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2018-02-15 07:00 by Karl Denninger
in Market Musings , 401 references
[Comments enabled]  


I know, the machines yesterday morning made it look like it was all going to crap.

It wasn't -- not yet anyway.

The pattern continues apace that I've seen before -- and so have you, if you weren't sucking down bong hits for the last decade, which, it appears, most of those commenting on the markets have been.

I still maintain that the next month or so, irrespective of the 10 year Treasury (going up!) and irrespective of retail sales (not doing all that well) will be generally positive.

Your level of skepticism should be roughly equivalent to an exponential series, however, starting around the end of March and increasing as the next months roll on.  If not you are at risk of a rather-severe and unwelcome surprise.

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2018-02-13 07:00 by Karl Denninger
in Market Musings , 252 references
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It's just a "glitch", you see....

Five years ago, the world’s largest exchange operator vowed to fix a flaw in its systems that allowed high-speed traders to infer the direction of the futures market a fraction of a second before everyone else.

Now, the defect is back at CME Group Inc., traders say. And some allege it is yielding rich profits for ultrafast firms at the expense of ordinary investors.

The problem arises from the two ways that CME distributes information about a trade. One is the private confirmation messages that the exchange sends to the buyer and seller in each transaction. The other is the public data feed that reports trades to everyone active at CME, a Chicago exchange where an average of 19 million contracts changed hands daily in January.

Sometimes, a firm will receive the private confirmation of its trade just before it is reported over CME’s data feed. During that delay—called a “latency”—an ultrafast firm can deduce that the market is about to move up or down, and quickly buy or sell to profit from that information, traders say.

Even better you can actually trick it this way.  That is, you can put a "feeler" order in and learn whether the market moves before anyone else finds out if your confirm comes back first.

This then allows you to trade with or against that fact before anyone else knows it happened and effectively steal from the other market participants.

Why does this sort of thing happen at all and why isn't any firm caught exploiting such a thing, if it's a "flaw" and not intentional, result in said firm being immediately shut down and all of its executives indicted since that's a clear and obvious cheat?

For that matter, why does the SEC allow location to matter?  Why is spending millions to shave off microseconds a profitable enterprise in the first place?  Only because it privileges you by getting data before everyone else.

This would not be hard to resolve.  Have one feed, with the bandwidth delay product known to each of many distribution sites in the US.  Insert an intentional delay line so that the data comes out at each at the same instant.

End of problem -- and advantage.

There's utterly no reason to allow exchanges of any sort to run their own data feeds, and especially not to allow them to sell faster ones.  There should be one consolidated data feed and it should be emitted from all reasonable places in the United States at the same time.

Yes, I know you can't get exactly that in all places at once.  But you sure can do it in Chicago, New York, DC, San Francisco, Los Angeles, Atlanta, Miami, and a few dozen other places.  This should be a public infrastructure that is heavily policed on a second-by-second basis to insure that it's actually fair and that nobody gets the data first by paying or spending more money beyond some baseline that any modest-sized trading firm can trivially afford.

Instead of guaranteeing and policing fairness the SEC, CFTC and other regulators look the other way while various firms find ways to rip others off.  May I remind you that for every dollar some company makes by doing this sort of thing someone else loses a dollar.  That someone is probably you and while the theft is diffuse it is happening and you're the ones losing if a handful of rich hedge funds are winning.

If we had anyone who gave a crap about this the firms involved would be prosecuted and the exchanges punished.

But will either happen?

Probably not.

After all, the entire business model in this country now is scam fast, scam often and scam bigly.

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2018-02-10 07:00 by Karl Denninger
in Market Musings , 197 references
[Comments enabled]  

Right on the 200, and with the oversold indicator I watch flashing bright red, the market bounced.

And bounced pretty good too.

Of course we had to taste that 200DMA, even though last night we were well into the oversold range.  Just to screw the most people who were shorting the hole yesterday morning and right into noon, at which point you got your faced ripped off with a 70ish handle SPX rally and roughly 700 points on the DOW.

Am I surprised?  Not a bit.  As I noted very early in the morning on Friday, with a post written Thursday, this was expected.  And it's probably not over either.  I fully expect there will be some more of this, and in fact if you're a trader there's probably plenty more money to be made on the upside in the next couple of weeks.  It's going to be tough to do with leveraged instruments though because option vol will collapse and so will premiums, which means if you buy them now you're overpaying compared against what they'll look like in a week or two.

With that said as I also noted I'm absolutely certain that critical damage was done somewhere in market structure, in financial firms, and in actual broad economic factors.  As in 2000 and 2007 I'm not sure where it has happened, but that it has happened is something you can take to the bank.

You can also take to the bank the fact that all the market "crooners" will not tell you where the damage is -- if they know -- and in fact everyone who got gangraped are going to do their level best to not tell you that their businesses are about to collapse.

It will take weeks or even months before that damage becomes impossible to hide and cascades through those impacted by their failures.  I suspect the most-serious of these problems is in both instruments and firms that cannot survive even a modest rise in interest rates or a withdrawal of additional central bank liquidity adds -- never mind drains.

