Market Overview

HFT Hell And The ESZ 1400 ReTest


*** CME GROUP STATEMENT: As a result of the securities industry decision to close US equities markets because of Hurricane Sandy, CME Group will be closing its US equity futures and equity options on futures markets on the trading floor and on CME Globex at 8:15 am CT Monday, Oct. 29. These markets opened at 5:00 p.m. CT Sunday and will remain open until 8:15 a.m. CT Monday. All other CME Group futures and options on futures markets will remain open. ***

Chart by Emin-Witch


By Danny Riley

With the election just 8 days off and the fiscal cliff only 2 months away, the S&P has gone through  a big wave of selling. As the ranges and the volumes narrowed late last week, the S&P continued lower and retested the psychologically important 1400 level. If we have learned anything about the effects of the lower volumes, it's that things don't always happen as quickly as they used to. Like the buy stops that were elected from  1460 to 1466 recently, things have to build up. The higher the S&P goes, the higher the expectations. After the buy stops are elected and all the shorts are squeezed out, the markets should make new highs. Or should they?

Last week when I spoke at the Markets Media event in Chicago on HFT trading, I pulled some charts up on the profitability of HFT stock trading. When I pointed out the steep decline in profits from HFT stock trading, the panel asked me where I got my information. Well, I don't have a Ph.D., but again, when they were chuckling, so was I. Do the people on the panel not even know their own business? If daily volume on the stock exchange is down 40% to 60%, how could they be making the same amount?  I have always tried to take a neutral stance on HFT, but after my experience on the panel I am convinced that the practice only has one thing in mind, and that, my friends, is called profits. The broker that clears the trades has to stay in business, the investment firm does not care where the profits come from and the trader that sets up the HFT, well, his ass is on the line if his system is not fast enough. Like the panel said, if they want to buy 19's for a couple more hundred thousand dollars they can buy 17's. They can pay for higher speed, you can't.

I knew going into it that the panel was pro-computerized trading. It's what they do for a living, but what struck me was the straightforward approach they have. It's all connectivity, latency and the new taxes or regulations that are going to be placed on the practice. As I shot through my questions, it was easy to see they knew more than I did about the technical side of how it works, so I came up with a few unscheduled questions. Why not? None of them lost $1.8mil in the flash crash, so why not get the “pros' view”?  After being on the floor for 34 years, it's always interesting to get what the public views as a professional. So I let it rip. I asked the panel where they thought the retail volume went and I posted up the October 2009 6.9mil ESZ CME all-time record volume and then talked about how today's daily volume averages about 1.6mil a day. I also brought up that the “retail” thinks that the new algorithmic trading systems chase buy and sell stops and one of the guys on the panel said that if that was the case the CME would not allow it. I told him that I know a lot about program trading, that I did all the UBS program trading business for almost 10 years and that when the S&P dropped and Moore Cap told me to sell 1,000 big S&P futures and make it look ugly, I knew how to make it ugly. I would scream into the direct line “give me bids” and I would sell right into them, causing an index arbitrage sell program. I know what a sell program looks like. I sold over 3,000 big S&Ps at a cost of $1.5mil a point during the '87 crash. I was there in both Gulf Wars and 9-11, the credit crisis and the flash crash, and no one can tell me that the price action in the S&P has not been taken over by program trading. No one can tell me that it's normal for the S&P futures to sell off and hit sell stops, then rally and hit buy stops and sell off again and hit sell stops. No one can tell me that the lower volumes in stocks are creating the same income as 3 or 4 years ago. No one can tell me that the lower volumes have not affected the daily swings in many of  the futures markets. So while I do respect the pros on the panel, I don't think they have ever been on the floor actually being part of any of the crashes like my desk on the floor has. I also wonder when the markets start to crash again if they will ever admit to being a part of it other than saying they supply liquidity. Maybe it's that type of liquidity that the markets don't need any more of …


Thursday          Oct. 18      SPZ  -5.6 handles
Friday              Oct. 19      SPZ -27.5 handles (1424.00 settle)

Monday            Oct. 22      SPZ  +6.1 handles
Tuesday           Oct. 23      SPZ  -23.3 handles (1406.80 settle)
Wednesday      Oct. 24      SPZ  -1.5 handles
Thursday          Oct. 25      SPZ  +2.9 handles
Friday              Oct. 26      SPZ  -.60 handles   

Our view:

  • It's 5:30 a.m. and the ESZ is up down 6.75 handles at 1400.75, crude is down 90 cents at 85.38 and the EC is trading 1.2910, down 29 ticks.
  • In Asia 7 out of 11 markets closed lower (Shanghai Comp. -0.35%, Hang Seng -0.16%).
  • In Europe 12 out of 12 markets are trading lower (CAC -0.84%, DAX -0.49%)
  • Today's headline: “Oil, Stocks Fall As Sandy Shuts U.S. Equity Markets”
  • Economic calendar: Today: Personal income & outlays, Dallas Fed mfg survey, Facebook lockup expiration, Google event; earnings from Burger King Worldwide, Baidu. TUESDAY: S&P Case-Shiller home price index, consumer confidence, Fed's Dudley speaks, Fed's Kocherlakota speaks; earnings from BP, Ford, Pfizer, UBS, Sirius XM, U.S. Steel, Valero Energy, EA, Take Two, Dreamworks, Shutterfly. WEDNESDAY: Weekly mortgage apps, Chicago PMI, oil inventories, Fed's Williams speaks, farm prices; earnings from Arcelor Mittal, GM, GlaxoSmithKline, MasterCard, Barclays, Clorox, Ralph Lauren, Time Warner Cable, Visa, Allstate, MetLife, Murphy Oil. THURSDAY: Challenger job-cut report, ADP employment report, jobless claims, productivity and costs, ISM mfg index, construction spending, auto sales, chain-store sales, Facebook's “gifts” event, Fed's Lockhart speaks, Fed's Rosengren speaks; earnings from ExxonMobil, Royal Dutch Shell, Cigna, Kellogg, AIG, Chesapeake Energy, Hartford Financial, Newmont Mining, Starbucks, Open Table, WebMD, Yelp. FRIDAY: Non-farm payrolls, factory orders, Fed's Williams speaks, Wynn shareholders meeting; earnings from Chevron.
  • VOLUME: 2mil ESZ and 10k SPZ traded
  • SPREADS: SPZ/H spreads traded (none)
  • YTD NET CHANGES: DOW +7.28%, NASDAQ +14.69%, S&P 500 +12.27%, RUSSELL +9.76%, CBOE VIX-23.72%.

