What In This Picture Does't Match The Others?

Stocks are rallying sharply overnight, despite that a pall of gloom overhangs world financial markets. Something doesn't quite match here. Are stocks showing signs of recovery, or is Europe truly the bellweather of gloom that these Wall St Journal articles suggest?
This reminds me of the pictures we would see in children's magazines that would show a picture or drawing and ask, "What in this picture doesn't match the others?" It's hard to imagine why stocks are rallying on this news of global gloom, but that's what's happening!
It also reminds me of another phenomena to which we have become accustomed. That phenomena is one off stocks rallying during the overnight hours when most Americans are asleep. This routinely occurs between 3-4 am EST. What gives? One wonders if this is market manipulation at an hour when few traders are awake to sell and there is such incongruity between market fundamentals and market valuation. Is there really this kind of momentum when there is no one to present a counterpoint to this bullishness? Is the market being manipulated at an hour during which there is no opposing force? One certainly has to wonder! And one must also wonder who is behind this. Is this Fed market manipulation at work? I am not the first to suggest it!

Government Itself Is the Bigger Market Manipulator

by Chris Powell at Journal Inquirer:

As gasoline prices passed $4 per gallon in Connecticut, Sen. Richard Blumenthal and Rep. Joseph D. Courtney joined President Obama in denouncing "speculators" and urging investigation of manipulation in the oil market. There are a few problems with this.

First is that such investigations have been undertaken before, including investigations by Blumenthal himself during his 20 years as Connecticut's attorney general, and they never found anything more than the OPEC oil producer cartel's public but uneven efforts to support the oil price. Anti-competitive as its activity is, OPEC's formation a half century ago was only a defensive response to the rigging of the currency markets by Western central banks and particularly by the U.S. Treasury Department and Federal Reserve, which were manipulating the value of the world reserve currency, the dollar, the international means of payment for oil, long before OPEC began to try to manipulate the oil price.

The second problem is that there are always speculators in all major markets. There were speculators in the oil market when gasoline last went to $4, in the summer of 2008, again when it crashed to $1.65 at the end of that year, and ever since then as it has risen back to $4. Big players in commodity markets can get away with a lot of manipulation because regulation by the U.S. Commodity Futures Trading Commission is so weak, but as the biggest players are investment banks allied with the government, which wants lower commodity prices, much of that manipulation is actually downward.

Third, and most important, the value of the U.S. dollar as measured in other currencies has fallen about 13 percent over the last year, hitting its lowest point since the dollar's last link to gold was broken in 1971. The dollar's fall reflects the U.S. government's long mismanagement of its finances and the nation's economy.


Any review of market manipulation should start with the biggest manipulator -- the U.S. government itself. With nearly complete secrecy, the Federal Reserve lately has been funneling hundreds of billions of dollars to private financial institutions, purportedly to stabilize markets. Congress and the public have little idea of what actually has been done with this money, nor any idea at all of the private understandings the Fed and Treasury Department have with investment houses like J.P. Morgan Chase that often act as government agents in the markets.

Further, federal law long has established an office in the Treasury Department whose very purpose is market manipulation: the Exchange Stabilization Fund. While it originally was intended to stabilize the dollar against foreign currencies, the fund is authorized to intervene in any market at the discretion of the treasury secretary and president. The law says the fund's decisions "are final and may not be reviewed by another officer or employee of the government."

The Fed and the Treasury Department routinely refuse to answer questions about their secret market interventions. Now that the government bond market is admittedly and almost entirely a Fed operation, even reputable market observers suspect that the government's market intervention has become comprehensive as the government's financial mismanagement has worsened -- that not just the bond market but the dollar and equity markets as well are being held up only because of secret government intervention.

So congressional investigation of market manipulation should start with the government itself -- if members of Congress aren't too scared of what they might find.

Market Manipulation Is Top Priority, Not Jobs

It is therefore too bad the top national priority is and continues to be manipulating stock markets, and creating a wealth effect for some and a poverty effect for most.-- Tyler Durden, Zero Hedge

Goldman's Manipulated Markets!

from ZeroHedge blog. Unbelievable! America has its oligarchy!

A recent story in Advanced Trading goes after some of the minutae of High Frequency Trading and provides a glimpse of the total value that HFT may provide to behemoth PT powerhouses such as Goldman Sachs. The article presents a very valuable perspective on just why HFT is so critical these days, especially when cash traders go for 6 hour Starbucks breaks between 10 am and 3:30 pm: "high frequency trading firms, which represent approximately 2% of the 20,000 or so trading firms operating in the US markets today, account for 73% of all US equity trading volume. These companies include proprietary trading desks for a small number of major investment banks, less than 100 of the most sophisticated hedge funds and hundreds of the most secretive prop shops, all of which operate with one thing in mind—capture profit opportunities by being smarter and faster than the closest competition." And as the market keeps going up day in and day out, regardless of the deteriorating economic conditions, it is just these HFT's that determine the overall market direction, usually without fundamental or technical reason. And based on a few lines of code, retail investors get suckered into a rising market that has nothing to do with green shoots or some Chinese firms buying a few hundred extra Intel servers: HFTs are merely perpetuating the same ponzi market mythology last seen in the Madoff case, but on a massively larger scale. When it all blows up, the question is whether the SEC will go after the perpetrators of this pyramid with the same zeal that it pursued Madoff himself. We think not.

