer, who believes that fundamentals are more critical than an artificially inflated market compliments of the biggest, most orchestrated short squeeze in history, you got Got by the same people you bailed out.

Update: Apparently Bberg had not completed filling its data at time of posting. We apologize for Bloomberg not having the perspicacity and alacrity of a 10 million SPARC turbo cluster. The end result: 21.05 billion shares short at 1.72% of float. The odd discrepancy is the increase in short-interest on NYSE-issued securities. Any readers who have an idea what is going on here, please chime in.

Nonetheless, below is the trend chart for the % of float as most recently reported by Bloomberg. If this data changes in 24 hours, an update will be posted.

hat tip JB

hat tip JB

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Saluzzi Educates MSM On PT, Does Not Buy Books

Irene, I would love to get a copy of your book. Are you willing to exchange one Digital Dickweed coffee mug for a few hundred copies? I am sure you have them lying around, and it sounds about equitable.

Also, good thing of Irene to admit that any variant of forntrunning is illegal. We are with you!

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Goldman Sachs Principal Transactions Update: 798 Million Shares And An Overall PT Market Update

There has been (finally) a lot of attention to program trading, a theme Zero Hedge has been focusing on for 4 months. This week, the NYSE finally switched over to its new methodology of providing program trading, which, as Zero Hedge announced previously, involves the , HFT of the DPTR and the delay/cancellation of implementation of "the proposed redefined program trading account type indicators (J and K)."

While Zero Hedge is comparing this data with historical ones, it is notable that the weekly public disclosure again provides Index Arbitrage stock data partitioning. We were curious why this is included and sent a query to NYSE's Ray Pellecchia. Here is his response:

"Tyler -- Index arbitrage has been reported since the release was started in 1988; the reason at the time was that there was discussion that index arbitrage accelerated the market's fall in the crash of October 1987, so it was determined to provide some additional disclosure on it."

It is good to know that the exchange is concerned about a data set that was relevant and deemed important the last time the market collapsed 20% in one day, and will be included going forward in weekly program trading disclosure.

Also, as it has been a while since we did a longitudinal analysis on NYSE program data, I provide an updated chart of several key data segments, all of which solidify the conclusion that Goldman's domination of NYSE program trading started exclusively with the inception of the NYSE mandated and SEC approved Supplemental Liquidity Provider program.

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An Open Letter To The Financial Media

By 1-2 and Marla Singer

It can hardly have escaped your notice that a battle of epic proportions, simmering at the fringes for months, was this very week finally joined. Pursuing what can only be termed a "mobius strip news cycle" strategy, certain "financial news" programs have taken to throwing those pesky "parasitic" bloggers to the proverbial wolves at every opportunity. Given the tenor of discourse and the ad hominem pursuits of our mainstream colleagues, conveniently beamed right into our offices from the from the otherwise warming glow of our LCD panels, we at Zero IntelligenceHedge welcome the opportunity to contribute to the discussion- not, mind you, because our feelings are hurt (you can’t hurt something that doesn’t bleed), but rather because our appraisal of these attacks puts them on par with the baseless ramblings of the Tourette's afflicted homeless guy who loiters about outside our offices. Pure stream of consciousness, laden with panic and paranoia, and characterized more by shrill tone and volume than a respectable signal to noise ratio. Desperate, and desperately ill.

Not so long ago, the dual-class share structure of newspapers was a bedrock principal of media corporate governance. Insulating- the argument went- the paper from the whims of the public was necessary to the independence of the Fourth Estate (can't have pesky shareholders dictating sacrosanct editorial policy, after all). Those days are over. This change is neither the result of some maverick revolt in corporate governance, nor is it the consequence of a dramatic awakening by institutional holders (who would require close order thermonuclear detonations to rouse). It is merely the sad result of the most abject and base squandering of a valuable estate since the Manor of Marr fell into the bloodsucking clutches of early 19th century English probate.

The Fourth Estate has spent and leveraged its reputation capital in keeping with the finest traditions of 21st century investment banking. As a consequence, these age-old institutions are quickly for the way of their banking parallels: Bear Stearns and Lehman Brothers. We are actually quite fortunate to witness the historic dying gasps of old media, painfully resisting the very same creative destruction they utilized to, temporarily, supplant town criers, printed pulp, Valueline and teletype as primary sources of daily news-flow. When the future of no lesser institution than the New York Times seems uncertain, and Tribune's only real valued asset is a baseball team (and the Chicago Cubs at that) it becomes difficult to go long old media brands. However, like all dying industries, instead of changing their own ways they choose to attack the new guardians of the estate: New Media. This is not to say "new media" is perfect, far from it. It does, however, have the virtue of being effective. Too effective, in fact, if you ask certain networks. Is it any wonder that we are now in the midst of new "circulation wars" or that the same "yellow journalism" has once again become en vogue? Today, however, we call them "click through rates" and "hard hitting programming." ("Hard hitting" referring primarily to the effect the carefully selected anchors have on viewers of the opposite sex- and so it has been since Arthur "The Desert Fox" Kent went to the sandbox for CNN).

It is easy to point fingers, to try to shift blame for what is, at the core, a lack of adaptability. Viewed from a distance, that mainstream media, burdened by its wholesale dependence on personality, would be threatened by anonymous speech is totally unsurprising. How old exactly is the phrase "media personality" after all? How alien must it be to veterans of the business that media without the personality might appeal? How difficult it must be to fight in a ring with someone who doesn't play by the rules, and when there is no ammunition for the only weapons available, the personal attack and the dirt-digger? If the primary complaint is that we have yet to provide a photocopy of our driver's licenses, that is concerning. With this in mind, Ladies and Gentlemen of the media, we would like to make a few points:

1. Anonymous speech is not a crime.

You may or may not be aware that there is a long tradition of anonymous speech in the United States. It did not begin here. Not by a long shot. In 509 BC Publius Valerius Publicola and colleagues transformed, with the help of extensive pamphleteering, the monarchy that ruled Rome into a republic by deposing and banishing Lucius Tarquinius Superbus. (What a great anchor name that would make!) The result was twofold. First, the invention of the Roman title of "Consul." Second, the beginning of the Roman Republic. You may recognize "Publius Valerius Publicola," as the precursor later taken by Alexander Hamilton, John Jay and James Madison in the form of "Publius," the pen name over which they wrote the Federalist Papers. We shouldn't have to point out the import of these events. If they escape you, may we recommend the World Book’s new age form, Wikipedia. (Britannica is, as one might expect, as dead as parchment). All this is a long way of pointing out exactly what you are indicting when you belittle pseudonymity. (As an aside, in sophisticated discourse, it pays to know the difference between anonymity and pseudonymity).

