How HFT Has Killed Market Basics

Yeah, high frequency trading should be illegal.

Except it never will be – simply because there is too damn much money in it.

Essentially, HFT allows trading firms to front-run a client order for a stock.  A fraction of a second.  But even so, it is fast enough to screw up two great ways to actually make money in the stock market.

One way is On—Balance Volume. 

This is a concept that was developed by Joe Granville – a very astute market technician years ago.

The problem that has evolved with OBV (as on-balance volume is called) is that as the percentage of program trades went through the roof (its up around 99% now) it became nearly impossible to reliably look at OBV.

I think of HFT as noise, to put it in ham radio receiver terms.  Oh, sure, there might be a signal in there, but the market has so much self-generated algorithmic noise now that it’s beyond the average home trader to be able to use OBV in a meaningful way without a lot of real work.

Say you enter an order to buy 100 shares of XYZ.  The trading house you’re with might buy 1,000 shares for a fraction of a second – just long enough to drive the price up.  Depending on machine speeds, another outfit notices the price and buys 1,000 shares, too.  And a third, perhaps.

By the time your poor order for 100 shares is actually “filled” what happens?  You pay a fraction of a cent more.  Regulators don’t care because they view it as “petty crime” but it happens millions of times per day so it adds up.

OK, that’s one way you get screwed.

Want another?

Statistically viable event weeks – like this one.  

If you study markets (in the pre-machine, pre-algo days) you might have noticed that markets tends to go up just a bit prior to a holiday.

Instead of this being a human-human match up, we we might see this week would go something like this:

Run the market down this morning.  Then run it up tomorrow and maybe Wednesday to get the last 7 remaining retail traders who manage their retirements into the fray.  Then, because algo’s don’t like to hold stocks over the weekend, they will likely sell off Friday and then Monday the 7th, the market is closed for Labor Day.

And we would expect that week to be a downer because of the Fed meeting on the 15th, I think it is.

Point is simply this:  Machines may be nice, but as soon as two parties have machines, then you really need to think about their being two stock and two bond and two foreign exchange markets.

You have the machine market – which will have one set of evolving rules among the robots.

Then you will have the remnants of humanity trading.

And that little gem occurred to me as I was wolfing down a short stack of vanilla-nutmeg pancakes (my boyish figure requires maintenance, right?):

We are remnants already in one field.

And like a bad infection, computer pus is coming to infect and kill your job/career/avocation.  It’s all just a matter of when, not if.

That gets me to the point:  Job displacement is caused by technological change.  That’s why you become obsolete, unemployed, and we call that a Depression.

Thanks to the Internet and the Big Lie about “free trade” big US companies are moving plants to Mexico.  Thanks Nabisco and thanks Ford.  And thanks Trump for being the only politician in the field who hasn’t sold out yet so he’s still free to mention it.

Futures are down over 100 on the Dow, but the subroutines behind the curtain have plans for your retirement and ooops, so sorry.  You’re not part of those plans.

Job Dribs, Drabs

Which brings us to the data points for the week which will begin with the Dallas Fed activity report mid morning today.  Market should be looking for a reason to turn higher by then, after the Original Amateur Hour at the open finishes off.

Wednesday there’s an ADP job report, Thursday is the Challenger Job Cut report, and Friday is the “offishul” gubmint job data.

imageYou can toss a dart at any one you please.  I will opt for the Challenger data, usually, look at the U-6 unemployment rather than the headline in the ‘fishul’ report simply because it’s a better reality check.

And then, to see if the world is really going to end in THE BIG ONE that half-witted financial pundits (many of which don’t have business degrees, and have never managed anything bigger than a nail clipper, go figure) miss is average hours worked. 

A big part of the game lately has been to adjust average work hours down when things look dicey, so in terms of “Is the World Really Going to End, oh Wild Man in the Woods?” the answer, Goldilocks, is no.

But when it’s getting on toward closing time (I’m still thinking mid 2017 when we find out how bad things really are and self driving cars come along) that between there and 2019 would be a fine time.

Not for the lights to go completely out.  Just for someone to hit the financial dimmer switch down to past Depression levels, which won’t be fun, unless you’ve planned for it.

And that’s more than just buying a gun and ammo, or anything stupid like that.  Old Special Forces rule:  For each round you throw out, expect one (or more) incoming… So when comes time for the economy to get real, you’re going to need more brains and plan because the brutes in the brute strength department will be mostly gone.

