Thursday, 28 August 2014

10yT-Note - T-Bond U14 spread closed down in loss

I closed my latest 10y T-Note U14 (long) T-Bond U14 (short) spread since we are almost due to roll all over to the new December contracts. I sold the 10yT-Note U14 at 126.50 and I covered the T-Bond short at 141.50, for a final loss of 1.25 figure. It has been not a good quarter but I have been seldom present on the market, I will have time to make this losses good in the coming months.
I have decided to roll over to December14 only the short on T-Bond  at 140.50 . I prefer to trade the short side for the moment being , in pure contrarian mode. The geopolitical tensions are sky-high on different fronts, still the S&P500 is not panicking at all. If that happens then I will have the signal to edge the short position on the Bonds.

Monday, 9 June 2014

The battle against the high frequency trading

Fast money: the battle against the high frequency traders


A 'flash crash' can knock a trillion dollars off the stock market in minutes as elite traders fleece the little guys. So why aren't the regulators stepping in? We talk to the legendary lawyer preparing for an epic showdown

by Andrew Smith

Computers monitoring trading
`The capacity to bankrupt the entire operation is immense. And the fact that it can happen faster than a human can step in and pull the plug keeps me up at night.? Photograph: Peter Hoffman for the Guardian

Back in the 1990s, when doctors had all but given up on holding the American tobacco industry to account, the lawyer Michael Lewis found an ingenious way through their defences. If juries couldn't see past individuals' responsibility for their habit, he reasoned, why not sue on behalf of individual states and their smoke-burdened Medicaid systems? Lewis gathered a team and tested the approach. In 1994, on behalf of the state of Mississippi, he sued 13 tobacco companies for the cost of treating cigarette-related illness; they were joined by another 38 US states and, under intense pressure, Big Tobacco agreed to pay $368.5bn. The industry's nemesis became legal legend.
A proud Mississippian, Lewis wears his intellect with quiet southern grace; he listens before speaking and never interrupts. In almost half a century of legal practice, he thought he'd seen everything, but over 14 years of retirement he watched the world lurch towards a new technology-driven feudalism, defined by disparities in wealth that were more keenly felt in his own state than most. He was feeling ready for another dragon to slay.
As is often the way, in the end the dragon found him. In April 2013, he was at a baseball game with his friend Professor Bonnie Van Ness, head of the University of Mississippi's school of business administration. Lewis asked after her professor husband, Robert, who was presenting a paper in Boston. What was the paper about?
"Quote stuffing."
"Quote stuffing?"
This is the practice by which stock market players called high-frequency traders slam vast numbers of orders into the system, cancelling them before anyone can react, with the aim of slowing the transit of information to competitors, or of creating confusion from which they can profit – all in the space of milliseconds.
"I'm certain you must have that wrong, Bonnie," Lewis said, "because that would be quite illegal. It would be market manipulation."
No, she said, quote stuffing was as real as the teams on the field. The stock market was a new wild west running on rocket science: the stuff going on there was mind-blowing. The rest of the game passed in a haze.
Van Ness mailed Lewis the paper. Over the coming weeks, he read everything he could on this phenomenon. Here was a market beyond human control, dominated by super-fast machines running complex computer algorithms that jostled and fought each other at the level of milliseconds, microseconds – and with no meaningful oversight. The familiar cliche of gaudily dressed men waving arms on a stock market floor was history: trading now happened within black boxes housed in highly secure, unmarked "data farms".
Not only that, the algorithms at the heart of this world were run not by finance or programming people, but by "quants": quantum physicists, climate scientists, theoretical mathematicians. Some of the most formidable minds in the world were now employed in a technological arms race, a hidden war stalked by million-dollar predator algorithms that could swarm those of the larger, slower players – typically, pension and mutual funds – in the same way a shoal of piranhas might an ox, cutting them to shreds and pocketing the profits. The regulators couldn't keep up. If they tried, the algos simply mutated.
To Lewis, it looked as though the finance industry had found a new way to fleece the public – the ordinary savers and workers with pensions. Already, the system had caused several big scares, most notably the "Flash Crash" of May 2010, in which $1 trillion was wiped off the value of markets in the space of 10 minutes. Yet, the deeper he delved, the more forcefully a depressing truth emerged: that a fortress of legislation had been built around the stock exchanges and powerful traders (mostly banks and hedge funds) by lobbyists and politicians. Immoral as these practices might be, they were no more illegal than had been the packaging of sub-prime mortgages into tradable securities prior to the crash of 2008-2009.
Lewis pressed on, but his mood grew bleak. Then he met Eric Hunsader.
Eric Scott Hunsader has lived in Chicago for years, but he's never been to a place quite like this – the Chicago Executive Airport, whose Comfort Inn frontage belies a runway full of Learjets out back. It is 6 May 2014 and for the past four years, Hunsader, one of the most gifted programmers in the country, has felt like a lone voice in the woods after stumbling across high-frequency trading (HFT) and being shaken by what he saw. Finance insiders have branded him a conspiracy theorist or – absurdly – a luddite, but now the world seems to be waking up. Next to him at a rosewood conference table is not just the renowned Big Tobacco slayer Michael Lewis, but Lewis's "dream team" of class-action lawyers, whom he must convince of the evidence – a tough job, given the complexity of HFT. He can see some of the team struggling with the material, having doubts, but then one by one getting it.
Hunsader tries not to feel excited, knowing what the stock exchanges and banks will do to protect their interests against any lawsuit. It helps that since he and Lewis first met a year ago, the bestselling book Flash Boys (written by the other Michael Lewis) has opened up HFT to wider debate. Lewis smiles as he invokes the movie Star Wars and the metre-wide ventilation shaft Luke Skywalker uses to destroy the Death Star, hoping to have found its stock market equivalent. He's even taken to calling this strategy "the Hunsader torpedo", after the man who pointed it out.
If the torpedo works, Hunsader will be at the heart of one of the legal battles of the fledgling century – The People versus Big Finance. He looks about the room full of top lawyers and – not for the first time – wonders: how the fuck did I get here?
High frequency trading illustration 'It’s a hidden war stalked by million-dollar predator algorithms that swarm those of the larger, slower players in the same way a shoal of piranhas might an ox.' Illustration: Francesco Bongiorni for the Guardian 