Confusing identity with reputation is a common error made by the enemies of anonymity. Do we respect the anchor of a well-known financial news channel (roll with us for a minute here) because of his Italian last name? Or do we respect him because of his reputation for hard-hitting financial journalism? Surely some embarrassing moments about his past might cause some snickering. But this is identity, not reputation- certainly not professional reputation. Is it relevant to the content of the news that another anchor on said channel got a wee-bit amorous in a taxi with a woman (or two) not his wife? (Or a woman someone else's wife?) Only insofar as that anchor makes his career about identity, that is personality, instead of reputation. If he does that, he is fair game for all the snark and gossip he whorishly solicits.

Since we write under pseudonyms we have but one currency: the quality of our content, and the reputation built since we started writing it. Readers will decide for themselves whether our content is informative and worthy of their time. There is no cloak of personality in which we may hide. Our professional "brands" are just as vulnerable as any reporter on any network. Unless you are a Luddite of some kind we are easy to contact. Contrast this with our experience with you. We have discovered, as it happens, that you never return our e-mails. It is apparently beneath you. Furthermore, owing to our lack of a highly leveraged, publicly held parent, we lack the traditional gatekeepers many personalities use to screen potential "bearers of bad newscorrection." Are there some bloggers out there who seek no more than to rake muck? Of course, but the same can be said for any circle of journalists you may care to name. Our writing is all we have (personality does not interest us) and so we strive to keep it accurate, informative, and interesting- just as any journalist would. Does that mean we consider ourselves journalists? What's in a name? Many of us are closer to op-ed writers. Many of us are purely editors. Some of us even fancy ourselves philosophers. But, may i remind you, editorials are generally written by a “board” even more anonymous than ourselves- subject to no army of instant-gratification grammar Nazis, and rarely lowering themselves to so much as issue a correction. Think anonymous writers are all scum? Read the Economist some time.

As to the personal habits of various mainstream reporters, we are totally uninterested in these details. They are only relevant where they expose the hypocritical tenor of someone who chides anonymous authors to reveal themselves and then hides behind a "no comment" when confronted with his or her own personality defects.

Attacking anonymity is the nexus of this misdirection error and an over-reliance on the media value of personality over content. This must end. We've said so long before mainstream media attacked us, not least in our manifesto. Content is what is important here, and none of you seem to understand that. You fall back to personality because it is your last and only hope. We don't care to play along, thank you. Why?

2. Your unveiling motives are less than pure.

Demanding the unveiling of anonymous authors is often a pretense for opening the door to personal attacks. We recognize that conflict makes for good prime time television. We understand that producers seek to capitalize on this and that, for reasons obvious even to a first year psychology student, juicy personal attacks draw ratings. Zero Hedge enjoyed a bit of personal experience in this vein when exposed to the high-pressure "are we doing this or what" come-on of a certain financial network producer. We declined, prompting "the talent"'s attempt to savage us on-air (and our largest spike of web traffic theretofore). Interesting as it will be in 20 years for sociologists to study, this is not journalism.

Ladies and Gentlemen, one-line zingers and contrived time limits designed to impale your hapless guests do not constitute "constructive conflict" worthy of the your interest in the Fourth Estate, which, incidentally, you do not own, but rather hold in trust on behalf of the citizenry. Want to see real, purposeful conflict on television? Try pulling some 5 or 10 year old archive tapes on the McLaughlin Group, or 1980s vintage runs of the British quiz show "Mastermind." The latter was invented by Bill Wright, a former gunner in the Royal Air Force who based the premise of the show on his experience resisting interrogation by the Gestapo. Do we need to point out that you are out of your league? That was conflict television. Mastermind itself is even purely entertainment (the British love to watch their fellows squirm). Your efforts pale in comparison and, as it happens, your urge to entertain is entirely misplaced when mixed with "financial journalism." We suggest you reflect seriously on this before you put the deci-split-screen up for the [n]th time. Actually, we take it back. Nothing better characterizes everything that is wrong with your approach than the deci-split-screen. As you were.

In case it was not already clear, let us just be plain: we are not interested in your ad hominem drama. We are not so in love with fame that we are prepared to subject ourselves to that kind of artifice in exchange for it. We understand this worldview puzzles and frightens you, and that we must seem an opponent no easier to grasp than quantum mechanics (well we have a former physicist among us, so maybe that's a bad example). Look back at real drama and notice that it never needed to be invented in the newsrooms of 1972. Demanding our unveiling is an excuse. An excuse wielded by those who have no content of value to offer. Just to be clear: this means you.

3. The era of personality-centric media needs to end- quickly, and (hopefully) painfully.

The fact that you thrive on the momentum of personality-centric reporting does not mean that we do, or that it is the right kind of reporting. Your shrill cries of "coward" in the face of anonymous or pseudonymous authors somehow implies that narcissism is equivalent to bravery. This is, in your case, self-serving. And, frankly, we beg to differ with respect to your basic premise.

On the contrary, we think narcissism is cowardice. Personality-centric reporting is the last resort of those who have no valuable content to offer on fading networks with waning delivery channels. Edutainment is a mutation designed (poorly) to forestall total decline. None of you seem to understand that the issue is content, not comment.

There was a time when the pinnacle of global discourse came from the newsroom at CBS. When no self-respecting citizen who considered themselves informed would go long without the evening news. What do we have now? Can we not all recognize what a severe devolution this is?

When we have Dan Rather's 77 year old face on HDTV, and this program is called "Dan Rather Reports," (the focus on the personality of the host is almost daunting) can we not agree that something is wrong? It is not that Dan Rather's majestic countenance is not comely (well, not only that) but that any countenance at all is a major portion of the visual offering. People, HDTV is for football, not news. If you have any doubt that this is so, consider how many HDTV reports of any weight emerged from Iran this month, or last. Zero. None. Of course. This was easily the most important foreign policy story of the year. Where did the scoops come from? Twitter and YouTube. We don't claim Twitter and YouTube are the next revolution. We think Twitter and YouTube are sort of lame. It's just that they are somewhat less lame than your medium. Stepping back for a moment, that is really quite sad.

Video killed the newsroom. Stop trying to jump-start the corpse.

4. You can't fight a dead model. (They don't respond to the sleeper hold at all, and getting caught with one while trying is bad news).

It is not our fault or our problem that your business model is dead. We didn't kill it. You did. You killed it when you did a 16 minute expose on the business of porn. You killed it when you stacked the anchor desk with stacked anchors. You killed it when you started writing books for six-figure advances, and schmoozing for access to fill those books with juicy tidbits about (and dialogue from) senior executives on Wall Street. You killed it when you hired an audio producer to dub in dramatic music in times of financial crisis. You killed it when you started paying someone six-figures to create eye-catching graphics. Every dollar you spent on this nonsense was a dollar you took away from the newsroom. Is it any wonder that reporters at the Wall Street Journal are paid shameful trifles while "the talent" (for the unwashed, we mean the TV anchors) rival investment banking paychecks?

