IS THE FEDERAL RESERVE ACTING PROACTIVELY?

Is the Federal Reserve becoming concerned about margin debt, especially relating to HFTs? Last week I referenced a report stating for the first time in December the Fed questioned its 21 primary dealers whether or not they extend credit to HFTs. Approximately two thirds answered yes.
The front page of yesterday’s Wall Street Journal stated the Fed is now considering becoming more involved in this $4.4 trillion market fearing a potential shock if an unexpected externality occurs. The WSJ states the margin debt is lower than it was in 2008 but is more concentrated in non-bank actors…aka trading firms.
The Federal Reserve is not relying upon newly passed legislation for this potential oversight but rather the 1934 SEC Act.
Last week the SEC stated approximately 96% of all orders entered are not executed. Moreover the SEC stated 81% of October’s volume was the result of HFTs.
Reiterating last week’s remark, is the SEC acting proactively, potentially resolving a problem before one actually occurs?
To write the obvious, I blame recent market performance upon HFTs, a vastly unregulated industry that did not exist 5 years ago, an industry that is not playing by the same rules as the typical investor or investment firm. To quote the SEC, high frequency trading firms have “created a un level playing field.”
Yesterday was a volatile trading session, starting strong then trading moderately lower to around a key support area (NASDAQ was off over 1%) and then back into nominal positive territory, a recovery that occurred during the last 15 minutes.
What will happen today? Alcoa commenced fourth quarter earning seasons with an upside surprise. Perhaps the only definitive statement to make is that the markets are vastly oversold and there is little confidence in the upcoming earning season.
Last night the foreign markets were mixed. London was up 1.49%, Paris up 2.19% and Frankfurt up 2.20%. China was up 0.39%, Japan down 2.71%and Hang Sang down 0.89%
The Dow should open moderately higher as commodities and the currencies if nations that produce raw materials pared declines and China stepped up its defense of the yuan.
As widely noted the NASDAQ has fallen or eight consecutive days, down about 11.3% its level one year ago. Some of its marquee leaders are now down over 30% in about four months. Wow! Is the momentum trade ending an ugly death just as it has in every other era?
The 10-year is off 5/32 to yield 2.20%.

 

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