6 May 2010 opens like any other day on the markets. Asia is quiet, the US and Europe jittery as UK electors trudge to the polls, while Greeks hit the streets to protest austerity. Stock prices have been rising through the year, buoyed by waves of cheap credit, but now the mood is darkening, and every time Athens hits the TV screen, another few points drift from the Dow Jones Industrial Average like teargas. By 2.30pm, it is down 2.5%: hardly catastrophic, but worth a weather eye.
And then something unexpected appears – a flutter in the price of E-mini futures contracts, an investment vehicle traded on the Chicago Mercantile Exchange and regarded as a bellwether of wider sentiment. Almost no one notices, until the flutter becomes a shiver, then a spasm, amid whipsawing prices as the E-mini's vertigo spreads to other stocks and exchanges, and indices begin to plummet.
Within seconds, the Dow has lost 100 points. Finance workers turn back to their screens. But seconds later, another 100 has been shed and managers fly from their offices, yelling, "Pull everything!" as traders hit buttons and hammer keyboards, cancelling orders in an attempt to limit damage. In horror, they gather in communal spaces and watch price lines dive with eerie, implacable momentum, like lines scratched by an angry child.
300 points down…
400 points…
500 points…
At 600 down, the Dow has fallen further than it did on news of Lehman Brothers' collapse in 2008. But that crash took a day: this spans minutes. At 5% down and in apparent freefall, traders will report feeling nauseous, sick; a sense of staring into oblivion. Even 9/11 failed to rock the market like this – which implies that something catastrophic has happened. But what? The CNBC pundit Jim Cramer, an experienced former hedge fund manager, roars: "The machines broke – these are not real prices!" and wonders why no grown-up is stepping in to shut the show down. But the trouble is, nobody can: circuit breakers designed to halt trading after unnatural price swings work only until 2.30pm and it is now 2.47pm, with the Dow racing towards an unprecedented 1,000-point loss and almost $1tn wiped from balance sheets.
Then something even stranger happens as, with Armageddon approaching, the market turns tail and begins to rise, just as impossibly as it fell.
600 down…
The traders breathe again. The whole episode, the most dramatic in stock market history, has occurred within 10 minutes. Welcome to the world of HFT and the Flash Crash.
Eric Hunsader never played the market himself: programming was his thing. At school he had been funnelled towards a career in medicine as a kind of smart kid default, but when he discovered coding, it was like falling in love. He adored the way you did "x" to make a computer do "y", and if it didn't, you knew you'd made a mistake; you got to the bottom of the glitch and fixed it. Beautifully simple, and certain.

