The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

“May 6 was clearly a market failure, and it brought to the fore concerns about our equity market structure.”

-Speech by SEC Chairman Mary L. Schapiro

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What a surprise! The SEC has acknowledged that the flash crash was a structural issue:

As the Securities and Exchange Commission finalizes its report on the May 6 “flash crash,” it is being forced to confront the fallout of its own decisions—which Wall Street sought and cheered—that ushered in an era of fast trading dispersed across dozens of venues.

As recently as this spring, many were applauding the speed, lower costs and competitive nature of the U.S. stock market that largely grew out of a series of policy and technology changes over a decade . . .

What created these structural flaws? A decade of increasing de-regulaton, de-centralization, and privatizing public exchange obligations all worked to release the markets from their historical constraints.

I was somewhat surprised how readily the WSJ acknowledged that the flash crash more or less by Wall Street tinkerings with the basic trading structures. Over the past 13 years, Wall Street requested various regulations, modifications, restructurings — and they were completely accommodated by the SEC, the exchanges, CFTC, CME and others. Whether this was a case of regulatory capture, or a belief in radical deregulation movement is hard to discern at the moment.

Various Wall Street critics quoted in this article blame changes that “left markets more vulnerable to rapid and unchecked swings than had been anticipated.”

Those changes that led to the Flash Crash include the following regulatory changes:

• Regulation ATS: The SEC adopted this reg in 1998 to allow for nonexchanges to execute trades electronically.

• Dark Pools: The rise of private trading venues with no obligations to maintain stability and orderly markets;

• Penny pricing: The 2000 SEC mandate of  pricing stocks in pennies instead of 1/8 fractions (reducing per-trade profits and incentives for traders)

• Regulation NMS:  In 2005, the SEC adopted opening stock trading to greater competition, thereby ending the duopoly of the New York Stock Exchange and Nasdaq Stock Market. Goodbye specialists, hello dark pools.

• Decentralized Trading Centers: Does having numerous trading centers (vs concentrated exchanges)impact stability? Apparently yes

• Instantaneous bid/offer quotes: There should be minimum requirements on the duration of orders, which can be measured today in 1000s per second.

• Phantom liquidity: High-speed traders do not reliably supply liquidity in a crisis.  that disappears when most needed by long-term investors and other market participants?” the release asked.

One area of discussion which I doubt the SEC will discuss is the Exchanges themselves. They are the ones who sold out the investing public, allowing the high frequency, co-located servers, quote sniffing, quote stuffing algo driven traders too steal from the public at will.

In the zero sum game that is trading, every penny in profits of HFTs comes from somewhere: Your pockets. That the NYSE exchanges would even defend this is, quite frankly shameful.

The remaining issue is what the SEC is going to do about this . . .

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Sources:
Strengthening Our Equity Market Structure
Mary L. Schapiro,
U.S. Securities and Exchange Commission
Economic Club of New York, September 7, 2010
http://www.sec.gov/news/speech/2010/spch090710mls.htm

Investors, Regulators Laid Path to ‘Flash Crash’
TOM LAURICELLA, KARA SCANNELL and JENNY STRASBURG
WSJ, September 28, 2010
http://online.wsj.com/article/SB10001424052748704791004575520363764665240.html

Previously:
Prechter WTF Forecast: Dow 2,000

Via Focus.com, comes this informative infographic:

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click for ginormous infographic

Tunku Varadarajan of NYU and the Daily Beast (formerly of the WSJ Op-Ed pages) asks this interesting question:

If you were to put together a list of the “Top Dozen most consequential commentators in the American media on the economy/business” who would you include?

Recall that we previously assisted Tunku with his Most Influential Journalists (by Political Orientation)

He adds:

As always, a few rules: If we limit this list to journalist-commentators (exclude the academics who write frequently for the popular media Roubini, John Taylor, Robert Frank etc.). This is not a list of the most consequential economists, for therein lies mayhem! If we include the FT.com as part of the “American” media, and, of course, blogs, TV, and magazines; and the list will strive to be heterodox.

A classic example of someone who fits the bill would be James Grant, or Martin Wolf.

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Tonite’s crowd query: Who are the most “consequential” economy/business commentators?