5. Take it from us. It's time to punt.

When you've gotten to the point where you are attacking online media in order to boost viewing of embedded video clips of your content, inventing fights with new media to boost ratings, when you are boosting online ad revenue this way, might not it be the time to just cut out the expensive cost center middlemen (we are looking at you- in the eye- stacked anchors) and move to online distribution entirely? We've been watching quite carefully and we haven't seen a story above the 5th grade level out of you in over a year. (Except, perhaps for the piece on porn, that was at 7th grade level for sure). Instead it seems clear that you have been reduced to calling us "morons" and "dickweeds." (We can say "fuckhead" in our medium, how about you?) We are sorry to tell you that the last decent movie John Hughes wrote was Uncle Buck. (Some people cite Home Alone, which came out a year later, but we think this nonsense). That is to say, personal attacks, one-liners, snarky comedy and "zingers" were funnier in 1989. It is now 2009, and no one is going to play "Don't You Forget About Me" while you walk away through the parking lot after work. (That is unless your producer hangs speakers out the window). If you want to drop a zinger here and there, better make sure it is bracketed on both sides with some real content. Stick to parody and satire. Name calling only works for awhile.

6. Get out of the cycle of co-personality-dependence.

When your biggest ratings and embedded hit counts come from fights between the various gargantuan egos on your anchor desk it should tell you two things. First, that your have become addicted to on-air sideshows. Second, that you have hauled your audience down with you into the blackness of personality-dependence addiction. They are so starved for something real that they cannot comprehend that there might be something better than watching someone scream and push buttons to produce canned sound effects, or call a fellow anchor an intellectual lightweight. Of course, when you run out of material for staged, behind-the-scenes drama, we are the next easiest target. We are shocked. May we recommend something novel? Investigate something other than your co-anchor. How about fraud? Groundbreaking, we know.

All our criticism aside for a moment, we recognize that in many ways it is not your fault. A drowning institution grasps at anything that floats. If we are discouraged by anything it is your inability to just swim on your own. Perhaps it has been so long that you've forgotten how. That's easy to fix. Kick your legs. Breathe. Do a lap. Trust us. They get easier. Meanwhile, we'll keep researching and writing. See you for couple's swim!

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Ratigan, Spitzer And Toure Clarify The Fed's Obsession With Secrecy

MSNBC's explanatory take on how the Federal Reserve "bailed" the system out and why the Fed is so keen on perpetuating the secrecy.

Eliot Spitzer: "The Fed is a Ponzi scheme, an inside job, it is outrageous, it is time for congress to say enough of this"

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New York City's Pain

One feels the pain of New York City Comptroller Bill Thompson, Jr. Not only does he have to deal with the continuing lunacy over in Albany and the still ongoing power struggle in the wake of Spitzer's abrupt implosion, but he has to scramble to contain the fall out in the world's most financially dependent city. His only wildcard: hope, whether it be preached by 1,000 billboards across America, or Obama appearing on TV every 15 minutes to remind Americans that the only way out of a credit crisis is to max out their credit cards, or by watching comedy channels disguised as financial reporting.

In the meantime, underneath the still glitzy veneer, is a hollow core that is starting to shrivel at such an alarming pace that the $16 billion in projected budgetary shortfalls will likely double within 12 months at the current rate of deterioration.

A good indication of the real state of micro economy is a cursory read of the most recent edition of NYC's "Economic Notes", the Comptroller's inside view periodic report on the real pain in New York City.

Here are the bullet points for the attention impaired:

  • Real Gross City Product fell at an estimated 4.1 percent annual rate in 1Q09, after a 6.1 percent decline in 4Q08.
  • NYC payroll jobs have fallen by 108,000 since their cyclical peak in August, 2008.
  • NYC’s unemployment rate rose to 9.0 percent in May, compared to 5.1 percent in May, 2008, representing its highest level on a seasonally-adjusted basis since 1997.
  • For the first half of 2009, the city’s payroll tax withholding, a good indicator of worker incomes, was down 14 percent from the equivalent period of 2008.
  • General city sales tax collections declined 7.8 percent for the first five months of 2009, compared to the same period in 2008.
  • The Manhattan office vacancy rate rose to 9.6 percent in 1Q09, the highest since 3Q05.
  • The number of Manhattan apartments sold rose 28 percent in 2Q09 over 1Q09, but were down 50 percent from 2Q08, according to a report by Prudential Douglas Elliman.
  • Ridership on NYC Transit, an indicator of the City’s overall economic activity, fell 2.2 percent during the first four months of 2009.

And here is Bill's condensed message:

After enjoying a period of historically low unemployment, the city is experiencing a surge in joblessness. The recession’s impacts have fallen most heavily on men, on African Americans, on prime-age workers, and on the relatively well-educated. Income losses from unemployment are likely to be cushioned somewhat due to the preponderance of multi-earner families and an increase in self-employment, but thousands of families will see their incomes plunge.

Here is one for the PR specialists:

The severity of the current recession raises fears that the city’s job losses will match or exceed those of previous downturns. Except in 1980-82, the city always lost proportionately more jobs than did the nation, and national job losses have been mounting at an alarming rate for the past six months. If the city had merely suffered a proportional rate of job loss as has the nation since the beginning of 2008, it would have already lost about 165,000 jobs.

A point on unemployment:

Unemployment is usually measured at the individual level but its impacts are often felt by entire households. Nearly 70 percent of the city’s workers are heads-of-household, or are the householder’s spouse or partner. The rest are the child of a household head, the sibling, the unrelated housemate, or one of a variety of other relations. All told, the average New York City worker lives in a household with 2.2 other people, so each instance of unemployment typically affects the economic circumstances of at least three individuals.

And this:

During 2006 and 2007, new initial claims for unemployment compensation in the city averaged about 7,000 per week. During the first half of 2008 they rose to about 8,000 per week, and during the second half of 2008 they exceeded 9,000 per week. During the first half of 2009 they were averaging over 12,700 weekly. By February, 2009, the total number of beneficiaries in the city had risen to almost 119,000, an increase of 57,000, or 93 percent, over the previous February.

The conclusion: Strip club valuations are going down... way down.

Even if the city’s jobs base stabilizes, however, unemployment is likely to continue to increase, and by mid-2010, some 400,000 New Yorkers may be unemployed. That suggests that over one million residents will be living in households whose incomes are severely diminished by unemployment and underemployment.