The reason for this, as the AT article points out, is that HFT has become the biggest cash cow for Wall Street: "The incredible capabilities offered by technology have given meteoric rise to a relatively few high frequency proprietary trading firms that now wield far greater influence on the markets today than most people recognize." How big of a cash cow:

"Proprietary trading takes in a number of unique strategies, including market making, arbitrage (ETFs, futures, options), pairs trading and others based on the linked trading of more than one asset class, e.g., futures index and cash equities. In fact, TABB Group estimates that annual aggregate profits of low latency arbitrage strategies exceed $21 billion, spread out among the few hundred firms that deploy them."

The $21 billion estimate is smack in the middle of the FIXProtocol estimated $15-$25 billion in revenue that HFT generates. So let's do a back of the envelope calculation: Goldman controls roughly 50-60% of principal program trading on the NYSE, which in turn accounts for 30% of all global program trading. Throw in Goldman's domination of dark pool trading through Sigma X, and one can come up to quite a sizable number - It would not be a stretch to conclude that, through various conduits, Goldman is directly responsible for over 20% of global HFT trading. 20% of $21 billion is over $4 billion a year. As margins on HFT are sky high (it doesn't cost all that much to tweak a few hundred lines of code - and if Sergey Aleynikov is any indication, $400,000/year for VPs in the program is peanuts for a firm like Goldman), this $4 billion likely drops to the bottom line almost dollar for dollar. Let's recall that Goldman's Q2 earnings were $3.44 billion. Does this mean that HFT/PT accounts for roughly 25% of earnings for the firm that is a hedge fund in all but FDIC backing? Zero Hedge would in fact take the over, especially in this environment where M&A fees are a distant memory. We leave this question open, but even if we are off, it would not be by order of magnitude, and would explain why Goldman has thrown the kitchen sink into dominating such NYSE programs as the SLP, and is expending so much energy to dominate dark pools as well.

Going back to the AT article, which provides some additional critical observations, especially with regard to the Aleynikov arrest and his ludicrous $750,000 bail which surpasses that of indicted Ponzier Sir Allen Stanford:

First, strategies that optimize the value of high frequency algorithmic trading are highly dependent on ultra-low latency. The right decisions are based on flowing information into your algorithm microseconds sooner than your competitors. To realize any real benefit from implementing these strategies, a trading firm must have a real-time, colocated, high-frequency trading platform—one where data is collected, and orders are created and routed to execution venues in sub-millisecond times.

Next, since many of these strategies require transacting in more than one asset class and across multiple exchanges often located hundreds of miles apart, i.e., NY to Chicago, that infrastructure will often require roundtrip long haul connectivity between the data centers. [TD:Any real estate professionals out there who can determine just how easy it is to set up a colocated station within millisecond distance of the NYSE, and whether or not Goldman has any rights of first refusal on this real estate optionality? Nothing like a little derivative monopoly to keep potential SLP vendors at bay]

Lastly and most importantly, this code has a limited shelf life, whose competitive advantage is diluted with each second it is outstanding. While a prop desk's high level trading strategy may be consistent over time, the micro-level strategies are constantly altered—growing stale after a few days if not sooner—for two important reasons. Firstly, because high frequency trading depends on ridiculously precise interaction of markets and mathematical correlations between securities, traders need to regularly adjust code—sometimes slightly, sometimes more—to reflect the subtle changes in the dynamic market. The speed and volatility of today's markets is such that the relationships forming the core of our algorithm strategies often change within seconds of our ability to implement the very strategies that exploit them. Secondly, competitive intelligence is so good across all rival trading firms that each is exposed to the increasing susceptibility of their strategies being reverse engineered, turning their most profitable ideas into their most risky. As a result, any firm acquiring the "stolen" code would gain benefit from it for no more than a few days before that firm would need to adjust the code to the dynamic conditions. Since these changes build on themselves, in a matter of weeks that code would look quite different from that which was originally "stolen."

And the conclusion:

There's no doubt that Goldman Sachs, or any other proprietary trading firm, could indeed lose tens of millions of dollars from its proprietary trading if their strategies are stolen—and that is very serious. The competitors that obtain access to these trading secrets could (and would) use it to front run or trade against it, ruining even the most well-planned tactics. This news story contains many very important sub-plots: trading espionage, the necessity for a trading firm to have sophisticated security systems built around its technology, the requirements for risk management, and even the potential for proprietary trading software to be targeted on a wider scale for terrorist activity; but more than anything else it highlights the critical role played by high frequency prop trading in this new market.