Global Public Debt Clock, from The Economist:

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click for interactive graphic

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Track and forecast public debt in countries around the world, is now live on the Buttonwood Gathering website. The Global Public Debt Clock provides a graphic perspective on an important and much discussed global economic issue.

Global public debt for 2010 is close to $40 trillion and is predicted to rise to over $42 trillion in 2011. In 2009, global debt was just under $37 trillion:

-US public debt is currently at $8.5 trillion, 58 % of GDP. It is predicted to rise to $9.5 trillion in 2011, which will be 63.1% of GDP.

-Japan’s public debt is currently $10.6 trillion, 196.1% of its GDP

-Greece’s public debt is currently $374.6 billion, 127.8% of its GDP.

-Chinese public debt is approximately $949 billion, 17.3% of its GDP.

Now if The Economist would make this an embeddable widget, they would be on to something . . .

Fiberglass Freaks’ have available for purchase officially licensed 1966 BATMOBILE Replica $150k.

Is the car just a prop? Absolutely not! Whether you stay with the rebuilt Ford 460 motor, or elect to enjoy the power of a brand new GM 350 crate engine, your car will have plenty of get up and go. Yes, our cars have working headlights, turn signals, and brake lights.

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Buy Bat Parts via boingboing

Artist Anthony Freda, whose work has been featured here before, writes to say:

Barry ‘ Love the left right post, you are indeed looking at the big picture. Brought to mind this cartoon I painted. Cheers!

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Click for bigger illustration

With the QE, reflation trade back on today (buy gold, sell $’s, buy other commodities and currencies, buy Treasuries, buy stocks), the 5 year note auction was very good. Yes, there is an inherent contradiction of buying conventional Treasuries and believing in reflation but for now the Fed is on your side. The yield was 1-2 bps below the when issued and the bid to cover of 2.96 is the 2nd best since mid ’06 and above the 12 month average of 2.71. Knowing the Fed is likely to announce another round of Treasury purchases, likely a month from now, buyers now are just jumping on board. Also a potential buyer are the Japanese as they park some of the $’s they bought a few weeks ago when they intervened.

I mentioned this morning that Jeff Hirsch is the anti-Prechter — forecasting a wild $38K Dow in 2025. (Discussed this AM here, with Jeff’s full piece here)

Jeff and I are in the same secular bear market camp; However, he argues that the current secular Bear market will end ~18 years after the last secular Bull market ended in March 2,000. I cannot place the end of the Bear that precisely, but I figure its coming sometime this decade.

Ironically, the route Jeff takes to get to $38k uses an approach similar to Prechter’s: Long historic cycles that impact group psychology, with regular wars that lead to massive government interventions and big inflation (so far so good). As the chart below shows, major global wars were followed in the 20th century by high inflation and 500% market moves over the following decades. Note huge 1447% Dow move from 1982 – 2000 — the theory being it was caused by an outsized 207% CPI inflation.

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War followed by Inflation, Peace, Secular Bull Market Gains

click for ginormous graphic

chart courtesy of Stock Trader’s Almanac

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One caveat: The 3 year Korean War (1950-53), with ~37,000 US dead, is omitted from this chart. I’d like to know why (other than convenience sake) that this was not considered a military conflict on par with WWI or Viet Nam.

Case Shiller:

“Home prices crept forward in July. Ten of the 20 cities saw year-over-year gains and only one – Las Vegas – made a new bottom, as the impact of the first time home buyer program continued to fade away. The year-overyear growth rates for 16 of the cities and both Composites weakened in July compared to June.

While we could still see some residual support from the homebuyers’ tax credit, which covers purchases closing
through September 30th, anyone looking for home price to return to the lofty 2005-2006 might be disappointed. Judging from the recent behavior of the housing market, stable prices seem more likely.

Annual growth rates in 16 of the 20 MSAs and the 10- and 20-City Composites slowed in July compared to June 2010. The 10-City Composite is up 4.1% and the 20-City Composite is up 3.2% from where they were in July 2009. For June they were reported as +5.0% and +4.2%, respectively. Although home prices increased in most markets in July versus June, 15 MSAs and both Composites saw these monthly rates moderate in July.

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click for larger charts

More charts after the jump

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