The whole point of sports (other than to generate boxcars of licensing revenues) is to think sometimes about tactics instead.

Not that many people do that.

I mean, how many people really sit down at the office and look around at competing fellow workers and ask:  “How does management score this game?  And, once I figure that out, how do I become the high scorer in that metric?

Same thing is true for stocks.  Some CEOs like fat earnings so they look good to the Berkshire Hathaway’s of the world.  Other CEO like astronomical growth with low earnings but an incredible “story” like Tesla. Whatever.  Is there a point in here?  Well…yah….

Since you’re CEO of your own life, you get to pick the metric and win whatever prizes go with it.

Say, did I mention the Dow futures were down 130 when I looked?

Spy Novel

Since no one is going to be really working their asses off this week, going into the long weekend, why not put this story about a spy who apparently got some goods on Bill Clinton and the Russian mob on your reading list? 

Sure, it’s non-fictions, but sometimes truth is stranger than something, or other.  Especially when there’s the name Clinton nearby.

A Check on Political Correctness Disease (PCD)_

Oh, yeah.  I’m old enough to remember when Alaska became #49 – and old enough to remember it used to be called Mt. McKinley, not Denali.

President Obama, though is sealing it officially as Denali henceforth, as a PCD warrior would be expected to do.

But, says this story over here, there’s a lot of renaming that could be done.

I’ll get back to you when Seattle is renamed Duwamish.

Not that it stops at borders.  The Queen Charlotte Islands of British Columbia have been long gone; now it’s Haida Gwaii.

Meantime, Washington State University, says a lawyer/reader, should be tossed in the “brain laundry” bin for threatening students for using terms like “illegal aliens” and “male” or “female” in their works.

I haven’t smelled so much bullshit since we last drove past the feedlots out west of Amarillo on I-40.  Though that was likely less, thinking back on it.

Fools in Politics

Here’s how a campaign in trouble ends up in print:  Scott Walker Doesn’t Rule Out Building a Fence Along US-Canada Border.

WTF does “Doesn’t rule out” mean?

Here’s how it translates in the Total Reality Newsroom:  President wannabe Scott Walker today said nothing.  Nothing at all.  And the press fell for it. 

Unable to actually state a position, the press had to justify their parking expense to attend the news conference and so they reported a non-story which became a useless headline to be foisted on stupid people since it’s Monday and the last week of unofficial summer.

Yes Everything’s a Business Model is True

Why do people still question me on this?

Thai Police Award Themselves $84K for Arrest of Bomb Suspect

Two-Faced Europe

There’s been no shortage of finger pointing from across the pond on how the US is trying to get a grip on the Mexico border mess.

So pardon me as I savor this one with you:  EU calls for migrant crisis meeting.

Oh, they ought to even tear down the whole Schengen Passport Free Zone’s outer boundaries, to, don’t you think?  And let the storming jihadistas take the Chunnel.  Taste a little reality we’ve been trying to mention now and then.

Bitter pill, ain’t it?

Now, go out and spend some money and do your part to keep the economy alive like a good little mindless consumer, soon to be replaced with a robot, please and thank you.

Comments

How HFT Has Killed Market Basics — 2 Comments

  1. A lot of topics to comment on today – Is this what they call ‘churn’? I think this has much in common with the scammers who skim off ‘mills’ from transactions (tenths of cents) and thus through many, many deals, grab funds to make a hell of a lot . . .

    As a North-westerner, I have no problem with names of geological features ‘going back’ to native nomenclature – just as long as it describes whatever it is . . . Native Americans were here first, and I think they get ‘first dibs’ on naming rights.

    Scott Walker has a screw loose – the border with Canada is even harder to ‘guard’ than that of Mexico considering (again) geological features – including something he ‘should’ remember – the ‘Great Lakes’, some of whom we share with Canada . . . What’s he going to do – make everyone recite the alphabet and when they get to ‘z’ – separate them when they say ‘zed’ instead of ‘zee’ – ‘sheep from the goats’ or ‘goats from the sheep’ (bible reference)? If he was truly intent on stopping ‘illegal’ crossing and staying here, he would be trying to enforce laws to punish employers who hire undocumented and/or fraudulent workers. Talk about a bunch of ‘sound and fury signifying nothing’!

  2. Surprised you didn’t point out that immediately after his rousing announcement speech for the Presidency, Ted Cruz flew to New York City to get a multi-million dollar check from a supporter whose fortune comes from — wait for it — HFT.