WASHINGTON, July 18, 2014 – Evidence has accumulated to the point where the U.S. government is willing to claim that “Russian separatists” in Ukraine (i.e., the KGB or their hired minions) were responsible for shooting down Malaysian Airlines flight MH17, killing all aboard.
That nasty riff on the disturbing Ukrainian situation was largely what put stocks themselves in a tailspin yesterday. The market is recovering somewhat today as July options expire, an action that usually provides a positive tone for traders.
Meanwhile, one of our favorite topics—high frequency trading (HFT)—is back in the news again according to an informative report by ZeroHedge, which attributes its current information to the Chicago Tribune.
Despite a full court press of PR to confirm HFT firms are friends of retail investors and do no wrong; the SEC, it appears, sees it differently. While Mary White has confidently explained the market is not rigged, her agency is now actively seeking tips, complaints, or referrals that show, as The Chicago Tribune reports, evidence of abuse of order types, as well as traditional forms of abusive trading like “layering” or “spoofing” and other issues relating to high-frequency trading that might be violations of the law.
For the uninitiated, “spoofing” and “layering” are HFT computer games not unlike Internet hacking. The idea is that HFT’s trading machines not infrequently place massive orders or a series of escalating orders at phony price points—orders that are immediately canceled by the computers within, likely, nanoseconds.
Those of us who trade online, even with the fastest connections, are always way behind these “corrected”—i.e., canceled, before they’re actually executed—prices which we see before they’re canceled. Thus, we are likely to trade on these fake prices which, as Zero explains “create the false impression of demand, aiming to trick others into buying or selling a stock at the artificial price.”
Cute. Smaller firms, firms with slower computers, plus John Q. Public and the Maven are all handicapped and tricked into inopportune trades as a result. And the victims rarely know this has happened to them.
This is one of the main reasons this column has been after HFTs since the Maven became aware of them. HFT firms claim they’re good guys who provide liquidity in an historically thin U.S. trading environment. But the liquidity is phony, and tactics like those described above offer proof of that. HFTs clearly rig the market to their own advantage, and that’s illegal.
This kind of predatory trading and market fixing is what’s rigged the game against little guys from the start. It’s all a bunch of baloney, but it provides tons of commissions to big brokerages and trading firms that they lost at the outset of the Great (and still ongoing) Recession. They don’t want to lose their customary fat paychecks and bonuses, so the rest of us get screwed.
The government’s regulators have tended to look the other way on this stuff, but for some reason, maybe they’ve developed a bit of spine on this issue. Maybe the HFTs don’t donate enough money to the
In any event, for the sake of full disclosure, here’s ZeroHedge’s list of the 10 HFT firms under investigation, again with a hat tip to the Chicago Tribune:
Allston Trading LLC; Hudson River Trading LLC; Jump Trading LLC; Latour Trading LLC, which is an affiliate of Tower Trading; Merrill Lynch, Pierce, Fenner & Smith, owned by Bank of America Group; Octeg LLC, which has been merged into a unit of KCG Holdings Inc; Tradebot Systems Inc; Two Sigma Investments LLC; Two Sigma Securities LLC; and Virtu Financial.
ZeroHedge wryly notes that “While this list is notable (and wide) as Reuters notes, there is one name missing that surprised us… arguably the biggest of all – Citadel… (too busy enabling the NYFed’s VIX-selling* machinations we assume is not considered rigging).”
In other words, ZeroHedge’s pseudonymous multi-headed author “Tyler Durden” is claiming Citadel is somehow in bed with the New York Fed. We can’t offer proof of this, but we wouldn’t dismiss the observation out of hand, just as we can’t erase the suspicion that campaign politics is also involved in this complex little game of selective investigation and, perhaps, prosecution.
Perp walks, anyone? We’ll see.
We managed, by chance, to be allocated a minimal amount of shares in the Terraform Power IPO, whose new symbol, TERP, has nothing to do (that we know) with the University of Maryland’s well-known mascot. It’s a green energy spinoff from Missouri-based SunEdison (SUNE), which lives, oddly enough, in Maryland Heights, Mo., Terp fans.
In any event, our brokerage firms notes on SUNE describe the firm thusly:
SunEdison Inc, formerly MEMC Electronic Materials, Inc., is engaged in the development, manufacture and sale of silicon wafers. The Company is a developer and seller of photovoltaic energy solutions. Through Solar Materials and Solar Energy (SunEdison), it is a developer of solar energy projects.
TERP, essentially, spins off the revenue side of the business, creating a stock entity that’s becoming known as a “Yieldco,” a company whose main business—aside from the one it’s in—is to share most of its revenue with shareholders, including SUNE, which will retain a goodly number of TERP’s shares itself.
The concept is somewhat arcane, and Yieldcos might not be good long term investments. But the dividends are fairly good in these companies in a zero interest rate environment where conservative investors, Boomers, and retirees are desperately looking under every stone for some kind of yield to replace the Treasury bill, note and bond interest and the savings interest they’ve lost.
So Yieldcos are currently hot. And fashionable. So expect to see more of these in the months and years ahead.
TERP turned out to be an unusually hot issue, which is why we were lucky to get any shares at all. The preliminary price of the IPO ranged between $19-21 per share. The range was kicked up to $23-25 yesterday before final pricing last evening, which came at $25, the top of the new range.
In IPO investing, this is usually a pretty good sign the issue is hot. Indeed, reports dribbled out that the issue was “many times oversubscribed,” which means that many more investors and institutions wanted shares than there were shares available. Which means that the stock will pop when it first opens for trading.
TERP, in fact, just opened for trading and popped to $34 per share before backing off just a bit—roughly a 36% gain for flippers. (Under house rules, we have to hold our pittance for 30 days.)
The sex appeal of this one, apparently, is the fact that the money-creating projects are focused on solar power generation. In other words, buy TERP and you can brag at your next cocktail party that you’re a Green, thereby cementing your fashionably liberal, environmentalist, and anti-
global warming climate change credentials in public.
We simply picked it up because it’s hot. Investing is best done without making moral judgments. If the dividend turns out to be okay, we may hold TERP beyond its allotted 30 days. Otherwise, assuming it’s still over the purchase price, we’ll trade it and book the profit.
Much has been made lately that solar efforts are starting “to turn a profit.” But we’d observe that most of these “profits” are likely still coming out of the pockets of American taxpayers. So we’ll take that with a grain of salt.
Aside from the TERP excitement, we’re content to sit back and wait for Monday. Given the international situation, trading one way or another could be rudely interrupted by world events this weekend, so best not to make too many new commitments.
*VIX: A once useful average describing the relative calmness or volatility (jumpiness) of the current trading environment. A low VIX number means the markets are calm, while a higher number means that stock moves are getting increasingly violent both up and down. Investors love a low VIX, traders a higher one. There are now investments that track the VIX. But over the past few years, these vehicles seem to be subject to gaming by HFTs and have lost popularity as well as value as hedging instruments, all of which ZeroHedge means to imply.