IS MEANINGFUL REGULATORY CHANGE COMING?

In about a month stop loss and GTC limit orders will no longer be considered good orders for the typical investor. The reason—to reduce the odds of “stopping out” during volatile conditions. However this rule change does not apply to high frequency trading (HFT).
The SEC stated yesterday that approximately 96% of all orders sent to US equity markets are never executed. In other words for every 27 orders placed on US stock exchanges, about one is filled. Moreover the SEC stated that 81% of October’s volume was the result of HFT, up from about 70% in September.
Wow! How does one compete in such an unbalanced (I believe the SEC used the term “unleveled”) playing field?
Earlier in the week I expressed concerns about potential HFT liquidity issues if markets dramatically moved in an unexpected direction…aka a massive short covering rally.
Yesterday the Federal Reserve’s December credit survey added a special set of questions for clients engaged in/with high frequency trading.
Of the 21 institutions surveyed, about two thirds had HFT clients; of those four fifths extend intraday credit in US cash equity markets. Two thirds extend intraday credit in US cash Treasury and futures markets.
To remind all a major reason why both Enron and Lehman failed is because money center banks froze and then called in all credit lines during periods of extreme volatility to protect the integrity of the bank.
Are the regulatory entities getting ahead of the curve before a major crisis unfolds? HFT did not exist five years ago when the average holding period of a stock was seven years. Today, according to NASDAQ, it is 3 months, down from 6 months registered about 18 months ago.
I hope so.
Commenting about yesterday’s market activity, oil fell again. As widely discussed oil has had its greatest two year loss on record and many are extrapolating current conditions forever. Such is the typical and expected response by analysts who were so wrong 18 months ago where range of crude was between $75 and $115 barrel with the average around $95.
Equites were narrowly volatile, trading nominally higher and lower throughout the day.
Last night the foreign markets were down. London was down 1.58%, Paris down 1.54% and Frankfurt down 1.40%. China was up 2.25%, Japan down 0.99% and Hang Sang down 0.98%
The Dow should open considerably lower as China set the yuan’s reference rate at an unexpectedly weak level, a reminder of the shock depreciation in August that sparked aa wave of financial market turmoil.
Geopolitical tensions are also weighing on the markets as North Korea announced they conducted it fourth nuclear test. And then there is the Middle East where many of the Sunni nations feel as though the US has abandoned them. Oil however is down about $0.90.
The 10-year is up 12/32 to yield 2.20%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.