Stocks in the US markets slipped on Friday, ending the Dow Jones Industrial Average’s (DJIA) longest winning streak since 1996, just after snapping a 10-day run. Data from Thomson Reuters’ Lipper service showed that investors in U.S.-based funds had poured $11.26 billion of new cash into stock funds this last week, the most since late January. The DJIA slipped 25.03 points, or 0.17 percent, to 14,514.11 at the close. Meanwhile, it was announced that the fewest workers on record were fired in January and job openings rebounded, showing employers were gaining confidence the U.S. expansion would be sustained.
According to some pundits, recent market activity is essentially driven by positive corporate earnings. The S&P500 Price/Earnings (PE) ratio is currently slightly high at 16.5, if we compare with past indicators. The median S&P500 Trailing Twelve Months (TTM) PE ratio has been about 14.5 over the last 100 years; average is around 16. It was during much of 2009 when the disconnect between price and TTM earnings was so extreme that the P/E ratio was in triple digits, as high as the 120s. Going back to the 1870’s, the average P/E ratio has been about 15; therefore, the US equity markets are not excessively valued, leaving some room for further growth.
Other pundits point to the Federal Reserve’s determination to continue stimulating the economy with increased liquidity. Mohammed Apabhai, head of Asia trading at Citigroup Global Markets, favors this train of thought. He has noted that there is a 70 percent correlation between stock market performance and liquidity, “whether it’s through the promise of lower rates, QE (Quantitative Easing) or promise of more QE.” The Federal Reserve has launched three rounds of Quantitative Easing since the financial crisis hit in 2008.
More likely, both factors are in play, very good corporate earnings and monetary policy that pushes investors to take risks in equities. So is the earnings momentum sustainable? Unfortunately, savings from the smaller share of the pie from labor, government spending and earnings coming from emerging markets (EM) outside the US are all factors that will be curtailed at some moment. Is the Fed eager to continue being the huge player in this equation? Some of its members are increasingly worried about the effectiveness of the continued QE; if the labor market recovers, as the January numbers showed, the Fed most probably might be ending its bond purchases soon.
As pointed out by James Saft, wages in the US have taken a smaller and smaller piece of the pie; now below 44pc of GDP and dropping, down several percentage points since 1999. That is in part the consequence of globalization and the offshoring of jobs. However, the labor which can be offshored largely has already been and the likely trend is for new manufacturing technologies to start pushing jobs back into the US. As has been of national knowledge as well, there is a real danger of declining government spending. A dollar spent by the government is a dollar that supports household income, and consumption, and of course corporate profits; there will be less dollars starting this month thank to the sequester, a series of spending cuts and tax increases aimed at reducing the budget deficit.
Emerging markets are looking overstretched heading into the second quarter, Barclays Capital said in a report dated March 15, pointing out that the cyclical recoveries in EM have slowed down. Consensus growth forecasts (according to Bloomberg) have been revised down by 0.75 percentage points on average since mid-2012. EM equities have been slow to react to these developments due partly to the continued inflows into the asset class from retail clients. The correction has started recently and the performance by country year to date has been mixed, but the most pronounced selloffs have been associated with the largest revisions to GDP growth forecasts. Adding to this dire situation, the economies of emerging markets grew at a slower pace in February than the month before, according to HSBC’s monthly purchasing managers’ index. The PMI recorded a level of 52.3, down from 53.8 in January, its lowest since August. The index covers 16 leading emerging markets, including India, Brazil and China, which all saw their rate of growth fall. Investors had been questioning whether emerging markets, whose growth depends in part on exports to mature markets, could continue to expand at fast rates of almost 10% in some cases.
What the equity markets want indeed is stable and/or predictably increasing US profits and the Fed to stay in the bond markets. Saft ironically suggested that markets’ best hope might be a cut in government spending deep enough to kill job growth and indefinitely extend QE, something that nobody else would agree with. Instead, markets would be happy with a bit of positive news today followed by another bit of negative news tomorrow. Unfortunately for the markets, profits will start showing stagnation starting with first quarter results. Federal Reserve said in September 2012, when QE3 was announced, that it would start pumping $40 billion a month to purchase agency mortgage-backed securities (MBS) until the labor market improves substantially. When will the Fed determine that the job market has made enough progress to reduce stimulus? The numbers for February will prove paramount in this regard. As these two important factors converge in a nightmarish scenario, equities markets should beware of the ensuing correction, coming as early as in the second quarter.Read Full Post | Make a Comment ( None so far )
Beyond the memories of the recent financial crisis and doubts about the safety and fairness of the equity markets, events such as the Flash Crash of May 2010, the hugely distressing Facebook NASDAQ initial public offering and trading malfunctions at Knight Capital and Nasdaq OMX were wrongly associated with high-frequency trading (HFT) and characterized as shocks to the psyche of average investors. The around $130 billion outflows from domestic equity mutual funds in 2012 led to Joe Saluzzi, co-head of trading at Themis Trading, to say as recently as of December 2012 that “all of those events are confidence-shattering events.”