So yes, while it is easy to wave the magic wand of generalization and hope at the overall broad and nebulous economy which is "stabilizing" simply due to a short squeeze in the markets, a drill down in regional areas exposes a lot more of the same truth that brought the market to its March lows. Alas, hope as a policy can and will only persist as there is one more marginal shorter whose forced buy in can lead the market that much higher. The question is what after.

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Sprott's David Franklin On The Depression

BNN interviews Sprott's David Franklin. Reality, and an eerie manifestation of what a real financial news channel should resemble, ensues.

Link here

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Daily Highlights: 7.24.09

  • Asian markets rise on improving economic data, strong earnings.
  • Europe truck sales down for 14th month.
  • Existing-home sales rose 3.6% in June from the previous month.
  • U.K. second-quarter GDP fell 0.8%, according to preliminary reading.
  • US Mortgage rates rise to 5.2% in first gain in 4 weeks: Freddie Mac.
  • 3M Co. posts 2Q EPS of $1.20, beating cons est. by 28%; ups Y09 EPS f'cast.
  • AmEx reported Q2 sales of $6.09B, 1.4% lower than est.. Net down 48%.
  • AT&T's Q2 profit fell 15% to $3.2B on weakness in the landline business.
  • Bristol-Myers Q2 profit up 29%.
  • Broadcom Q2 net income down down 90%.
  • CIT may sell railcar, aircraft leasing units as lender seeks more capital.
  • Capital One’s net excl. one-time charges fell by half to $224.2M on a 5% dip in revs.
  • Chubb Corp. reported Q2 net of $551M, up 17% YoY, beats estimates.
  • Ericsson Q2 profits drop 56%.
  • Ford posts Q2 profit of $2.3B led by $3.4B gain related to debt-restructuring.
  • Guaranty Financial said it can’t raise capital to comply with regulator demands
  • Hershey Co. expects Y09 EPS to be slightly above it objective of 6-8% growth.
  • McDonald's profit falls 8% to $1.09B on 7% drop in sales.
  • Microsoft Q4 profit down 29%.
  • New York Times Co.'s 2Q net rises 84% on tax benefit, lower operating costs.
  • Occidental Petroleum's 2Q profit dropped 70% to $682M; revs down 48% at $3.69B.
  • Pfizer Inc. goes to trial re. epilepsy medication Neurontin increases suicide risk.
  • Philip Morris' Q2 profit falls 8.6% on a $135M charge to fight counterfeiting in Colombia.
  • Reliance Steel misses by $0.28, Q2 loss of $0.08/sh. Revs down 40.7% at $1.24B.
  • Samsung Q2 profit rose 5.2%.
  • Schlumberger Q2 earnings down 57% as drilling drops.
  • Toyota said to decide to shut California auto plant in first-ever closure.
  • UPS' 2Q net slid 49% to $445M, hit by the downturn. Sees 3Q EPS below cons f'casts.
  • Vodafone Q1 revenue up 9.3%.
  • Volkswagen increases its global car market share to 12% from 9.9%.
  • Xerox's Q2 profit falls 35%; sees Q3 EPS at $0.10-0.12; Y09 EPS at $0.50-0.55.
Recent Egan-Jones Rating Actions:


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Frontrunning: July 24

  • CIT bankruptcy to follow even if exchange offer is successful, uncaring robots run futures up on news (Bloomberg)
  • Earnings really starting to suck: Schlumberger profit down 57% (AP), in other news economy irrelevant to the recovery
  • Slowest diamond sales since 1974, good for another 10 points on the S&P (Bloomberg)
  • In the meantime JP Morgan is increasing banker base pay, while bonuses will likely remain as high as always (Bloomberg)
  • Euro rises on improved confidence Europe will never export another product again, market on 10th straight up day, 355 more to go (Bloomberg)
  • In the meantime the "strong" German recovery is weaker than its US counterpart, as Obama keeps handing out blue pills (FT)
  • Regional banks on the brink as green shoots grow through the soon the ruins (MSN, h/t Jonathan)
  • CNBC snapshot, November 27, 1999 (Bearish News)
  • Asia markets cheered by yesterday's US rally, US futures up on higher Asian market - pretty simple actually (FT)
  • GE- bad management strategy or bad luck (Value Expectations)
  • Goldman Sachs pays off Fed and Buffett (Fundmastery)
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So It Begins: The SEC Commences Investigation Into Goldman Sachs Trading Practices

From GATA:

United States Securities and Exchange Commission
Washington, D.C. 20549

July 20, 2009

Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
7 Villa Louisa Road
Manchester, Connecticut 06043-7541

Dear Mr. Powell:

Thank you for your letter of July 7, 2009, to Chairman Mary Schapiro of the U.S. Securities and Exchange Commission. Your letter has been referred to the SEC's Office of Investor Education and Advocacy for a response.

We are taking your complaint regarding Goldman Sachs and its proprietary software that may be used to manipulate the markets very seriously, and have referred it to the appropriate people within the SEC.

Please understand that the SEC conducts its investigations on a confidential basis and neither confirms nor denies the existence of an investigation unless we bring charges against someone involved. We do this to protect the integrity and effectiveness of our investigative process and to preserve the privacy of the individuals and entities involved. As a result, we will not be able to provide you with any future updates on the status of your complaint or of any pending SEC investigation.

I've attached a flyer that describes our policy as it will apply to your complaint. If you have any question, please contact Bonnie Dailey, an attorney on my staff, at 202-551-6364.


Gloria Smith-Hill
Branch Chief
Office of Investor Education and Advocacy

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Thursday, July 23, 2009

Bloomberg's Pimm Fox On High Frequency Trading

First Goldman, now High Frequency Trading... The media onslaught is converging.

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The New York Times Unleashed On High Frequency Trading

High frequency trading has official gone mainstream. From the New York Times:

"It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer."

Read the whole thing here.

hat tip Nicholas

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Daily Credit Summary: July 23 - Up But Not Out

Spreads were tighter in the US as all the indices improved (as HY outperformed IG with the latter making all of its moves by 11amET and flatlining the rest of the day at 2009 tights - pulling modestly wider into the close). Indices typically underperformed single-names (thanks to some tail risk compression in CIT, ILFC, and TXTFI) with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew. The IG curve steepened (in the face of TSY steepening) but remains significantly steeper than intrinsics as the steepening was more in the longer-end than we had seen in the short-end recently.