Thursday, 5 June 2014

Full text of Draghi's Introductory Statement

Introductory statement to the press conference

Mario Draghi, President of the ECB,
Frankfurt am Main, 5 June 2014

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Rehn.
In pursuing our price stability mandate, today we decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy. This package includes further reductions in the key ECB interest rates, targeted longer-term refinancing operations, preparatory work related to outright purchases of asset-backed securities and a prolongation of fixed rate, full allotment tender procedures. In addition, we have decided to suspend the weekly fine-tuning operation sterilising the liquidity injected under the Securities Markets Programme.
The decisions are based on our economic analysis, taking into account the latest macroeconomic projections by Eurosystem staff, and the signals coming from the monetary analysis. Together, the measures will contribute to a return of inflation rates to levels closer to 2%. Inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%. Looking ahead, the Governing Council is strongly determined to safeguard this anchoring. Concerning our forward guidance, the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation. This expectation is further underpinned by our decisions today. Moreover, if required, we will act swiftly with further monetary policy easing. The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation.
Let me now briefly describe the individual measures decided today. Further details will be published at 3.30 p.m. on the ECB’s website.
First, we decided to lower the interest rate on the main refinancing operations of the Eurosystem by 10 basis points to 0.15% and the rate on the marginal lending facility by 35 basis points to 0.40%. The rate on the deposit facility was lowered by 10 basis points to -0.10%. These changes will come into effect on 11 June 2014. The negative rate will also apply to reserve holdings in excess of the minimum reserve requirements and certain other deposits held with the Eurosystem.
Second, in order to support bank lending to households and non-financial corporations, excluding loans to households for house purchase, we will be conducting a series of targeted longer-term refinancing operations (TLTROs). All TLTROs will mature in September 2018, i.e. in around 4 years. Counterparties will be entitled to borrow, initially, 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014. Lending to the public sector will not be considered in this calculation. The combined initial entitlement amounts to some €400 billion. To that effect, two successive TLTROs will be conducted in September and December 2014. In addition, from March 2015 to June 2016, all counterparties will be able to borrow, quarterly, up to three times the amount of their net lending to the euro area non-financial private sector, excluding loans to households for house purchase, over a specific period in excess of a specified benchmark. Net lending will be measured in terms of new loans minus redemptions. Loan sales, securitisations and write-downs do not affect the net lending measure. The interest rate on the TLTROs will be fixed over the life of each operation, at the rate on the Eurosystem’s main refinancing operations (MROs) prevailing at the time of take-up, plus a fixed spread of 10 basis points. Starting 24 months after each TLTRO, counterparties will have the option to make repayments. A number of provisions will aim to ensure that the funds support the real economy. Those counterparties that have not fulfilled certain conditions regarding the volume of their net lending to the real economy will be required to pay back borrowings in September 2016.
In addition, the Governing Council decided to extend the existing eligibility of additional assets as collateral, notably under the additional credit claims framework, at least until September 2018.
Third, the Governing Council decided to intensify preparatory work related to outright purchases in the ABS market to enhance the functioning of the monetary policy transmission mechanism. Under this initiative, the Eurosystem will consider purchasing simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector, taking into account the desirable changes in the regulatory environment, and will work with other relevant institutions to that effect.
Fourth, in line with our forward guidance and our determination to maintain a high degree of monetary accommodation, as well as to contain volatility in money markets, we decided to continue conducting the MROs as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period ending in December 2016. Furthermore, we decided to conduct the three-month longer-term refinancing operations (LTROs) to be allotted before the end of the reserve maintenance period ending in December 2016 as fixed rate tender procedures with full allotment. The rates in these three-month operations will be fixed at the average rate of the MROs over the life of the respective LTRO. In addition, we decided to suspend the weekly fine-tuning operation sterilising the liquidity injected under the Securities Markets Programme.
Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP in the euro area rose by 0.2%, quarter on quarter, in the first quarter of this year. This confirmed the ongoing gradual recovery, while the outcome was somewhat weaker than expected. Most recent survey results signal moderate growth also in the second quarter of 2014. Looking ahead, domestic demand should continue to be supported by a number of factors, including the accommodative monetary policy stance, ongoing improvements in financing conditions working their way through to the real economy, the progress made in fiscal consolidation and structural reforms, and gains in real disposable income resulting from falls in energy prices. At the same time, although labour markets have shown some further signs of improvement, unemployment remains high in the euro area and, overall, unutilised capacity continues to be sizeable. Moreover, the annual rate of change of MFI loans to the private sector remained negative in April and the necessary balance sheet adjustments in the public and private sectors are likely to continue to weigh on the pace of the economic recovery.
This assessment of a moderate recovery is also reflected in the June 2014 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP increasing by 1.0% in 2014, 1.7% in 2015 and 1.8% in 2016. Compared with the March 2014 ECB staff macroeconomic projections, the projection for real GDP growth for 2014 has been revised downwards and the projection for 2015 has been revised upwards.
The risks surrounding the economic outlook for the euro area continue to be on the downside. Geopolitical risks, as well as developments in emerging market economies and global financial markets, may have the potential to affect economic conditions negatively. Other downside risks include weaker than expected domestic demand and insufficient implementation of structural reforms in euro area countries, as well as weaker export growth.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 0.5% in May 2014, after 0.7% in April. This outcome was lower than expected. On the basis of the information available to us at today’s meeting, annual HICP inflation is expected to remain at low levels over the coming months, before increasing only gradually during 2015 and 2016, thereby underpinning the case for today’s decisions. Meanwhile, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%. Looking ahead, the Governing Council is strongly determined to safeguard this anchoring.
Our assessment has been supported by the June 2014 Eurosystem staff macroeconomic projections for the euro area. They foresee annual HICP inflation at 0.7% in 2014, 1.1% in 2015 and 1.4% in 2016. In the last quarter of 2016, annual HICP inflation is projected to be 1.5%. In comparison with the March 2014 ECB staff macroeconomic projections, the projections for inflation for 2014, 2015 and 2016 have been revised downwards. It should be stressed that the projections are conditional on a number of technical assumptions, including exchange rates and oil prices, and that the uncertainty surrounding each projection increases with the length of the projection horizon.

