I am fairly confident that I have made my disdain of high frequency trading (HFT) fairly clear over the past year or so. But just in case I haven't, let me say that I firmly believe all the HFT front-running (yea, I said it, it's front running and for some reason the big boys with their uber-fancy computer toys are allowed - heck, even encouraged - to do it), the algo-induced mo-mo trades, and the AI thievery going on today is ruining the market for average investors everywhere.
How else do you explain the fact that individuals continue to pull money out of equity funds at an eye-popping rate? For example, despite the fact that both the S&P and DJIA hit new bull market highs last week, the public yanked another $2.7 billion out of equity funds. Sure, nobody sees what is happening to their trades when they buy Apple (AAPL), Google (GOOG), or Mickey D's (MCD), or when they sell their Facebook (FB) shares. But, behind the scenes, deep in the plumbing of the so-called exchanges, there are computers working at nearly the speed of light to grab a fraction of a penny from you, and you, and you, and...
But as the saying goes, you've got to play the hand you've been dealt, not the one you want. So, despite my feelings toward the practice of HFT by a select few banks and hedge funds, I have found that HFT can actually serve a purpose.
You see, every time a headline, report, or rumor hits the newswires, the computers react. There is no thinking and there is no analysis done by the machines. No, when the computer gets the combination of words it has been "programmed to receive," it fires off rounds of trades faster than you can blink. Remember, the difference between winning and losing in the game of HFT is often determined by how fast your machine moves. But again, I digress.
The point is that dozens and dozens of computers are all "watching" the same headlines (and did you know that a cottage industry has grown up that converts headlines and reports into code computers can "read"?). And since, at least at this stage of the game, a human programs the computer as to the type of trades that are to be triggered by the headline, the magnitude of the nearly instantaneous reaction to each and every headline tells us what is important to the math geniuses doing the coding (and, of course, their bosses - the guys who actually understand what moves the market).
Wednesday was a perfect example of what I'm rambling on about this morning. When the report on New Home Sales hit the tape (which were better than expected by the way) the market barely budged. Sure the report had been leaked early, but the bottom line is that nobody who tells the computers what to do cared about the number. However, when Eurogroup Chief Jean-Claude Juncker started to talk the market began to move in earnest. It turns out that there was an awful lot of talk out of Europe yesterday that included the words "Greek exit." And it seems that every time a comment was made a new batch of sell programs hit the tape.
Even after the market spiked higher on the FOMC minutes, the headline "Citigroup Sees Greek Exit As Early As September/October" knocked 5 points off the S&P 500 in a matter of minutes. Thus, we can conclude that Greece is still important to the stock market these days. I know, I know, I too am sick and tired of anything and everything relating to Greece. But if the algo's still care, then I need to care.
Speaking of caring, apparently Ben Bernanke's gang still matters to the boys and their expensive computer toys. As the clock struck 2:00 pm eastern yesterday, the S&P suddenly spiked from 1408 to about 1413 in 4 minutes (with the move to 1411 occurring in the first minute). And since I've learned that anything moving the market at least 1 S&P point per minute for several minutes is a big deal, I figured something was up. It turns out that while my feeble brain had forgotten about it, this was when the FOMC minutes were released.
Usually the Fed minutes aren't a big deal. But this time there was a paragraph that led both humans and computers alike to realize that the Fed just might launch another round of QE - and soon. So, as you might suspect, it was up, up, and away for a few minutes. Well, until the next Greek headline hit and the computers did their thing for a few more minutes. But once the humans got involved again, the machines made it very clear that the Fed still matters to the market. And based on the next 7-point S&P swing, I'm going to say that the Fed obviously still matters a lot.
So, while I utterly abhor the idea of a select few raking in millions by jumping in front of your buy or sell order (why exactly is this legal again?), all the lightning-fast HFT mo-mo trades can tell us what the market is "about" if we will simply watch what they are doing and when.
Above is a chart of the S&P 500 using 1-minute candles from about 11:30am mountain time. At 12:00 you can see the spike from the Fed Minutes. Then just after 12:10 you can see the decline triggered by the Greek headline. And then you can see the major run starting at 12:30 when traders realized that QE3 was back on the table.
Publishing Note: With vacation season in full swing on Wall Street, Daily State reports will be published on an as needed basis between now and Labor Day.
Turning to this morning... Markets were higher in Asia and are flat in Europe at the present time in response to weaker flash PMI numbers in both regions. In the U.S., futures have recently pulled back on comments from St. Louis Fed President James Bullard who said that the data has improved since the last Fed meeting. Futures now point to a flat open here in the U.S.
Thought for the day... Remember, you can choose a peaceful mode at any point of any day...
For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)
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Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Strategist
Positions in stocks mentioned: none
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