The names having the largest impact on IG are Metlife, Inc. (-45bps) pushing IG 0.36bps tighter (although intraday we saw CIT rally on more technically-driven protection selling with a late day gap back wider to unch), and Safeway Inc. (+5bps) adding 0.04bps to IG (we note that many of the very tightest CDS names stormed relatively tighter today as we suspect some Super Senior tranche hedges were unwound - MCD 3bps tighter to 20/25 for example as it misses and stock tanks). HVOL is more sensitive with Metlife, Inc. pushing it 1.61bps tighter, and Canadian Natural Resources Limited contributing -0.03bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both AT&T Inc. (-15bps) pushing the index 0.16bps tighter, and Safeway Inc. (+5bps) adding 0.05bps to ExHVOL.

The price of investment grade credit rose 0.26% to around 99.23% of par, while the price of high yield credits rose 1.5% to around 87.81% of par. ABX market prices are higher (improving) by 0.39% of par or in absolute terms, 1.93%. Broadly speaking, CMBX market prices are higher (improving) by 0.26% of par or in absolute terms, 0.06%. Volatility (VIX) is down -0.04pts to 23.43%, with 10Y TSY selling off (yield rising) 11.5bps to 3.66% and the 2s10s curve steepened by 4.1bps, as the cost of protection on US Treasuries fell 1.48bps to 31.845bps. 2Y swap spreads widened 0.8bps to 44bps, as the TED Spread widened by 0.2bps to 0.32% and Libor-OIS improved 0.2bps to 30.7bps.

The Dollar strengthened with DXY rising 0.47% to 79.073 (though its intraday swing was dramatic and clearly demarked the risk-on/risk-off line), Oil rising $1.75 to $67.15 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.99% today (a 3.15% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $2.9 to $948.5 as the S&P rallies (965.3 1.67%) outperforming IG credits (118.5bps 0.26%) while IG, which opened tighter at 124.25bps, underperforms HY credits. IG11 and XOver11 are -6.25bps and -21bps respectively while ITRX11 is -5.12bps to 95.88bps (breaking thru 100bps for the first time in this contract - back to pre-Lehman as FINLs outperform non-FINLs over there).

Dispersion fell -5bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

66% of IG credits are shifting by more than 3bps and 70% of the CDX universe are also shifting significantly (more than the 5 day average of 60%). The number of names wider than the index decreased by 2 to 40 as the day's range rose to 8bps (one-week average 5.35bps), between low bid at 117 and high offer at 125 and higher beta credits (-5.67%) outperformed lower beta credits (-4.95%).

In IG, wideners were outpaced by tighteners by around 12-to-1, with only 8 credits notably wider. By sector, CONS saw 11% names wider, ENRGs 0% names wider, FINLs 10% names wider, INDUs 7% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 97.85bps and the latter at 97.81bps.

Cross Market, we are seeing the HY-XOver spread compressing to 195.71bps from 223.54bps, and remains below the short-term average of 222.88bps, with the HY/XOver ratio falling to 1.3x, below its 5-day mean of 1.33x. The IG-Main spread compressed to 22.62bps from 23.75bps, but remains above the short-term average of 22bps, with the IG/Main ratio rising to 1.24x, above its 5-day mean of 1.21x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 6bps to 97.8bps, with 96 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 5.85bps to 122.79bps, with Finance names (worst) tighter by 2.9bps to 947.66bps, Brokers (best) tighter by 7.06bps to 141.89bps, and Banks tighter by 8.11bps to 166.47bps. Monolines are trading tighter on average by -141.58bps (5.33%) to 2458.51bps.

In IG, FINLs underperformed non-FINLs (3.54% tighter to 5.74% tighter respectively), with the former (IG FINLs) tighter by 12.6bps to 343bps, with 19 of the 21 names tighter. The IG CDS market (as per CDX) is 30.2bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (88.28bps), with the bond ETFs outperforming the IG CDS market by around 1.96bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 4.43bps to 97.85bps (with ITRX FINLs -trending tighter- better by 7.88 to 88bps) and is currently trading tight to its week's range at 0%, between 113.94 to 97.85bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at -0.01%, between 81.12 to 67.58bps. ExHVOL outperformed LoVOL as the differential compressed to -11.13bps from -7.41bps, and remains below the short-term average of -9.31bps. The Main exFINLS to IG ExHVOL differential decompressed to 41.4bps from 39.72bps, and remains above the short-term average of 40.79bps.

Commentary compliments of

Index/Intrinsics Changes:

CDR LQD 50 NAIG091 -8.62bps to 142.79 (3 wider - 46 tighter <> 34 steeper - 15 flatter).
CDX12 IG -6.25bps to 118.5 ($0.26 to $99.23) (FV -6.9bps to 136.46) (9 wider - 114 tighter <> 84 steeper - 41 flatter) - Trend Tighter.
CDX12 HVOL -6.67bps to 315 (FV -18.19bps to 382.23) (0 wider - 30 tighter <> 28 steeper - 2 flatter) - Trend Tighter.
CDX12 ExHVOL -6.12bps to 56.45 (FV -3.66bps to 69.87) (9 wider - 86 tighter <> 39 steeper - 56 flatter).
CDX11 XO -11bps to 336.4 (FV -16.57bps to 405.38) (3 wider - 31 tighter <> 30 steeper - 4 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+1.5 to $87.81 / -48.8bps to 848 (FV -35.59bps to 790.55) (7 wider - 87 tighter <> 73 steeper - 22 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+1.47 to $89.7 / -55.5bps to 567.58 - Trend Tighter.
MCDX12 -1.25bps to 168.75bps. - Trend Tighter.
CDR Counterparty Risk Index fell 5.62bps (-4.37%) to 123.03bps (1 wider - 13 tighter).
CDR Government Risk Index fell 1.25bps (-2.49%) to 48.94bps..
DXY strengthened 0.47% to 79.07.
Oil rose $1.52 to $66.92.
Gold fell $2.9 to $948.5.
VIX fell 0.04pts to 23.43%.
10Y US Treasury yields rose 11.3bps to 3.66%.
S&P500 Futures gained 1.67% to 965.3.

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We Are Not Ungrateful...

We would be remiss if we did not acknowledge that the recent free ad campaign on behalf of Zero Hedge by General Electric has been much appreciated. We thought it is only fair to return the favor with some advertising of our own.

Gratuitous lampoonery compliments of reader John

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More Child Abuse Heaped On Zero Intelligence

I was interrupted from peacefully watching a financial news station (Bloomberg TV lest there be some confusion) when I got this email: "the sweaty, drunk guy on CNBC is bashing you again." Curious, I decided to investigate. Not surprisingly some more ad pseudonymem amusement ensued:

It's funny one should mention "allegedly factual", because ironically the last time a CNBC talking head attacked Zero Intelligence, the whole ploy was scripted from the beginning to boost CNBC's traffic and viewership (we have yet to see June's Nielsen ratings for the outcome: we will promptly provide that once available).

