Algos, HFTs in complete control of stock markets


WASHINGTON, May 31, 2013 — Stocks began this morning with a profound swoon after the government reported that Americans cut back on spending last month for the first time in almost a year. Scary. Except that around 11:30 a.m. EDT as we write this, the market is now rather nicely up, circa 40-60 points depending on which way the wind is blowing or the headlines are going. Whenever this market gets stuck in the mud, the institutions are apparently getting lots more money from the Fed to goose things back up again, and up they go.

It’s all a bit like the earthbound angry bird in our anonymously sourced cartoon above. The little guy is just waiting for an assist here in order to get airborne, and in this market, that kind of predictable assist has always been waiting just around the corner, courtesy of more mad Fed bond-buying activity, aka QE Infinity.

Futures started out looking lousy this morning with an announcement that consumer spending fell 0.2 percent in April. That was the first decline since last May, the Commerce Department said Friday, following a 0.1 percent increase in March and a 0.8 percent jump in February. Which is all kind of weird as consumer spending has actually been falling—via revised figures—since the payroll tax increase that wasn’t a tax increase hit paychecks in January. Nothing to see here folks.

At any rate, the drop was supposedly a disappointment for investors hoping that increasingly confident consumers would step up their spending, which would contribute to U.S. economic growth. But right now, “investors”—read “high frequency traders”—don’t seem terribly concerned, and they’re jacking this air-filled market right up again. Which is strange, since none of the few stocks we have left in our portfolios seem to be going up this morning. So what the heck are the HFTs trading?

ZeroHedge seems to think that, despite badly negative stats nearly everywhere else, the HFTs—which trade on headline news and not on anything resembling stock or market fundamental analysis—were tuned into an allegedly good Chicago purchasing manager index number. We’ll let Zero explain:

What most may not know is just how massive the pent up deluge of trades was behind this number. Courtesy of Nanex we know. Because during just 1 second of time at 9:42:00, the following trade counts were recorded:

  •     550,000 SPY shares
  •     10,000 June 2013 eMini futures contracts
  •     1,400 Nasdaq 100 futures contracts
  •     800 Dow Jones futures contracts
  •     350 Russell 2000 futures contracts
  •     125 S&P 400 Midcap futures contracts
  •     300 Crude Oil futures contracts
  •     900 Dollar Index futures contracts
  •     800 Gold futures contracts
  •     10,000 10yr T-Note futures contracts
  •     2,500 5yr T-Note futures contracts
  •     3,500 T-Bond futures contracts
  •     5,000 Eurodollar futures contracts
  •     750 Japanese Yen futures contracts
  •     600 Euro futures contracts


Yup: it’s nothing more than a headline driven market with the only variable whether or not a number is > or < than “expected.”

Which is the same as the trading response when the April retail spending data hit two weeks ago, and which was just revised from a massive beat to a miss. Alas, algos aren’t programmed to sell on disappointing data revisions: only to buy on beats (and in the New Normal – misses).

Paradoxically, in another ZeroHedge entry, we learn that so-called smart-money investors (the guys who always have more illegal insider info than we can ever get) have been bailing out of the market in every way, shape, and form since at least 6-8 weeks ago. Who knew? We did, by looking at the price-volume charts. Even on up days, there have been pockets of serious but cleverly timed, steady selling, and it’s been going on for a long time.

Between the opportunistic HFTs who trade on headlines, put up plenty of bogus, quickly canceled trades to game the system, and then get back out of positions in milleseconds, the dichotomy is a swell way to make money by shading tiny fractions of points on lots of shares.

Meanwhile, the happy-looking markets, gamed by the HFTs, have been masking the big exits from stocks and builders via the smart money of shady figures like left-wing kingpin George Soros who’s been exiting lots of his own positions lately, likely for big profits, and likely to fund more anti-Republican shadow institutions as he gears up to game the 2014 Congressional elections. It’s all worthy of a TV thriller series, really, except that its likely this plot is too convoluted to follow. Which is exactly the point.

Maybe the fairly left-wing, gold-obsessed, but also Cassandra-like truth-telling author of Jesse’s Café Américain put it best in a short, free verse-style entry this morning while observing the beat-down of gold following yesterday’s rally:

As you know I said yesterday that Fridays are the days on which they smack the metals. 

And on Tuesdays they ramp stocks. 

And so on, and so on.

No wonder the BRICs [acronym for Brazil, Russian, India, and China] are so upset. No wonder the rest of the world is appalled. 

This is not price discovery. 

This is mere anarchy. This is a broad menu of corruption. This is moral hazard.

This is institutionalized fraud.

Overcome by greed, they have no shame. And their pride knows no bounds.

They do not even bother with pretense any more. 

I think we all know how this is going to end.

Yeah, we do. But not until the Fed turns off the printing press, which it can’t do as long as Congress does nothing, which is what it will continue to do.

So we remain almost entirely in cash with a few legacy bonds in the portfolio. It’s a pain to get whipped around in this nonsense, so we just won’t play for a while. We’ve made pretty good profits since January. Now the boys are trying to take retail traders for another ride. Not this one. Sell in May. Last chance today.

Pare your portfolio down and enjoy the weekend.

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.



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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17