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There’s been this meme circulating that 70% of all trading volume on the exchanges is HFT, and that the average holding period for stocks is 11 seconds. Punch into Google “Average Stock Holding Period: 11 Seconds” and you get 850,000 results.

The problem is, none of these “data points” are backed up with real data. I set about tracking down where this meme came from.

I had first read this number in an interview with Peter Cohan in Marketplace. I tagged Peter, and he gave me Bloomberg as the source for the 70%. It turns out that the Bloomberg article in question quotes Raymond James analyst Patrick O’Shaughnessy. He appears to made a guess that “High-frequency trading may accounts for 70 percent of share volume in the U.S.”  But that “may” mean it is a only a guess, not backed up with data. Somehow, that 70% estimate somehow morphed into a fact. I’ll reach out to O’Shaughnessy to see what he says.

As to the 11 seconds holding period, here is the NYT:

“The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said.”

This 11 seconds data point is 1) a rough number, 2) without much supporting data; 3) spitballed to a group of students, 4) for one small HFT firm.

Other people have looked at holding periods and came up with far longer holds. David Hunkar recently wrote:

“Based on the NYSE index data, the mean duration of holding period by US investors was around 7 years  in 1940. This stayed the same for the next 35 years.  The average holding period had fallen to under 2 years by the time of the 1987 crash. By the turn of the century it had fallen to below one year. It was around 7 months by 2007.

Similar pattern exists in the UK also as shown in the chart above. There the average duration has fallen from around 5 years in the mid-1960s to less than 7.5 months in 2007.

Over the past 15 years even in international equity markets, holding periods have fallen. The Chinese market was red hot until few months ago. However the duration for the Shanghai stock market index is close to just 6 months.This shows that Chinese investors do not have a long term horizon.”

The best data I’ve tracked down confirms that range of holding times.

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Conclusion: The 11 second number is wrong. There is no data supporting that. Estimates of HFT of 70% of trade volume are just that — estimates — and we have no evidenciary proof or data that HFT trade volumes are 70% . . .

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Update: O’Shaughnessy writes back “That’s an estimate I put together by speaking with various industry”

He adds: “HFTs are the new market makers, which puts them on essentially one side of all exchange trading. Exchange trading is around 70% of all trading activity, so that gets them to 35% share. Then you have a lot of exchange trades where the hft algos trade against each other, plus hfts do a lot of dark pool trading too. 70% may be a bit high but I would wager it is easily 50%.”

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Sources:
Flash Trade Halt Backed for Nasdaq, Bats as SEC Votes
Whitney Kisling and Jesse Westbrook
Bloomberg, Sept. 18 2010
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aCHizjnQq73E

Speedy New Traders Make Waves Far From Wall St.
JULIE CRESWELL
NYT, May 16, 2010  
http://www.nytimes.com/2010/05/17/business/17trade.html

Comment:

As we have noted before, the list of those that say QE2 is not necessary, or harmful is long distinguished and impressive. Today’s installment includes Peter Orzsag, Bill Gross and Ambrose Evans-Pritchard.

And, as we have previously noted, other than the doves at the FOMC, where is the list of distinguished heavyweights arguing for QE2? Even TARP had it local supporters like Warren Buffett.

The Federal Reserve appears to be acting without broad support, which may account for the next story below.

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•  The New York Times – PETER ORSZAG: Sailing the Wrong Way with QE2?

In other words, by perpetuating an artificially low 10-year government bond rate, the Fed may be delaying (even if very modestly, given the modest impact of the action on long rates) the very fiscal policy action that the nation most needs, while doing little to boost an economy whose principal problem is not high long-term interest rates.

•  Bloomberg.com – Fed Easing to Signify End of Bull Market, Gross Says
Bill Gross, manager of the world’s largest bond fund at Pacific Investment Management Co., said a renewal of asset purchases by the Federal Reserve will likely signify the end of the 30-year bull market in bonds. “Check writing in the trillions is not a bondholder’s friend,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website today. “It is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead end where those prices can no longer go up.” The Fed, led by Chairman Ben S. Bernanke, will announce another round of large-scale asset purchases when policy makers meet next week after deploying $1.7 trillion to pull the economy out of the financial crisis, according to a survey of the 18 primary dealers that trade debt with the central bank. Fed officials, who already cut interest rates almost to zero, are discussing more purchases of Treasuries to flood markets with cheap money as well as strategies for raising inflation expectations to prevent stagnating prices from undermining the recovery. Gross, a founder and co-chief investment officer of Pimco, said in March that bonds may have seen their best days while making an argument for investors to own fewer. He reduced holdings of government-related debt in the Total Return Fund for the third straight month in September, after the securities accounted for 63 percent of assets in June, the highest since it held an equal amount in October 2009.