As to the BS that blogs like Zero Intelligence spread, it is all based on linked and referenced facts (yes, that's what those graphs and hyperlinks in the posts are for, click them, you may be surprised what you find). Charlie, here is a primer on how blogging works (and no Steve, it is called blogging, and not reporting, just because of the following) - it is feedback driven: if a blog does provide false and misleading data it is always called upon it, and people lose interest. Simple as that. And, as I retorted to your less than primetime spot colleague Dennis Kneale, in blogging the content is king, not the messenger. To wit:

"Zero Hedge is not about personalities, goatees or glasses - it is about ideas, facts and opinions. People come to Zero Hedge not because of my chiseled washboard abs, but because they appreciate my insight into things financial and economic. My personality is not relevant when discussing critical concepts. Who knows - maybe I do not care for being recognized while having dinner at Campagnola."

Oh, and here is our manifesto. Check it out some time.

But Charlie does make a good point: people do in fact get a lot of their information from the Internet. More and more in fact. And the reason is because they now openly mistrust organizations which have massive reporting conflicts of interest, compliments of their highly troubled parent companies, whose well being (and by extension, the paychecks of said TV pundits) depend on the perpetuation of the confidence and economic soundness fallacy.

Furthermore, Zero Intelligence is not an investment advisor, nor does it promote any securities. If we did, we would disclose it. Just like you should disclose at the beginning of every segment that CNBC is a direct subsidiary of GE which is a recipient of over $51 billion in taxpayer cash via the FDIC's TLGP (see the link to the left? click on it). Having your interns actually perform some diligence before that 2 minute soundbite "exclusive" is a great way to spend some of that $51 billion. Try it out.

Nonetheless, Zero Intelligence completely agrees with Charlie that those seeking important, critical, and relevant information should absolutely go to openly satirical websites such as Dealbreaker and Clusterstock. After all, CNBC knows a thing or two about truth and satire.

In the meantime, please forgive us Charlie and Steve if in our pursuit of the definition of reporting, we stumble upon some other peculiarities about potential conflicts of interest that may or may not involve CNBC pundits.

In conclusion, while we realize that we could never do as good a job as Charlie has done promoting us, Zero Intelligence is in the process of submitting an RFP for purchasing 5 hours of 18,000 subsecond ad blocks on CNBC, to be interspersed within the Power Lunch segment. We will advise readers on the outcome. Perhaps we can all split the cost as ironically Zero Intelligence has no external (and definitely no taxpayer subsidized) funding, aside from our recurring readers consistently finding interesting content on our pages.

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Zero Hedge Advertising Budget: $0

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The Other Plunge Protection Team: 122,017 December SPY $95 Puts

Not much commentary needed. Last night open interest was 28,197. Volume so far: 122,018

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A Plea For Your "Made In China" Garbage

Zero Hedge is currently in secret negotiations (see GE subsidiaries, we can leak market moving, secret stuff too) with Walstreetpro, finalizing the terms of his contributor status to our little (but growing) community.

In the meantime, Zero Hedge and Walstreetpro have a plea to readers who have one or one hundred pieces of unneeded and/or unnecessary Chinese inventory lying around. If you would like to see the world's greatest baseball economist trash that broken microwave oven/plasma TV/cell phone/disco ball/SPARC-based PC/CISCO router in front of an imaginary studio audience, please mail (don't Fedex or UPS, they already get your tax dollars) to the attention of:

Wal Streetpro

315 Speedway Place NW

Concord, NC 28027

The comatose American budget deficit and an exponentially growing army of Walstreetpro supporters will thank you for your generosity.

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229 Billion Reasons To Squeeze The Market

The bond vigilantes (and PIMCO which just loves the short end) will be happy to see this. And the equity market will need a higher point to drop from as $229 billion in capital is reallocated.

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The Market X-Files: July 23 Edition

Today's curveball: Now VIX is directly correlating with stocks. Last time that made sense was, well, never, even though it happened just over a week ago. The Black Swan reverse migration is the market melt up this time around.

And the meltup in equities continues even as Vol and Dollar are telling HAL9000 to slow down. Skynet is now sentient.

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Lime Brokerage: "The Next 'Long Term Capital' Meltdown Will Happen In A Five-Minute Time Period."

A recent Bloomberg piece that for some reason was made available only to terminal subscribers, provides a very interesting discussion on the dangers of sponsored access, how the associated pre-trade vs post-trade monitoring deliberations by "regulators" will influence short selling curbs, and not surprisingly, the desire by Goldman to not only dominate this yet another aspect of high-frequency trading, but to dictate market policy at will.

What is sponsored access:

In sponsored access, a broker-dealer lends its market participation identification (MPID) number to clients for them to trade on exchanges without going through the broker's trading system, to avoid slowing down the execution. That places responsibility on the broker-dealer to make sure the participant abides by securities regulations, and that its trading, which can involve hundreds or thousands of orders a second, does not run amok.

Is it thus surprising, that none other than Goldman Sachs is muscling its way into providing not only a sponsored access platform to its clients, but a new form of sponsored access that needs the blessing of regulators:

Wall Street heavyweight Goldman Sachs, now launching its own sponsored-access service to lend clients its identification to access securities exchanges directly, said last week it favors monitoring client orders prior to execution.

"Our view is that there is a real need for pre-trade checks in the use of sponsored access to fulfill [broker-dealers'] regulatory responsibilities," said Greg Tusar, managing director at Goldman.

Goldman's stand in favor of pre-trade instead of post-trade monitoring of sponsored clients' activity is one side of a debate in which regulators may choose a middle ground. The regulators' decision on how to monitor sponsored access may also influence their deliberations on restricting short sales.

What is the difference between pre-trade and post-trade monitoring? In brief:


  • Compliant with Reg SHO
  • Nip problems before they happen
  • View activity across exchanges


  • Faster order executions
  • Pre-trade systems still fallible

And another tidbit:

In traditional sponsored-access arrangements, a broker-dealer determines a client's suitability to access market centers directly and then allows the client to trade without monitoring its individual orders prior to execution.

In other words, the Goldman endorsed pre-trade approach will allow "monitoring of individual orders prior to execution." Whether or not pre-trade checks provide the capacity to observe not just wholesale exchange activity in the context of sponsored access but from a much broader market angle is a discussion for another time, although this could be one place where Sergey Aleynikov could shed an infinite amount of light, especially as pertains to Goldman's sponsored-access service. Conveniently, his gag order will prevent him from saying much if anything until such time as there is an appetizing settlement to keep him gagged in perpetuity. The bottom line is that with a pre-trade environment, the sponsored access providers will be able to have the potential to front run all those who use their platforms. The residual question of how far they go to comply with regulations to prevent this from happening, and remain true to their ethics standards is also a topic for another day.