Well, you're going to get drains.  I'm sure of it.  I'm also sure rates are going to continue to go up with the US Government "choosing" to spend another $200 billion this year alone last night, cranking deficits into a long-in-the-tooth "recovery" where we ought to be running a material, even if only on paper (without the Social Security fund thefts) surplus.

The "all clear" will soon be sounded, and the people who bought into the ramp in late January, only to lose 5% or more immediately, literally within days, and then who sold into the bottom, are going to cry.  A lot.  Then they will rush back in, just in time for the 50, 60, 70 or even 80% collapse.

Can the larger blowup be avoided?  Yes, just as it could have been in 2007, when I wrote and faxed to Congress exactly where they were headed with their profligate policies.  While the dollar did not collapse the asset markets sure did.  The dollar will not collapse this time either -- but the asset markets sure will.

How did I know this wasn't "the big one"?  Because there are certain asset families that barely moved or even went up a bit, and they went to hell in 2008.  Further, this move down was extraordinarily ugly in that liquidity just disappeared outright as all the robot traders were shut off, exposing the nasty truth: There are damn few actual people left in the markets; they've all been driven out by robots trading against robots.  In other words there is no "value" measurement performed in the market any more; it is all an algorithmic game of hot potato and has driven prices dramatically higher.

But the same sort of warning signs that were in the market in '07 are here right now, and as a result in another few months.....

Don't bother asking "where do I hide" (other than in cash, of course), because there is no answer to that question that will work well, where "well" is a positive rate of return.  Being short things might work, if you get the timing right, but that's tricky.

As in 2007 the answer is political; the people of this country need to find their pitchfork and torch, and demand a stop to the scams and frauds that are destroying the federal and state balance sheets and therefore forcing the deficit higher which, when coupled with a Fed that cannot turn the spigot back on will ultimately force a re-rating of leverage down by a factor of several times.

When that happens asset prices will fall to meet that new baseline -- which is way below where they are now.

Like by half on average -- which means, in many cases, more.

Just as in 2007 nobody will lift a damn finger or get off their ass this time either, and as such I fully expect that in a relatively short period of time I'm going to be hoisting this sign once again:


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2018-02-09 13:59 by Karl Denninger
in Market Musings , 211 references
[Comments enabled]  

The 200MA and oversold indicator I watch, which I warned about here, appears to be legitimately in play.

That's quite a bounce off the low.  There will probably be some fade off that, but don't be surprised if we close green today.

Lots of people rolled down PUTs in the NDX in particular.  If you did that this morning after the fall started you may be in for a very rude surprise.

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2018-02-09 05:00 by Karl Denninger
in Market Musings , 387 references
[Comments enabled]  

You think you can run another $300 billion+ worth of government spending this year and not have the market blow up?

Guess what -- you're wrong.

Is it going to bounce somewhere?  You bet.

Probably furiously, and maybe right now.

In fact, on a technical basis and looking back 20 years or so, where the market is right now has been a very reliable short-term buy. So if you're a trader this looks like a fat pitch -- on the long side.  But only if you're a trader, because just as in 2007 these "no-notice" sorts of collapses into what looks like strong fundamentals means you've been lied to by damn near everyone and critical damage has been done that is now being hidden.

Thus the markets will probably bounce north -- hard.

And then it will all go to crap.  All of it -- interest rates, stock prices, house prices, commercial real estate and the broader economy, since almost everything in asset markets is now levered to a degree that is close to double what it was in 2007, with some of the worst of that leverage on government balance sheets - including ours.

I have pointed out for years that if you keep blowing bubbles while stealing over a trillion a year in the medical system, which someone has to pay for and which governments have basically written off through deficit spending, eventually you would produce an exhaustion trade and all of the bubble crap in asset markets will reverse -- violently.

Well, it has begun.

And it will continue unless President Trump and Congress both cut the crap, which they will not because neither thinks they have to stop spending money the government does not have.  As in 2007 when I warned that if Congress and the President did not cut the **** the markets were going to go straight down the toilet, and about a year later they sure as hell did, this time the same pattern is setting up -- except worse, because we've added ten trillion in government debt over the last decade and thus the ability of government to "issue its way out of it" without causing a wholesale blowup in the Treasury market is no longer a bet either the government or Fed can take.

This crap must stop now because there is a time limit on patience in the market and the ability to cover up the truth.  The market is now in the mode where it will continue to push until Congress and Trump respond and cut it out.  If they do not stop their horse**** then once that knee point is reached the markets will not "correct", they will crash.

Your "tax cuts" just came right back out of your 401k, and that's just getting started.

A huge number of names were hammered by 5% yesterday alone.

Good luck, for I know you're going to need it since you won't get off your ass and demand that Congress and Trump cut the crap.  As a result I fully expect that just like in 2007 when nobody listened when the opportunity to interrupt the pattern was there, and I was in fact sending faxes to all 535 members of Congress full of data, charts and facts, nobody will this time either -- and this time around when it all blows up the outcome will be much worse than it was in '08.

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