Some trading on my Bonds/Bund position on ECB day

I am a lot active today since it is/has been ECB day.
I have covered one of my two shorts on T-Bond U14 at 134 31/32 , for a 3 figures gain. This has been a very good psycological shoot for I recovered in short time all the troubles I had with T-Bond in the last quarter.
I  bought 1 10yT-Note U14 at 124.25 , and now I have my trading spread pair completed on the long part of the US Bonds curve.
Finally I have just sold my long on Bund M14 at  146.18 , one tick below today's R1, for a good 4.33 figures gain. Tomorrow it is expire day for the M14 contract and the new U14 is pricing 145 at the moment , being in backwardation. I will wait for a better price , ideally around 143, to enter long again.

Monday, 2 June 2014

Rolling position to new U14 contracts on ECBOT

I managed to roll some position last week on ECBOT.
I covered all my three shorts on T-Bond M14 at 137 , for a final 3-30/32 loss . I went short 2 new T-Bond U14 at 138 , one for the long (?) run and the second for fast trading (target 136.5-136). Here I must pay a lot of attention because there are rumours that the EBC and China may begin to buy US treasuries for their own monetary scopes. That is the main reason for the late US Bonds surge.
I also sold my three longs on 10yT-Note M14 at 126.50 , for a 3 figures gain. I decided not to roll the position immediately but to wait and see if the stock market would give me some help. So today I am bidding around the 125 mark.
In the end I must say I partially saved the quarter on my US Bonds position , losing only  a figure. It could have been much worse.
Still I have a very good long position on BundM14 on hand.

Thursday, 15 May 2014

Bonds attack: short T-Bond at 138

I am short a third T-Bond at 138 , following the last Bond attack with furious buying on Europe weakness.
My last short missed the target for barely 4 ticks and then was covered at 136 2/16 ,where my automatic profit-buy order was triggered , for a 10 ticks profit. I forgot the write this down before but I was taken apart by the market. No stop here , no target as well as I will make my mind up on the go. Sure thing is the future is now overbought and needs at all costs (:D) to go down a bit and take some respite. Ideally a need at least a figure profit on this latest short, but if I see no reaction on the S&P500 , I will try and react accordingly.
I am not happy with this turn of the events but I have to put up with it, so I also went long 3 10yT-Note M14 at 125.5 , to partially edge my short position . One of these longs will go eventually at 126.5 , if the prices go up to that.
Still long one Bund.

Friday, 9 May 2014

Short third T-Bond M14 at 136 12/32

I am short a third T-Bond M14 from 136 12/32. Target 135. No stop.
I must confess I have been taken by surprise by this kind of surge of prices on the Bonds compartment plus I should have covered my second short on the prefixed target to be in a better position now. Greed is your fist enemy sometimes.
Looking at T-Bond charts ( daily and 1h frames especially ) I can sense that the prices are finding difficult to sustain theirself above 136 , so a visit down to 135 could be on the cards.

