A Chicago programmer is going to trial over software he developed that prosecutors say had only one purpose: to manipulate market with bogus orders.   Most market manipulation cases are against people who buy and sell securities.  This is the first case brought against a non-trader, a programmer who manipulated the market with algorithms and programs.  The defendant made “millions” while working in his parent’s basement.

According to prosecutors, the defendant was conspiring to violate spoofing laws from October 2011 to April 2015.

Will this be a landmark case?

Several leading Democratic Presidential candidates have proposed levying a 0.1% transaction tax in an attempt to end lightning fast trading.   I am against any tax but adamantly believe reform most occur.  Many, including the Treasury Department, have state the markets are “imbalanced” because of such trading practices.

Many times I have opined the regulatory entities have sacrificed capitalization and liquidity for speed and cost of execution.  The emergence of algorithmic trading is a direct result of this regulatory dictate, a great example where the cure is worse than the disease.

Speaking of a potential nightmare, bond liquidity is virtually absent.  According to S & P, US corporate bonds outstanding has more than doubled from 2008 to $8.8 trillion from $3.8 trillion.  It is always dangerous when corporate debt grows faster than the GDP, especially when the debt proceeds are used for non-economic purposes such as share repurchases and dividend increases.

The growth has not occurred in the high yield arena but rather in the investment grade debt market where the market has almost tripled from $2.5 trillion in 2008 to $6.4 trillion today.   The issue at hand in that BBB- debt has quadrupled to $3.2 trillion or about 50% of the investment grade rated market, the vast majority must be refinanced between now and 2022.

Money center bank inventories are down about 90% from 2008 because of Dodd Frank.  Many believe passive bond ETFs will provide liquidity while reducing transaction costs, utilizing some type of algorithmic model to determine value while not sacrificing liquidity.

Is this realistic?  Will a market stabilizing organization step up in times of stress?  Moreover what about potential market manipulation?

Many are attempting to “equify” fixed income trading.  In my view, such is impossible given the size of the fixed income market….approximately 3 million identifiable fixed income CUSIPs as compared to about 7,500 equities.  The vast majority of debt does not trade for months; I ask how can technology be used for price discovery?  Lack of discovery in an illiquid market will create chaos.

Radically changing topics, equities rallied on trade hopes and economic data.  Little attention was focused upon the moderate selloff in Treasuries as the prices fell anywhere between 1 and 2 points.

It is generally accepted the dramatic decline in yields is the result of technology based trading.  Can we assume yesterday’s selloff was for the same reason?  I would suggest yes.

What will happen today?

Last night the foreign markets were up.   London was up 0.67%, Paris up 0.19% and Frankfurt up 0.18%.  China was up 0.20%, Japan down 0.02%  and Hang Sang up 0.21%.

The Dow should open flat.  The 10-year is  up 3/32 to yield 2.48%.


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.