•  Pimco – Bill Gross: Run Turkey, Run
Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion. Check writing [QE2] in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

•  Bloomberg.com – Mark Gilbert: Insane Fed Should Beware Unquantifiable Outcomes
Albert Einstein defined insanity as doing the same thing repeatedly and expecting different outcomes. The crazy gang at the Federal Reserve should heed those words when debating how much more market manipulation to inflict on the world of fixed income. The worrisome thing about so-called quantitative easing — a concept still novel enough to mean whatever the Humpty-Dumptys in central banking want it to — is that its consequences remain unquantifiable, and the perceived need for more central-bank purchases of securities should make investors uneasy. Fed Chairman Ben Bernanke said in an Oct. 15 speech that it’s difficult to work out the “appropriate quantity and pace of purchases and to communicate this policy response to the public.” He also said that “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.” Imagine a surgeon telling her patient she wasn’t sure what size scalpel she’d be using or what the likely outcome of the procedure might be. Or an architect admitting to a planning committee that he wasn’t confident about his stress calculations or the durability of the newfangled materials he was using. “Nobody understands QE,” says Fred Goodwin, a strategist at Nomura International in London. “We have no idea how inflationary it really is. A patient juiced up on QE wants to party and it does not matter what anyone says. Don’t worry about what central banks are worried about; worry about unintended consequences.”

•  The Telegraph (UK) – Ambrose Evans-Pritchard: The Fed’s impending blunder
OK, I’ve calmed down after a week of Jamon Iberico and Rioja in Granada’s Albaycin, so I will try to be polite about the US Federal Reserve. Try, that is, not necessarily succeed. For a good insight into the thinking of the New Keynesian priesthood that rules our money and our lives, it is worth reading “QE2: How Much is Needed?” by Jan Hatzius from Goldman Sachs. His argument – crudely – is that US interest rates at zero are 7pc too high given the Taylor Rule on output gaps, et cetera (not that Professor Taylor himself happens to agree, but let us not quibble). Since rates cannot be minus 7pc, the Fed would need to launch a $4 trillion blitz of fresh bond purchases to fully compensate, such is the mess that America’s leadership has inflicted on the Great Republic. I have over-simplified: Goldman Sachs relies on a “policy gap” concept, which factors in fiscal tightening et al. This would push the Fed balance sheet to $6.3 trillion, above the $5 trillion pencilled in as the upper limit during the Great Crash. Mr Hatzius is not saying the Fed will do this, or should do this. His forecast is that the Fed will start off with baby steps of $500bn spread over six months or so, rising over time to meet the bank’s “dual mandate of low inflation and sustainable employment”.

•  The Financial Times – Dollar falls as Fed credibility questioned
The dollar lost ground on Thursday as the recent rally in the currency faltered. The dollar has performed strongly over the past week as investors have covered short positions in the currency, on speculation that the Federal Reserve would take a less aggressive approach to quantitative easing than previously anticipated in its policy meeting next week. But the dollar fell on Thursday as news that the Fed had sent out a survey asking primary Treasury dealers of their expectations of the size and impact of further asset purchases. Maurice Pomery at Strategic Alpha said the credibility of the Fed might come into question as the news suggested the central bank had no idea of how much, or how, to throw additional quantitative easing into the market. “The faith in the dollar is likely to be tested and the credibility of the Fed may be as well,” he said. “Holding US assets might just become as fashionable as kipper ties and large collared shirts.”

Awesome chart, from Visualizing Economics:

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click for larger graphic

Source:  Visualizing Economics

Stock market data from Irrational Exuberance.com, by Rober Shiller

click for interactive graphic

Hat tip ChartPorn

Initial Jobless Claims totaled 434k, well below expectations of 455k and down from 455k last week. Taking out the July 4th holiday distortion to the early July reading of 427k, today’s figure is the lowest since Aug ’08. Smoothing out the data has the 4 week average down to 453k from 459k last week. The Labor Dept is saying the non seasonally adjusted gain of 3% the week after Columbus Day holiday is usually more than twice that and thus there was a drop in the seasonally adjusted figure. Continuing Claims up to 26 weeks fell to the lowest since Nov ’08 and Extended Benefits fell a net 414k. Bottom line, the drop in initial claims is very encouraging and hopefully sustainable but because of seasonal adjustment issues, let’s wait one more week before we conclude today is the beginning of a trend. The next part of the equation though is job hiring which maybe after next week, companies will get more clarity on both fiscal and monetary policy.

Individual investors are now officially giddy for stocks. As measured by the AAII survey, individual investor bullishness rose to 51.2 from 49.6 last week, to the highest since May ’08 while Bears fell to 21.6 from 25.2, the lowest since Jan ’06. Luckily we have to wait less than a week now to see what’s been priced in and what hasn’t been. The 10 yr Irish bond yield has broken out to a new high in response to the story that a block of subordinated bondholders will vote against the Irish government’s plan to restructure it. The bonds are currently trading at .20 on the euro. The yield at 6.83% is well off its early morning high because there is speculation the ECB was in the market buying Irish debt. The cost of insuring Irish debt is higher by 22 bps to 466bps, just 24 bps from a fresh high. The Euro is higher notwithstanding after Euro Zone economic confidence rose to the best since Dec ’07.

