by Sinclair Noe
DOW + 180 = 15,176
SPX + 23 = 1636
NAS + 44 = 3445
10 YR YLD – .06 = 2.17%
OIL + .83 = 96.71
GOLD – 2.70 = 1386.70
SILV + .07 = 21.95
Let’s spend the next few minutes together, shall we? It’s a strange expression, isn’t it? Spending time? Turns out you can buy time. Well, you can if you have enough money. You can’t buy much, but you can buy a little, and it turns out that buying a little time can be very profitable. High frequency trading outfits and other traders and investors buy time, just a second or so, or even milliseconds.
And this gives them a profitable advantage. A few milliseconds to look at the latest economic report; maybe the market moving report on consumer confidence; maybe the market moving report on growth in the service sector. And if you have enough money, you can get this information at the same time as the high frequency traders who pay to get early access.
It sounds like a type of insider trading, but it’s not. It’s legal; routine even. Thomson Reuters buys data points from various sources that compile the consumer confidence numbers and the purchasing managers surveys and such, and then they charge their news-feed customers a fat premium to get that information passed to them, just a smidge faster than everybody else. It’s called news feed trading or event jumping, and apparently the SEC and the other regulators don’t seem to mind. Of course, it’s not like it adds to a fair and orderly market, but that doesn’t seem to be a concern.
It’s not that the regulators don’t do anything. I just read that FINRA is going to look into dark pool trading. FINRA is the self-regulatory which is financed and full of broker-dealers and brokerages that channel your trades from your desktops and through brokers, whom FINRA is responsible for registering and regulating, to various exchanges for execution.
Dark pools are are off-exchange trading venues where stocks are traded “blindly.” That’s supposed to mean buyers and sellers don’t know who’s who. But the truth is, even dark pool customers are blind to how these shadow operators really operate. Three of the biggest operators of dark pools are Goldman Sachs, Credit Suisse, and Barclays. Collectively, as calculated by market research firm Tabb Group, about 13% of daily trading volume happens in dark pools.
FINRA has just recently announced that it is going to look into dark pool trading, because apparently there are some shenanigans going on in the darkness. The Wall Street Journal reported: “In 2011, the SEC fined Pipeline Trading Systems LLC, a now-defunct New York dark-pool operator, $1 million for allegedly failing to disclose that a secretive trading unit interacted with the vast majority of client orders. Pipeline didn’t admit or deny wrongdoing. Last October, a dark pool operated by several large Wall Street banks, LeveL ATS, settled SEC allegations, without admitting or denying wrongdoing, that it improperly shared confidential client trading information with a unit of Citigroup, one of its investors.”
So, FINRA is sending out examination letters to 15 dark pool operators. They are just politely asking what happens in the dark pools; and if FINRA gets lucky, the dark pool operators might even answer a few questions, such as:
Do dark pool customers know how operators may be operating on them, without them knowing?
Are dark pool operators playing their customers by manipulating prices at public exchanges to influence trading orders and execution prices in their dark pools?
Are dark pool operators who act as market-makers – meaning they trade for themselves based on where the orders they are “seeing” are coming from to buy and sell and how big those orders are – using the “order flow” their big customers believe is “blind” to their inside advantage?
Yep, that’s what’s happening in the dark pools.
Dark pool operators are employing high-frequency trading computer technology to read incoming quotes and orders going to the public exchanges so they can do what high frequency traders do, manipulate quotes and orders, including in their dark pools, where they have captive customers trading blocks. Customers who don’t know that, most of the time, the trader on the other side is going to skim off some profit before they place your trade.
Now, your next question might be, why do these dark pools exist? The most obvious answer is they make money for their operators. They don’t seem to provide any value for regular investors; they don’t do anything to make a more fair and orderly market.
I could save FINRA some time; it’s insider trading 100%. The only real question is why FINRA is the regulator asking questions. The questions should really be coming from the SEC or the Department of Justice, which actually has some authority to do something, if they ever grew a spine. Until then, we’ll just see how much the high frequency traders and the dark pools can skim.
When the big banks say their trading desks posted a profit every single trading day for an entire quarter, it seems hard to believe; and yet, JPMorgan Chase and Bank of America recently reported perfect trading records in the first quarter of 2013. Goldman Sachs was right there with only 2 negative trading days, and Morgan Stanley was the slacker, with 8 negative trading days. Such perfection, or near perfection, would seem remarkable from one Big Bank, much less all of them. I mean, how many investors can come out ahead every single day for 60 days or more?
This is not new. Back in 2010, for example, JPMorgan had a perfect trading record in three out of four quarters, losing money on only eight days in the second quarter. A reporter from Bloomberg calculated the odds of posting a net gain 63 days in a row at 5.7 billion to one. That’s the odds of a perfect trading quarter (not 3) for one bank (not 2).
So, maybe you’re thinking these people running the banks trading desks must be the greatest traders of all time, a trained group of elite economic minds. Not exactly. How do they do it? Will Jamie Dimon reveal his trading secrets in a 5 DVD box set that he sells on late night TV? They do have certain tricks up their sleeves, such as buying time; that split second advantage to jump in front of news and plop down a trade; they do have the advantage of operating dark pools; that edge that comes from jumping in front of a customer’s order to skim off a little profit.
And they have another advantage. The big banks don’t just have one trading desk; they have multiple desks stretched around the globe. The bottom line is the net of the combined desks, and there are some days when a trading desk may or may not choose to report their bottom line. There is nothing to indicate the traders mark-to-mark their positions.