Furthermore, U.S. congressman Ed Markey tried to persuade the SEC that high-frequency trading was driving investors off the electronic trading highway completely because it was eroding confidence in U.S. markets. Congressman Markey wrote that “sophisticated trading firms can make full use of light speed HFT algorithms, while the ordinary investor day-trading his 401k remains at more terrestrial speeds. There is a real risk that algorithmic trading is making investors hesitant to re-enter the equity markets because they fear that the entire game is rigged.” Ultimately, he proposed that HFT should be curtailed immediately.
Data from Trim Tabs Investment Research appeared to support Mr. Saluzzi and Congressman Markey’s concerns. Their data show outflows from U.S. equity mutual funds in 2008 hit a record $148 billion; in 2009, confidence appeared to be stabilizing as outflows from U.S. equity mutual funds totaled just $28 billion, only to grow again in 2010 to hit $81 billion, $132 billion in 2011 and last year totaled $130 billion. So what would they say now that the Washington-based Investment Company Institute has revealed that equity mutual funds have gathered $29.9 billion in January’s first three weeks, more than for any full month since 2006? Moreover, long-term funds, which exclude money-market vehicles, attracted $64.8 billion in the first three weeks of the month. The previous record was $52.6 billion for all of May 2009.
What was the catalyst of the change in trend? Was HFT suddenly disappearing from the equity markets? As we have suspected in the past, it was the health of the economy. The dysfunctional behavior of the leadership in Washington, leading to a crisis of significant proportions in December 2012, was holding market participants from making investment decisions; when Washington still managed to temporarily solve the fiscal cliff issue, allowing the government to remove its borrowing cap and removing the terrifying prospect of sovereign default, investors rushed into stocks (and bonds too), setting the stage for the biggest month on record for deposits into U.S. mutual funds.
We are looking at forces beyond the niche of algorithmic and high-frequency trading in action here. Signs of improvement in the U.S. economy and a rising stock market (that pushed the Dow Jones Industrial Average above 14,000 on February 1 for the first time since 2007) are now prompting Americans to step up their investments. Hiring climbed in January as well, providing further evidence that the U.S. labor market is making progress. As the economy overall makes progress, inflows will increase as more and more households and companies start to invest in the financial markets, creating a net impact in the real economy, and further reinforcing the performance of the markets. Once again, the phrase “it is the economy, stupid!” remains as valid as ever.Read Full Post | Make a Comment ( None so far )
2010年5月的“闪电崩盘”及Facebook在骑士资本和纳斯达克的IPO交易故障等事件，都被错误地与高频交易联系到一起，被描绘为对普通投资者造成灵魂冲击。但真正原因是经济健康问题。It is the economy, stupid。这个短语仍旧有效。
除了与最近一次金融危机有关的记忆以及有关股票市场安全性和公平性的疑问以外，2010年5月份的“闪电崩盘”及Facebook在骑士资本和纳斯达克市场上令人感到非常沮丧的IPO(首次公开招股)交易故障等事件都被错误地与高频交易联系到一起，被描绘为对普通投资者造成了灵魂冲击。Read Full Post | Make a Comment ( None so far )
Financial exchanges play a vital role in economic development as one of the primary tools for the allocation of capital in both developed economies and emerging ones. The indices created using the platforms provided by global exchanges are used by the financial services industry and the government as barometers of economic health and a predictor of national financial well-being.
However, the exchanges model has changed dramatically over the past decade starting with demutualization. The first wave began with the Stockholm Stock Exchange (STO) in 1993 and included the Bombay Stock Exchange (BSE) in 1995 and Borsa Italiana (BVME) in 1997. Demutualization was followed by a second stage in which a number of exchanges became publicly traded and profit-seeking companies listed on their own platform, with the Australian Securities Exchange (ASX) being the first to follow this model in 1998. Such restructurings are still taking place in exchanges all over the world.
Exchanges have come under increasing regulatory attention. In the US, for instance, the Securities and Exchange Commission is expanding an enforcement probe into a broader look at how exchanges develop new products, communicate with investors and provide incentives to trade; this was sparked partly by an SEC probe into trading order types apparently benefiting high-speed traders, whose activity comprises more than half of all stock-trading volume.
As companies exercise more flexibility in seeking to raise capital outside their national boundaries, the environment has become even more competitive for exchanges. Furthermore, they are hugely capital intensive (mostly due to the IT infrastructure required for increasingly high frequency trading), reason why some exchanges are looking to grow through acquisitions in order to enjoy greater economies of scale.
While these challenges are common to exchanges worldwide, the impact on their bottom lines has been rather diverse. For instance, the Philippines Stock Exchange (PSE) doubled its profit in the first nine months of 2012 compared to last year. While the exchange benefited tremendously from the favorable economic environment and sky-high optimism in the country, there were a number of reforms implemented by the PSE, including the rollout of a new trading system, extension of trading hours and implementation of multiple regulatory and governance enhancements.
