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Monday, September 12, 2011
Attention Human Trader, You Are No Longer Needed
By Guest Author
If there are any human traders still out there that happen to be reading
this, the UK Foresight project team has some news for you : don’t expect to be
trading for much longer. Here is what the report had to say: Read
Paper Here
“It is reasonable to speculate that the number of human traders involved
in the financial markets could fall dramatically over the next ten years. While
unlikely, it is not impossible that human traders will simply no longer
be required at all in some market roles. The simple fact is that we
humans are made from hardware that is just too bandwidth-limited, and too slow,
to compete with coming waves of computer technology.”
The UK Foresight project is a group of academics from over 20 countries who
decided to get together and study the effects of computer based trading. Lots of
familiar academics names appear in the report including the pro-HFT academic
crowd of Brogaard, Angel and Hendershott. And lots of the same old, tired
defenses of HFT appear in the report: no evidence that HFT increase volatility,
liquidity has improved and transaction costs have been lowered. No doubt this
report will be picked up by the HFT lobby and their friendly media contacts and
waved around telling people that all is well in the stock market.
But the report does raise some major concerns. Two of which
are feedback loops and market manipulation.
Six different types of feedback loops are identified: Risk, Volume,
Shallowness, News, Delay and Index loops. You can read more about these on page
14 of the report but the bottom line is that many HFT systems are very similar
and tend to react to each other when unexpected events occur. The report
says:
“The direct link between market outcomes and the fundamental events that
ought to act as anchors for valuation has been severed and replaced by a complex
web of iterated and nested beliefs.”
“A liquidity shock on one venue that might have gone unnoticed if there
was one large centralised exchange can now affect prices on that venue. In
normal times, the aberrant price would quickly disappear as cross-trading-venue
HFTs buy low and sell high. But in stressed times, the capital of HFTs may be
limited, or the HFTs themselves may start to doubt the prices (as happened
during the Flash Crash) and refrain from arbitraging. Real-money investors then
start to mistrust valuations across the board, and the resulting pressures mean
that HFTs no longer contribute to liquidity provision, which makes price
divergence across trading venues worse still. And so the shock is
transmitted through the network, and its effects are reinforced by positive
feedback. Trades and transactions will happen at socially inefficient
prices, and mark-to-market valuations can only be done to multiple and illiquid
marks. Understanding how to avoid such situations, and to contain them when they
do occur, is a topic for further research.”
They must be kidding? They just described how flash crashes happen and then
leave it by saying they need further research on how to contain them. We will
save you the trouble and all the hours of research with one simple word:
Fragmentation. Without fragmented markets and multiple liquidity pools, the
situation that is described above does not occur.
There is much more in the Foresight report but we just wanted to touch on one
more subject they brought up: market manipulation.
“Negative effects on efficiency can arise if HF traders pursue market
manipulation strategies. Strategies such as front running, quote
stuffing (placing and then immediately cancelling orders), and
layering (using hidden orders on one side and visible orders on the
other) can be used to manipulate prices. For example,
deterministic algorithmic trading such as VWAP (volume weighted average price)
strategies can be front-run by other algorithms programmed to recognise such
trading. Momentum ignition strategies, which essentially induce algorithms to
compete with other algorithms, can push prices away from fundamental
values.”
So, be gone human trader. You are no longer needed as now we have a system in
place which has the potential to crash at any time due to feedback loops and
where market manipulation “strategies” run rampant. And, luddite, don’t you dare
complain or raise objections because technology is always good and always
increases efficiency. Right?
ECB and Bond Buying….
ECB will buy bonds and save Europe from going bust, or? As The Trader has
argued, the Big Elephants in the room, are still “under control”. The crisis
spreading to Spain with unemployment at +20%, youth unemployment at close to
50%, “hidden” local debt, further declines in property prices (and transactions)
will be much greater than the Greek mess. In order to understand the full scope
of the Spanish contagion, one needs to live in Spain, in order to understand the
mentality of NEVER taking a Stop Loss.
Italy on the other hand, with Berlusconi guiding the country in these stormy
waters, will end in a total disaster. Note, Italy is Spain, Ireland and Portugal
combined….
ECB coming out to rescue? Sure, but they lack the fire power, or will Ben
join the party? We clearly see what happened in Ireland and Portugal. Spain and
Italy coming up, or is this time different? We say no, it never is
different.
Europe and 2011 Are Not Working Out So Well
by Bespoke Investment Group
Below we highlight the year to date performance of the main equity indices
for the 20 largest countries in the world (based on market caps). As shown,
Europe's big three (Italy, Germany, France) have been nothing short of disasters
in 2011. France is down 25.4%, Germany is down 27.4%, and Italy is down 32.8%.