One of the things we learned from the London Whale was that they don’t reveal their trading books. One of the things we learned is that there might be losses that aren’t recorded in the way most businesses would report a loss. And this is one more reason why the banks utilize dark pools and why they avoid the sunlight of transparency and why they fight regulation tooth an nail. There’s something about the reported profits that just doesn’t square with facts. If the banks can turn in perfect, or near perfect trading quarters, then they should be sitting on big stacks of capital reserves. Why would they fight the idea of higher capital reserve requirement? If they always win, why do they need to bet with FDIC insured money? If the banksters were really making all that money, then why do they even need the Fed’s Quantitative Easing.
And then there’s on more trick the banksters have used to turn in perfect trading records – they had insurance, in the form of the Federal Reserve QE, which buys mortgage bonds and Treasuries; that has driven trading volumes higher, boosted asset values, and provided backup liquidity in the markets. It gives traders a buyer of last resort and confidence that they have an outlet if something goes wrong.
These banks have the advantage of an unlevel playing field. They can borrow money for next to nothing at current rates and lend it for more, simply by buying longer-term Treasuries; any dolt could make money with that kind of deal. They have access to information that their clients lack. They have computer-trading platforms that operate in milliseconds.
The Federal Reserve has been trying to stimulate the economy back to a virtuous circle of economic growth with a targeted unemployment rate of 6.5% and inflation rate not to top 2.5%. The Fed has expanded their balance sheet to nearly $4 trillion. Which is another way of saying that we’re paying for their trading profits.That’s money that could have been used for things like infrastructure, roads, bridges, electrical grid, education; hell, they could have wiped out $1 trillion in student loan debt with just a snap of their fingers. Of course, if the Fed did that, then they couldn’t serve as the safety net for the banks.
The term “animal spirits” refers to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.
When we talk about an economic recovery, when the Federal Reserve talks about ending stimulus, there is one more target that has not yet been reached, and until we get there, we will never fully recover.
And if you have a few more minutes to spend with us today, let’s take a look at what else is going on in the world.
A US military proposal for arming Syrian rebels also calls for a limited no-fly zone inside Syria. Military planners have said that creating an area to train and equip rebel forces would require keeping Syrian aircraft well away from the Jordanian border. To do that, the military envisages creating a no-fly zone stretching up to 25 miles into Syria which would be enforced using aircraft flown from Jordanian bases. The limited no-fly zone wouldn’t require the destruction of Syrian antiaircraft batteries.
American and European intelligence analysts now believe that President Bashar al-Assad’s troops have used chemical weapons against rebel forces in the civil war in Syria, an assessment that will put added pressure on a deeply divided Obama administration to develop a response to a provocation that the president himself has declared a “red line.” The White House says U.S. intelligence concluded that the Assad regime used chemical weapons, including the nerve agent Sarin, against rebel fighters in the last year.
Applications last week for unemployment benefits fell and retail sales rose 0.6 percent in May from April. The number of Americans seeking unemployment benefits dropped 12,000 last week to a seasonally adjusted 334,000, a decline that suggests steady job gains will endure.
The less volatile four-week average decreased 7,250 to 345,250, the Labor Department said on Thursday. Both figures are roughly 7,000 higher than a month ago, which were the lowest in five years. Separately, the Commerce Department said that retail sales increased 0.6 percent last month, showing that consumers remained resilient despite higher taxes and could drive faster growth later this year.
Chalk up a very dubious distinction for Congress: Americans’ confidence in the institution has fallen to its lowest level ever. That’s according to Gallup on Thursday, in a new poll ranking the combined House and Senate dead last on a list of societal institutions for the fourth year in a row. Confidence in the legislative branch is at just 10%, down three percentage points from last year’s poll. The lowest rankings of 16 institutions included: the criminal justice system, banks, TV news, newspapers, big business, organized labor, HMO’s, and in last place – Congress; all at less than 30%. The highest rankings went to the military and small business.
The Supreme Court has ruled that human genes, isolated from the body, can’t be patented. The case involved Myriad Genetics which holds patents related to two genes, known as BRCA1 and BRCA2, that can indicate whether a woman has a heightened risk of developing breast cancer or ovarian cancer. Justice Clarence Thomas, writing for the court, said the genes Myriad isolated are products of nature, which aren’t eligible for patents. The high court’s ruling was a win for a coalition of cancer patients, medical groups and geneticists who filed a lawsuit in 2009 challenging Myriad’s patents. Thanks to those patents, the Salt Lake City company has been the exclusive U.S. commercial provider of genetic tests for breast cancer and ovarian cancer.
Last week, the Supremes ruled that police can take a DNA sample from someone who has been arrested and charged but not convicted of a serious crime. They just can’t patent it. The Supreme Court did not announce decisions today in hotly anticipated cases on affirmative action, the Voting Rights Act and gay marriage.
We might be hearing more about Syria in the next few days. The next likely declaration of war will come from the G-8 meeting in Northern Ireland. They’ve been getting ready for the world economic leaders by putting posters over shuttered small businesses to make it look like Northern Ireland is economically robust. The G-8 is expected to declare war on tax cheats. Also on the agenda is a trade deal between the Euro-Union and the US. They might even discuss how the US is clearly spying on all non-US telephone and internet communications. That should make the Europeans feel good about establishing a trade deal.
The census estimates, as of July 2012, show that would-be retirees are opting to stay put in urban areas near jobs. Rural counties are losing population for the first time ever because of waning interest among baby boomers in moving to far-flung locations for retirement and recreation. Long weighed down by dwindling populations in farming and coal communities and the movement of young people to cities, rural America is now being hit by sputtering growth in retirement and recreation areas, once residential hot spots for baby boomers. About 46.2 million people, or 15 percent of the U.S. population, reside in rural counties, which spread across 72 percent of the nation’s land area. From 2011 to 2012, those non-metro areas lost more than 40,000 people, a 0.1 percent drop.