Going back to the topic at hand. Here is why sponsored access could easily be quite a bother to capital markets sooner rather than later:

Unchecked errors or unintended repeat orders could deplete broker- dealers' capital, and potentially wreak havoc in the broader market. Concerns have arisen, however, about whether all broker-dealers are able to fulfill that duty in today's electronic trading environment, and according to which standards.

And here Goldman chimes in to not only promote their proposed architecture but to expound on the virtues of pre-trade checking.

"In the case of high-frequency trading, in particular guarding against technology failures, oversized orders and other situations where there's potentially systemic market impact, we believe strongly that pre-trade checks are a prerequisite," Tusar says.

Nasdaq's proposal as well as Securities and Exchange Commission officials' speeches a few months ago appeared to lean toward bolstering the traditional approach.

"We don't believe that's strong enough or what the regulators want now, because of the potentially dire consequences, and because we-as broker-dealers-bear much of that risk," Tusar says.

Now the reason why this is very relevant in the context of not just potential front running, but also market structure is that Regulation SHO, which is the primary regulatory framework for short selling (and the purvey of potential Uptick Rule reinstatement, which will happen once the market is allowed to hit a bid) is a post-trade architecture.

Wedbush [Morgan] routinely tests clients' systems to ensure they are compliant with Reg SHO. In addition, he says, the brokerage sets limits on clients available locates-as well as credit and trading limits--before the start of each trading day that its system tracks, prohibiting shorts without locates and providing a type of pre-trade check.

Or as has recently become the case, seeing rolling buy ins in the middle of the day as borrowable shares in even the most liquid stocks mysteriously disappear (look at today's market action for yet another blatant example of this practice).

Anticipating the regulators' likely response, one should not be surprised to see them siding with Goldman and against shorters:

As the SEC also seeks to appease investor concerns over rampant short selling, especially naked short selling, new sponsored-access standards may provide part of the solution. Given that day-traders may be the last remaining culprits of such activity,, increasing and standardizing scrutiny over their trading may reduce uncovered (and illegal) shorts even further.

How about appeasing concerns over rampant, unjustified buying? When will the downtick buy rule be implemented? But we jest.

And I digress again. Why should all this be concerning to advocates of stability of high-frequency trading:

The mother of all concerns is a sponsored firm's algorithm going awry and executing thousands of problematic trades across a range of securities and market centers.

Well, this is not really a problem when it happens to the upside as has been the case for months now - it is only a threat when Joe Sixpack's 401(k) may be impacted, i.e., to the downside.

And here is where a SEC Comment submitted by broker Lime Brokerage is a very troubling must read by all who naively claim that High-frequency trading is a boon to an efficient market (which doesn't provide . Well, yes and no - it is, until such moment that it causes the market to, literally, break. I will post a critical excerpt from the Lime submission, and leave the rest to our readers' independent analysis:

Lime's familiarity with high speed trading allows us to benchmark some of the fastest computer traders on the planet, and we have seen CDT (Computerized Day Trading) order placement rates easily exceed 1,000 orders per second. Should a CDT algorithm go awry, where a large amount of orders are placed erroneously or where the orders should not have passed order validation, the Sponsor will incur a substantial timelag in addressing the issue. From the moment the Sponsor’s representative detects the problem until the time the problematic orders can be addressed by the Sponsor, at least two mintues will have passed. The Sponsor’s only tools to control Sponsored Access flow are to log into the Trading Center’s website (if available), place a phone call to the Trading Center, or call the Sponsee to disable trading and cancel these erroneous orders – all sub-optimal processes which require human intervention. With a two minute delay to cancel these erroneous orders, 120,000 orders could have gone into the market and been executed, even though an order validation problem was detected previously. At 1,000 shares per order and an average price of $20 per share, $2.4 billion of improper trades could be executed in this short timeframe. The sheer volume of activity in a concentrated period of time is extremely disruptive to the process of maintaining a “fair and orderly” market. This shortcoming needs to be addressed if the practice of Naked Access is going to be permitted to continue; otherwise, the next “Long Term Capital” meltdown will happen in a five-minute time period.

And here is the punchline: our wise exchanges and broker-dealers have already set the stage for an outcome that will be extremely disadvantageous to anyone who is not a member of the "club." The strawman is total market collapse (which will happen sooner or later regardless) - just look at this chart from the CME indicating the phenomenal growth in prop trading across clients and the increasing domination of computerized trading:

So in essence the forced choice to regulators and traders by the likes of Goldman and exchanges it the following: pre-trade clearance, i.e., seeing ahead of all trades for entities who use sponsored access, a platform that all will soon need to be used be everyone who wishes to remain competitive in this day and age where one extra millisecond of latency over a long enough timeline renders a speculator (or basically trader, now that "buy and hold" is dead) useless, or the threat of complete market collapse. In other words: do what we want or the repercussions will destroy the free market.

It is time to call the bluff on all these alternatives by the administration and by Wall Street that have the apocalypse as one of the two options.

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Barack Morpheus Preaching To Americans To Believe Whatever They Want To Believe

Zero Hedge presents Obama's take on healthcare reform as represented by popular movie culture. Mr. President, just as an FYI, the blue pill was (is) the wrong choice.

Morhpeus: This is your last chance. After this, there is no turning back. You take the blue pill - the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill - you stay in Wonderland and I show you how deep the rabbit-hole goes.

As an aside: is America doomed to promote policy and relate to a mass audience only by anchoring to widely symbolic film narrative such as "The Matrix", "The Big Lebowski", and, of course, "Fight Club"

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Frontrunning: July 23

  • US Initial Jobless Claims (Jul 18) W/W 554K vs. Exp. 557K (Prev. 522K, Rev. to 524K)
  • "If there's a blue pill and a red pill, and the blue pill is half the price of the red pill and works just as well, why not pay half price for the thing that's going to make you well?"- Obama (Washington Examiner)
  • Zero Intelligence trading closely mimics stock market (New Scientist)
  • Jonathan Weil: Accountants gain courage to stand up to bankers (Bloomberg)
  • Obama's Fed Risk Regulator plan fading as lawmakers back council (Bloomberg)
  • Looks like that CIT bankruptcy will still happen after the soon to be failed bond exchange offer (Bloomberg)
  • Michael Milken, 60,000 deaths, and the story of Dendreon (Deep Capture)
  • Ford burns $1 billion, earns $2.3 billion, accountants everywhere highfiving on a job well done(WSJ)
  • NPR: Bin Laden's son may have been killed by U.S. missile in Pakistan (Bloomberg)
  • Thoughts on U.S. personal consumption (David Malpass, Enicma Global)
  • Bond market leadership: what does that tell us (Green Faucet)
  • Howard Marks: stem those fees (NY Post)
  • Ignoring watchdog report, treasury gives three major banks sweetheart deals (HuffPo)
  • Wendelin Wiedeking gets €50 million departure gift for destroying Porsche (FT)
  • FINalternatives Survey: High-Frequency trading has a bright future (FINalt)
  • Fed's exit strategy: a deft and fortunate fed (Global Commentary, Northern Trust)
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Daily Highlights: 7.23.09