MrTopStep Closing Print Video:

Brian's Friday recap: The overseas markets were sharply lower, but the equities worked back to open the US market nearly unchanged. Over the past several trading sessions, sentiment has turned the corner. Generally speaking, when the crowd gets too far ahead of itself, it is not advisable to be the last one on the bus. The earnings season has delivered the one-two punch, body blows of disappointment and lower guidance. The election and the looming fiscal cliff are set up to be the ol' hail mary. Tick tock… Previously, it was hard to knock the bull off course as the QE worked its hopium, but that balloon has sprung a leak. Time will tell if the leak is manageable and maybe this recent price action is a wakeup call for Congress to act like leaders. Sources are sharing: A Romney victory means less Fed interaction with limited emphasis on less regulation, while an Obama win is seen as “more” Fed and restrictive regulation and higher taxes. Yields do have to rise sharply to make stocks uncompetitive, but a shift in regulation which is more favorable toward business is what the market really needs to work higher. Risk has turned decidedly defensive as  CEOs in the US have called for a comprehensive resolution of the fiscal cliff peril. They have acknowledged that to avoid the fiscal cliff will require both tax increases as well as spending cuts. The Congress has until Dec. 31 to address the problem or the U.S. can expect a severe recession.

Morning observations:GDP posted a 2.0% growth rate in Q3, versus Q2′s 1.3% and 2.2% in Q1. It's on the high side of market expectations, but nothing to get too excited about. Overall, the recovery has yet to translate to a significant climb in business and consumer confidence that is critical for transitioning the early cyclical inventory rebound into a sustainable growth surge for aggregate demand. Without a recovery in confidence, GDP growth is likely to remain well below the 6%+ rates that might otherwise be expected through the third year of an expansion from a deep trough.

The recent trend of the higher overnight price action followed by the failure to hold onto the early gains suggests the continuation of a buyers' strike. Furthermore, the inability to sustain buying activity in light of oversold conditions and proximity to support levels suggests that any rebound could be short lived. Coming into Thursday the SP futures were +2.17% MTD on the open and are -4.15% MTD during the actual hours.Thursday the SP opened up more than .5% and erased that. Benefactor? Well, the Hang Seng has closed up 10 days in a row until Friday's action, profit taking. FXI has been on a tear – check out the relative outperformance. Today, obviously opened 1.5 handles, but did work 4 handles higher in the early going before the flop to 1398.00.

MrTS video:
Jamie Dimon: CEOs Already Cutting Back Due to ‘Fiscal Cliff' – YAHOO!

Thursday started with 548k ESZ and 3.2k SPZ traded on Globex, trading range 1394.50 – 1411.00 / Thursday's RTH's, pit range was 1399.70 – 1416.70, settled at 1408.20 up 2.90  handles. The RTH's gapped 1.5 handles lower to opened 1.5 handles lower at 1406.80 – 1407.00, traded 1407.80 down to 1406.30 and up to 1411.60 before stepping lower to 1404.50 post Michigan sentiment checking in 82.6 vs exp 83.0. The euro popped as the ECB stated Spain's bailout was on track and the spoos made a lower high, holding the 1409.50 area before flopping to new lows of 1403.80 by 9:30CT. Unable to convert the opening range the spoos stepped lower to 1398.00 LOD by 11:07 as AAPL lead the charge trading $591.00 down over $18.  EUBIE (11:36:53): almost every chart I see OIL / SPU / NQ… individual names AAPL etc .. all PUNCHING HUGE / 1399 TIMESTAMP. The spoos went on to retest the opening range by 12:40 in light trade as scores of traders left early for the day. mts2 (13:14:35): Eubie is taking some profits on his AAPL trade tony_rago (13:14:35): for da bulls to head into the weekend with a little dignity they want SPY to close north of 141.00 and ideally convert the 08 SPOT IMO mts2 (13:15:23): if you need the profit – take some in. At 2:00 both the spoos and AAPL, not necessarily in that order…were still testing unch to slightly positive, the nazzy was up 14 handles, DJT's up 13 points and the DJIA up 15 points. The last hour was fairly uneventful, mostly sideways trade in the unch'd area in very light Friday afternoon volume. The closing  imbalance showed only 28 of the Dow 30 to sell and the broader market with an overall $ 239.29 M / -1,615.89 M – large sell side imbalance. The spoos traded 1407 area on the cash close before settling at 1407.60 on the 3:15 futures close, down only .6 handles on the day.





Richard Chappell, Channels & Patterns


Obviously there was no bounce of substance yesterday despite the very promising setup in the morning. SPX closed up on the day, however, just above the lower bollinger band. If that continues today into a strong bounce, then the obvious targets are the 50 DMA at 1435 and the middle bollinger band slightly higher:







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