This is indeed, a conclusion that Zero Hedge has been pounding the table on for months. It is imperative that Wall Street firms shed much more light into this astronomically profitable yet highly misunderstood and under the radar concept. In the absence of more information, the likelihood that Wall Street firms who dominate order flow and have material unfair advantages over virtually everyone else, should be isolated from trading up to the point where they provide sufficient information to make the market a fair and equal playing field for all investors. Until that moment, investing, trading and speculating is doomed to have the same outcome for the majority of market participants as playing roulette with 35 instances of 00, a much lower fun coefficient and no ability to be comped for your room in light of significant trading losses.

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Pandemic Could Lead to More Government Interventions

from Reuters:
The spread of a possible flu pandemic could see an increase in already heightened levels of government intervention in economies and financial markets as a result of the global financial crisis. In the short term, it might serve to give governments an easy justification to impose protectionist measures that could further stifle slumping trade flows.

Goldman Results -- A Work of Fiction

from Marketwatch:

One analyst chalked up the performance to funds Goldman received from American International Group after the insurance giant was bailed out by the government.

Goldman is "one of the major beneficiaries of our tax payer dollars, and the great irony is in an alternate universe, the quarter in which Goldman's reported earnings were twice Street expectations would have been the quarter in which it declared bankruptcy," said Dan Greenhaus, an equity analyst at Miller Tabak & Co.

That said, Greenhaus noted the outcome is what the government was looking for when it gave AIG the original $85 billion in rescue funds. "They wanted that money to filter through the global banking system and help get capital to financial institutions that were in need," the analyst commented.

And from Clusterstock:
The stunning quarterly results achieved by Goldman Sachs tell us almost nothing about the financial health of Goldman, and less than nothing about the health of the banking sector. Goldman, even more so than many of its competitors, still remains basically opaque. We don't know the source of its profits, except in a general way, and the outdated types of financial disclosures it makes only further obscures its financial health.

The problem is not, as some of the more frothing Goldman haters believe, that Goldman is fudging the numbers or lying about earnings. The problem is that the numbers are problematic even if we assume 100 percent veracity. Many of the troubling dynamics that have helped destroy Wall Street are embodied in Goldman's latest earnings report.

• I-Banking, Still Dead. The lack of profits from the basic, traditional financial businesses encouraged Goldman to take on ever-greater risk. Their internal measures of the daily risk at the bank ballooned.
  
• Cheap Money=Profits. Much of Goldman's profitability last quarter seems to have resulted from the availability of cheap government funding that could be put to work against a steep yeild curve. This is a recipe for windfall profits that is no more sustainable than those made from CDOs in the housing boom.
• Accounting Noise. The accounting earnings at banks have long been meaningless, reflecting write-downs and write-up of assets based on accounting rules that often poorly reflect the risk involved. Goldman said today it had written up some of the assets it had written down last quarter. All of this is mostly noise signifying nothing.
• Dumb Legacy Capital Measures. Discussion of earnings and capital allocations absent quality risk measurement is basically useless. All the talk about capital ratios, Tier 1 versus Tier 2 versus Teir 3, hybrid preferred stocks versus common, arguments about misclassification of capital, are left-overs from an legacy regulatory regime. Do we need to remind you that the legacy regulatory structure has proved to be completely disfunctional and unable to accurately predict a potential insolvency, much less future profitability?
• Too Much Leverage. There's still too much leverage at Goldman Sachs. Although Goldman reduced the leverage ratio of money owed to outside creditors compared to its equity, it increased its internal leverage by ramping up the amount it pays its employees as a percentage of revenues. Make no mistake, this internal leverage ratio is just as important to predicting any investment bank's future performance as external leverage. When faced with hard times, dependence on internal leverage for earnings can cripple a bank by sparking a flight of talent--an internal run on the bank--that can be just as damaging to performance as a creditor initiated liquidity crisis.
• Lack of Transparency. Goldman continued its long tradition of reporting earnings that keep investors in the dark about its business model. This lack of transparency makes it almost impossible to conduct an outside assessment of risk, and is probably an indicator that even within Goldman there is no real knowledge of risk and therefore no effective risk management.

Let's put it differently. The performance of Goldman Sachs last quarter does nothing to resolve the long-standing debate about the viability of the business models of independent investment banks. It remains largely undiversified and highly leveraged, putting in question whether it is equipped to survive a major systemic financial crisis.

And from Tyler Durden at Zero Hedge:
This is kinda a huge deal... Peter Fisher, managing director of BlackRock (yes, that BlackRock), states in a Bloomberg interview that Goldman's first quarter trading profit is non-recurring in nature, and believes it was mostly due to AIG unwinds... It is a little shocking that BlackRock would have anything bad to say about the phenomenal resurrection of financial companies, and puts the huge "profit" in it's true light. After all PIMROCK are the direct beneficiaries of the perpetuating delusion that all is well with the banking system, so it is odd that a BlackRock professional would dare to go against the grain on this one.