Monday, 14 April 2014

Short second T-Bond M14 from 134.875

I am short a second T-Bond M14 from 134 18/32. I have to defend my short position on T-Bond so the 135 level seems to me a good point to start out a "counterattack" , hoping that some buying will occur in the stock market at the start of the new week.
First target is 133 16/32. No stop for the moment being.

Thursday, 3 April 2014

The Market's 'Stop Hunt' Phenomenon Explained

"Momentum Ignition" - The Market's Parasitic 'Stop Hunt' Phenomenon Explained

A few days ago, Credit Suisse did something profoundly unexpected: its Trading Strategy team led by Jonathan Tse released a report titled "High Frequency Trading - Measurement, Detection and Response" in which the firm - one of the biggest flow and prop traders by equity volume in both light and dark venues -  admitted what Zero Hedge has been alleging for years (and has gotten sick and tired of preaching), and which the regulators have been unable to grasp and comprehend: that high frequency trading is a predatory system which abuses market structure and topology, which virtually constantly engages in such abusive trading practices as the Nanex-branded quote stuffing, as well as layering, spoofing, order book fading, and, last but not least, momentum ignition.
This is Credit Suisse, an entity whose incremental input we are confident will be very much welcome by Congress and the regulators, not some fringe, tinfoil hat blog.
While we we cover the full report in the next few days and all its SEC-humiliating implications, it is the last aspect that we wish to focus on because while all the prior ones have been extensively covered on these pages in the past, it is the phenomenon of momentum ignition that goes straight at the dark beating heart of today's zombie markets: momentum, momentum, and more momentum, in which nothing but stop hunts and even more momentum, define the "fair value" of any risk asset - i.e., reflexivity at its absolute worst  (in addition to Fed intervention of course), where value is implied by technicals and trading patterns, and where algos buy simply because other algos are buying. Behold robotic stop hunts: HFT-facilitated "Momentum Ignition."

From Credit Suisse:

What is Momentum Ignition?
Momentum ignition refers to a strategy that attempts to trigger a number of other participants to trade quickly and cause a rapid price move.
Why Trigger Momentum Ignition?
By trying to instigate other participants to buy or sell quickly, the instigator of momentum ignition can profit either having taken a pre-position or by laddering the book, knowing the price is likely to revert after the initial rapid price move, and trading out afterwards.
Likelihood and Rapid Price Moves
Momentum ignition does not occur in the blink of an eye, but its perpetrators benefit from an ultra-fast reaction time. Generally, the instigator takes a pre-position; instigates other market participants to trade aggressively in response, causing a price move; then trades out. We identify momentum ignition with a combination of factors, targeting volume spikes and outsized price moves - see Exhibit 18 for a example of this pattern in Daimler on 13th July, 2012:

To pinpoint momentum ignition, we search for:
  1. Stable prices and a spike in volume (Box 1 in Exhibit 18)
  2. A large price move compared to the intraday volatility (Box 2)
  3. Reversion (Box 3)
Though we cannot conclusively determine the intention behind every trade, this is the kind of pattern we would expect to emerge from momentum ignition. We use this as a proxy to estimate the likelihood and frequency of these events (further details are provided in Appendix 4).
Likelihood and Rapid Price Moves
As shown in Figure 19, we estimate that momentum ignition occured on average 1.6 times per stock per day for STOXX 600 names in Q3 2012, with almost every stock in the STOXX600 exhibiting this pattern on average once a day or more.

In addition, we note that the average price move is 38bps (but over 5% are more than 75bps, with some significantly higher – see Exhibit 20), and the time it takes for that move to occur is approximately 1.5 minutes (see Exhibit 21).

While 38bps may not sound like a big move, it is a bit more significant when compared to the average duration of these events (1.5 minutes) and the average spread on the STOXX600 (approximately 8bps).
Though not all momentum ignition events result in massive price moves, those that do can cause significant impact. Percentage of volume orders that would normally execute over hours may complete in minutes on the back of “false” volume ( one of the causes of the 2010 flash crash was a straightforward percentage of volume order). AES offers a variety of protections to help mitigate this kind of dislocation, including customised circuit breakers, active limits (that kick in when the stock decouples from a specified index) and fair value limits.

Monday, 31 March 2014

Short on T-Bond M14 covered on target

I covered my last short on T-Bond M14 on the first target at 132 24/32 , for a 1-12/32 gain. The US stocks indexes opened leaving a considerable gap in the charts, with a strong possibility that they're gong to cover it later today. For this reason I decided not to wait 132 to cover one of my 2 T-Bond shorts.
I keep going with one short on T-Bond M14, at new average price 134 16/32 and one long on Bund M14.