  • ADB: East Asian economies may have 'V' shaped recovery.
  • Asian stocks rise on yen; merging market stocks hit 10-month high.
  • IMF says China has room for more fiscal stimulus through 2010.
  • Iceland formally applies to join EU, faces talks on fishing rights.
  • Japan's export fall by smallest margin in 6 months as recession eases.
  • Weaker yen sends Japan stocks higher for seventh straight session of gains.
  • Oil above $65 in noon European trading after mixed US investory data.
  • Sri Lanka's mulling a US dollar bond that will test investors' appetite for risk.
  • Swedish unemployment jumps to 9.8 percent in June, men hit hardest.
  • US May Home Prices rise 0.9% vs. previous month: FHFA.
  • Allegheny Tech sees Q3 EPS at break-even vs. cons. est. of a profit of $0.24/sh.
  • Amazon to acquire online footwear retailer Zappos for ~$847M in cash, stock.
  • Bank of New York Mellon's writedowns rose 68% on declines in residential value.
  • Bristol Myers Squibb to acquire Medarex for about $2.4B.
  • Celera Corp. withdraws 2009 f'cast; expects 2Q sales to decline YoY.
  • Chrysler offers car buyers $4,500 cash as US 'clunker' program begins.
  • Deutsche Post second quarter net profit falls 71%; sales fall 17%.
  • Dutch telecom KPN says Q2 profit rises only 4.8%, sees weak demand.
  • Engineering company ABB reports 31 pct drop in Q2 net profit to $675M.
  • Fiat to sell €1.25B of bonds at 9.25 percent yield.
  • Ford lost $2.8B in June 2009.
  • Goldman Sachs pays $1.1B to redeem TARP warrants.
  • Hyundai Motor says 2nd-quarter net profit rises 48 percent on China, India sales.
  • Intuitive Surgical posted Q2 EPS of $1.62. topping cons. est. by 26 percent.
  • Morgan Stanley posted $159M Q2 loss cites conservatism in running its business.
  • Pacific Sunwear of California expects 2Q loss of at least $0.22/sh (cons -$0.13/sh).
  • Porsche Board agrees to prepare €5B capital increase.
  • St. Jude Medical's Q2 net up 14% at $219.34M, revs up 4.3% at $1.18B.
  • Tupperware's Q2 net falls 8.1% to $33.1M; sees Y09 EPS at $2.59-2.64, sales decline of 5-7%.

Economic Calendar: Data on Initial Claims, Existing Home Sales to be released today.

Recent Egan Jones Rating Actions:


Data Provided by: Egan-Jones Ratings And Analytics

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Wednesday, July 22, 2009

Morgan Stanley's Stephen Roach: "A Rude Awakening"

The Vice Chairman of Morgan Stanley Asia destroys any last germinating green shoots.

"Green shoots are a very simplistic way to look at the world." Why is it no surprise that Fed Chairman Ben Bernanke came up with it.

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Deep Thoughts From A 0.925 Batting Average

CG: Hey Zero Intelligence whatchu got?

ZI: What I got is GE is in discussions to swap out its equity stake in CNBC with a 100% investment in Wall Street Pro.

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Sprott: "It's The Real Economy, Stupid"

Anything that starts with "We are now in the early stages of a depression" is a must read.

hat tip Joel

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Robotic VWAP Regression Never Fails

VWAP consistently at yesterday's closing price. T-1000 sells 100 GMCR shares to C-3PO, who promptly forces a margin call on Johnny 5. The latter covers by buying from WOPR which fries a vaccum tube and sets HAL9000 off on a short covering rampage before killing all the drunk traders at the NYMEX.

And while all this is happening, Bernanke is squatting over in the corner, rapidly buying mortgages to make it seem like his monetary insanity is helping the economy.

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The Commoditization Of America V3, Or 1:1:-1Correlations

Fundamental analysis at its best.

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Charlie Lets Zero Intelligence Have It

Charlie, Charlie, Charlie. Less than three hours after saying this "I generally don't respond to people who don't matter on Wall Street" you come out with this:

Not even sure you deserve a response to this, as apparently you have completely missed our prodding which had nothing to do with you being on Goldman's pay and everything with you doing the responsible journalistic thing, i.e., asking the tough questions which you purport you did, instead of being fed the party line. We appreciate the other side of the story: we can get that from Goldman's press releases and 8K's - you are supposed to read between the lines and find out what it is in the story that your new friends at 85 Broad are not telling you. But if by now you have not realized what your job as a journalist entails, it would be a folly for Zero Hedge to try to educate you at this late stage in your career.

Instead, as everyone knows the true nature of CNBC's journalism, which is namely to sell advertising space, we would simply like to present one piece of data that you, your producer, and your parent company General Electric may be most interested in.

As to the veracity of your, or Zero Hedge's claims, well, the audience is the best arbiter of that.

Good day.

PS. Maria (oh wait, whispering in my ear says your name is) Michelle, please give us a mailing address: we will dispatch a copy of Fight Club to you post haste, for free. It is a travesty to have your producer whisper in your ear just who this pseudonymous Tyler Durden is.

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So Much For Zero Intelligence Not Getting In The Middle Of It

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Neil Barofsky Repeat Testimony

If you missed Fed, Wall Street and CNBC public enemy #1 yesterday, here is your chance to see him live again. Neil Barofksy, the scourge of all crony bankers (crony is redundant in the last phrase) and "honest answer-conflicted" Fractional Reserve Banking system executives, will be testifying at 2:00 PM before the House Committee on Fin Services. The hearing will consist of two panels, with Herb Allison dominating the first one, and sure to provide extensive entertainment as per usual.

Panel One

  • Mr. Herbert M. Allison, Jr., Assistant Secretary for Financial Stability, U.S. Department of the Treasury

Panel Two

  • Mr. Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program
  • Professor Elizabeth Warren, Chair, Congressional Oversight Panel
  • Mr. Thomas J. McCool, Director of the Center for Economics, Government Accountability Office

The live webcast can be accessed here. Hopefully Congress has learned to keep any 19 year old interns who like discussing thei SMS texting skills and personal lives away from the microphones during break interruptions.

And here are Neil's prepared remarks.

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