On the other hand, the decline here in the US of 9.1% year to date doesn't look
all that bad when compared to the rest of the world.
Below is a more expanded list of 2011 stock market performance by country.
While Italy is at the bottom of the list above, two other countries have done
even worse -- Greece (-39.76%) and the Ukraine (-41.29%). Of the BRICs, China
now leads the way with a 2011 decline of 11.05%. Russia is down 12.21%, while
Brazil and India are both down roughly 20%.
See the original article >>
Morning markets: Wasde bolsters crops as oil and shares slip
by Agrimoney.com
The
September 11 commemorations stole the headlines this weekend, but they weren't
the only sobering news in town.
In
Europe, fears for Greece's debts got a boost from growing talk among German
politicians that default may be in order.
Furthermore, in France, banks such as Credit Agricole and BNP
Paribas, which are viewed as particularly exposed to Greek debt, are reportedly
bracing themselves for a potential credit rating downgrade by
Moody's.
With
analysts hardly raving about US economic prospects either, Tokyo's Nikkei share index tumbled 2.3% to a two-year
low. Wall Street stocks are expected to open lower later on too.
New
York crude fell 2.1%, copper eased, the dollar gained 0.5%
against a basket of currencies, hitting its highest since March – markets had a
distinctly "risk-off" tone.
Data later
…which
might have extended to crop markets were it not for two factors.
The
first is the prospect later of the US Department of Agriculture's monthly Wasde
report on world crop supply and demand which is expected to cut estimates for
the domestic soybean and, in
particular, corn crops, following a
summer long on heat and short on rainfall.
Investors have been increasingly cautious ahead of data expected to
move markets.
"Is
the high in" for corn and soybean futures, Mike Mawdsley at Market 1
asked.
"No
one knows for sure, but the USDA report will mostly likely give traders some
fodder, bullish or bearish."
'Strong cold front'
The
second is the prospect of further adverse US weather, an early frost, which
showed no signs of letting up.
"Clearly the main issue this week is going to be the strong cold
front which is going to bring a real blast of autumn into a good portion" of
central and eastern America from around Thursday, weather service WxRisk.com
said.
The
high pressure formation "will be the largest and strongest since
May".
"The
frost risk for North Dakota, South Dakota northern Iowa Minnesota and Wisconsin
is pretty high."
Chinese imports
There
were some Chinese import data for August, released on Saturday, for traders to
factor in too.
For
soybeans, of which the country is the top importer, imports fell 15.7% month on
month to 4.51m tonnes, although the data was less poor on vegetable oil, with a
drop of 1.4% to 690,000 tonnes.
Overall Chinese soybean imports this year have reached about 34m
tonnes, down about 1.5m tonnes on the same period in 2010.
And
there is also mounting talk over the degree at which South American growers will
switch sowings to corn, thanks to high prices of the grain.
"Surging corn prices have raised concerns farmers in the US and
South America may cut soybean plantings in favour of corn," Lynette Tan at
Phillip Futures said.
'Demand remains stagnant'
Still,
with the Wasde ahead, Chicago corn moved all of 0.25 cents, downward, to $7.36 ¼
a bushel for December delivery, as of 07:50 GMT (08:50 UK time).
Soybeans added 0.3% to $14.30 ½ a bushel for November.
That
left wheat the best performer of the Chicago majors, adding
0.7% to $7.34 ½ a bushel for December delivery, looking for its first positive
close in four trading sessions.
"The
bulk of the weakness [in wheat] has stemmed from upward momentum in the dollar,
but overall demand for spring wheat and soft wheat remains rather stagnant,"
Brian Henry at Benson Quinn Commodities said, also flagging the competition from
Russian exports.
"There
is talk of Black Sea wheat and corn pencilling a profit into the [US] south
east."
Luke
Mathews at Commonwealth Bank of Australia held out hope for wheat
futures,
"A
strong [Wasde] report may see prices rebound, particularly given that drought
conditions continue across the US Great Plains, negatively impacting hard red
winter wheat planting," he said.
Thai rains
Elsewhere, dry weather in the drought-hit US South over the
weekend, and estimates from Pakistan that some 2m bales may have been lost to
heavy rains, allowed a rebound in cotton, which added 0.8% to
112.78 cents a pound in New York, for December delivery.
In
Asia, palm oil picked up, adding
0.7% to 3,072 ringgit a tonne in Kuala Lumpur for November delivery, on the back
of firmness in oilseed peer soybeans.
But
rubber lost further ground, shedding 1.7% to 362.50 yen a
kilogramme, well below the February high of 535.70 yen a kilogramme.
Still,
the tyre ingredient's "downside is limited due to tight supply amid heavy rain
in Thailand, wintering in parts of Indonesia and stock replenishing in China",
Ker Chung Yang at Phillip Futures said.
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