“It’s an open secret among my brethren that if you get Levine, he’s not going to rule for the investor.”

-Steven Berk, an investor protection attorney in Washington

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Michael Hiltzik of the Los Angeles Times takes Judge Painter‘s CFTC accusation against his fellow judge Bruce Levine to a new level:

“It would be hard for the commission to claim it has been unaware of serious issues with Levine’s work. My search found three cases in which it overturned dismissals by Levine, sometimes with harsh words for his performance.

In 2007, for instance, the CFTC concluded that Levine committed “procedural errors” and “severely prejudiced” an investor in his $74,000 complaint against a futures broker. The commission awarded the investor more than $32,000.

In another case, the commission overruled Levine’s dismissal of an investor’s complaint twice before finally transferring the matter to Painter. He awarded the investor, a 75-year-old retiree, $47,627.

In a third case, the CFTC bounced a dismissal back to Levine with instructions to waive the procedural rule that prompted his dismissal. Levine dismissed it again, throwing in for good measure harsh words about the commission’s performance.”

In light of Judge George Painter’s contention of Levine’s vow to never to rule in an investor’s favor appears to be borne out by the record.

Indeed, as Hiltzik states, “When George H. Painter says the game is rigged against the small investor in Washington, I have reason to take him at his word.”

And Hiltzik expands:

“I first encountered Judge Painter nearly three decades ago, when he issued a number of stern rulings involving a Newport Beach investment operator I had been writing about.

The investment firm, Monex International, had been hawking illegal futures contracts, he ruled. In one case, he found that Monex had ignored a customer’s repeated pleas to cash out her deteriorating stake, and awarded her $20,000 in reparations.

When I reached Painter again last week, he didn’t seemed to have changed much. “It’s gone to hell,” he said, referring to the standing of the investor at the CFTC. “But it’s always been that way, hasn’t it? We’re not prosecuting the bad guys.” For the record: He sounded perfectly lucid . . .

Under normal circumstances, Painter’s view might be taken to heart by the bureaucratic establishment in Washington. It was regulatory agencies’ failures to look out for consumers that helped win enactment of a new consumer protection agency this year.”

The CFTC, which regulates the commodity futures markets, has very much been captured by the group it is charged with regulating. If you are an investor in commodities, you should expect rape and pillage as part of the “servicing” you get from the industry and its regulators.

I never thought I would say this, but the CFTC makes the absurd arbitration process for equities look almost fair by comparison.

Bottom line: Speculate in Futures with risk capital only, and assume that 1) you will lose most if not all of your monies; b) if you are wronged, you should not have any expectations of obtaining Justice through the CFTC judicial process.

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Source:
Retiring CFTC judge’s allegations should concern small investors
Michael Hiltzik
Los Angeles Times, October 26, 2010
http://www.latimes.com/business/la-fi-hiltzik-20101026,0,180301.column

Here’s how to start your morning with a laugh:

Can you find:

George Dubya Bush, Ayn Rand,  Erin Callan, Steve Flintstone, Wall Street Madam, Chris “Party Time” Cox, Chucky the Dancer Prince, Sandy 2Big2Fail Weill, Charles Ponzi, Johnny Comode, Hank Greenberg, Senator Dodge, Ronald & Bonzo, Jamie Dimon, Bubba Clinton, Gideon Gono, Barney Rubble, Robert Rubin, Vikram Pandit, Tyler Durden, John Howstheweather, Jimmy Cannibis, Bernie Madoff, Dr Ben, Alan Greenspan, Hank Paulsen, Forest Gump, Bobby Dylan, Christine Romer, WillamBanzai7, Mad Cramer, John Milton Clown, Maria Bartiromo, Uncle Milton, Obama Bin Banksta, Justin Bieber, Stan Oh Shit!, Super Gramm, Father Blankfein, Lucas Van Praag, Neal Cash N Carry, Warren Buffoon, TurboTim, Joey Fast Talk Cassano, Fabrice Tourre, Angelo Godzilla, Dick the Gorilla, Chuckie Fast Trade Schumer, Ken Screwless Lewis, Larry Summers

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click for ginormous graphic

Anyone know the source of this?

Source: The WilliamBanzai7 Blog

Karl Denninger really unloads on the Tea Party crowd:

It began as a movement to take back the United States from corrupt politicians. The Tea Party movement has been hijacked by Republicans and is now all about guns, gods and gays. Karl Denninger of The Market Ticker was one of the original founders of the Tea Party and calls the direction of the group an absolute joke.

See also:

• To The Tea Party: Go Screw Yourself

• America Doesn’t Want Tea

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