London Stock Exchange (LSE) reported a profit for the first half of the year nearly unchanged from last year as strong performance in information services helped offset weak capital markets. The exchange highlighted the benefits of its increasingly diversified international group and the growth from its Information, Post Trade and Technology businesses; the exchange reported a 66 percent increase in Information Services revenue, while Capital Markets revenue dropped 19 percent.
On the other side of the spectrum, NYSE Euronext, the operator of the New York Stock Exchange and other stock exchanges, announced that its third-quarter profit fell 46 percent, which the company attributed to reduced average daily trading volumes, primarily related to its derivatives business. It said its results last year were helped by the extreme volatility of the markets in Europe and the United States due to debt concerns. Certainly, volatility has declined considerably since then, reaching multi-year lows in August 2012.
Exchanges are responding to this increasing competition in a number of ways. Negotiating mergers has been the first option considered by a number of companies, only to be derailed in some cases by regulators or rebuffed by targets. NYSE Euronext face resistance from European regulators on its proposed combination with Deutsche Boerse; ASX’s agreement with Singapore Exchange (SGX) fell through as well; LSE dropped its bid for Toronto Stock Exchange (TSX) after its owners spurned them in favor of the bid from a group of Canadian banks and pensions. However, that doesn’t mean that exchanges will not attempt to find combinations that don’t run afoul of regulations, just because mergers almost in all cases strive to provide an avenue to widen their business model and to exploit economies of scale, economies of network, cross selling opportunities and trading hours; for instance in Asia, Tokyo and Hong Kong shortened their midday halt to one hour last year, while Singapore scrapped its lunch break altogether, joining Australia, South Korea and India on the list of exchanges that have uninterrupted trading days.
Second, developing cutting edge-edge technology and its further commercialization is paving the way to extract additional profits from investments already paid. For instance, LSE leveraged its IT investments with the adoption of an outsourced managed services model that allowed the exchange to run other exchanges, such as the Johannesburg Stock Exchange, using its own platform. Building a major technology franchise through outsourcing was vital for the LSE if it was to continue to compete with the likes of NYSE Euronext and Nasdaq OMX, which had extended their brand and influence in several emerging markets through major technology deals.
Finally, exchanges are standing up to the challenge of diversifying their business model. Exchanges that were primarily focused on cash trading decided to integrate services such as the trading of derivative financial instruments markets. As it was the case for LSE, information services delivered in machine-readable format are providing growth opportunities for exchanges worldwide; RapiData, company acquired by Nasdaq OMX, enabled the company to deliver U.S. government and other economic news directly from the source to customers interested in receiving information in an electronic feed, giving them instant access to events that are incorporated into algorithmic trading systems. The perennial appetite of high-frequency and algorithmic trading firms for faster access to trading data is also encouraging exchanges to provide colocation services that bring all participants equal access to their matching engines. Ultimately, exchanges will be forced to explore all upstream and downstream opportunities in the production chain of the exchange industry, from the above mentioned information services upstream to the integration of clearing and settlement services downstream.
Revenues at exchanges will need to evolve from its reliance on volume-dependent fees and commissions for a range of activities (including trading, listing, clearing, settlement, depository, custody and nominee services) to uncorrelated income sources that might not have existed just a few years ago; the infrastructure they have, the data they manage and proximity to their matching engine are all key assets that need to be fully exploited if exchanges are to succeed in 2013 and beyond.Read Full Post | Make a Comment ( None so far )
No other than European Central Bank policymaker Ewald Nowotny called today for a regulatory ban on high-frequency trading, saying the technique of using computer algorithms to generate multiple high-speed trades had no practical value.
Reading the note from Reuters made me wonder whether Mr. Nowotny had thought about the consequences of a potential ban, when the technique already has more than 50% participation of equities trading in the continent.
“With high-frequency trading there is nothing to be regulated, it is to be banned. There is no really demonstrable net advantage from this (form of trading),” he told a panel discussion at a regulatory conference.
Mr. Nowotny, who heads the Austrian National Bank, would certainly benefit from attending one of my workshops. While I only have New York, September 25, Chicago, October 9, Dubai, October 14, Jakarta, November 16, Shanghai, November 22, and London, December 12, in my calendar for the year, I am faced with the urgent need to take my slides to Austria and add some light where darkness seems to be reigning; at least, I might schedule a stop in the Kitzbühel Alps.Read Full Post | Make a Comment ( None so far )
[ 在高頻交易中，如果要確保資本的有效使用，高頻交易員會希望交易價格最低的股票，這樣每筆交易的利潤保持不變但是利潤百分比就高了。這就是為什么股票的流動性和低價格成為高頻交易策略中重要的組成部分 ]
2008年金融危機以來，許多對沖基金紛紛倒閉，投資者們也謹慎地捂緊錢袋，然而，有一種交易模式卻在不斷擴張，以它為商業模式的基金也如雨後春筍，這就是高頻交易(High-Frequency Trading)。這種盈利模式的核心競爭力在哪裡，前景又如何？Read Full Post | Make a Comment ( None so far )