Is The Stock Market Rigged - You Tell Me

[Copper Catcher]

Is High-Speed Computer Trading Killing Investing?
Source: http://www.genesisselect.com/is-high-sp ... investing/

High speed computer trading by funds with holding periods of sometimes just milliseconds are to blame for rising volatility, the disappearance of diversification and the death of individual stock picking, and the problem is going to get worse, say an number of traders and market strategists.

“From our perch, trading customer business day in and day out, we can certainly say that high frequency trading has amplified market moves, both up and down,” said Sal Arnuk, co-head of equity trading at Themis Trading who advised the SEC after last year’s so-called flash crash. “High frequency trading does not analyze fundamental metrics of corporations. It analyzes data patterns.”

Need evidence? The S&P 500 rose or fell greater than 2 percent during half of the trading days in August. This unprecedented volatility stretch included, for the first time ever, four consecutive days where the Dow Jones Industrial Average moved more than 400 points. The CBOE Volatility Index was up 45 percent in August.

Since the recent decline really began to take hold on July 7, every sector of the market, from financials to the very different utilities, has had a daily correlation of 0.9 or higher to the S&P 500, according to Bespoke Investment Group. Even crude oil has moved in lockstep with the S&P 500, trading in-line with the equity benchmark during 85 percent of the trading days.

Trying your hand at stock picking? Over the last month, just 22 stocks in the S&P 500 are higher. One Dow member, McDonald’s, is positive over that same period, with a 1 percent return. This data begs the question: Are individual prospects for these companies simply just all deteriorating at the same time or is the mass buying and selling by computers detaching stock prices from fundamentals?

High frequency traders “hold positions between 10 milliseconds and 10 seconds,” according to a recent study in the Review of Futures Markets journal. The study estimates that anywhere from 40 to 70 percent of all volume on U.S. equities market is done by a type of computer trading, but many traders speculate that percentage has increased recently.

“Individual stocks seem to have less alpha and more beta in their returns,” said Ed Yardeni of Yardeni Research and a former chief strategist at Prudential and Deutsche Bank, in a note to clients this month. “This explains why valuation multiples have both declined and converged across different sectors, industries, and styles.”

The price-earnings ratios, based on forward analyst estimates, for the 9 major market sectors all hover around ten, according to Finviz.com. Financials have the lowest forward multiple at 8.8 and utilities have the highest at 13. Health care, industrials, basic materials and conglomerates all have P-E ratios of about 10 times estimates.

Professor Luc Bauwens of Catholic University in Louvain, Belgium, who is quoted frequently in the recent Review of Futures Markets piece, believes that computer trading could add to market liquidity, but also acknowledges it could be making markets less efficient.

“Correlation between intraday returns of stocks has increased without apparently much reason, and this may be caused by HFT driven by econometric models disconnected from fundamentals,” the paper cites Bauwens as saying.

“Since 2008 investors, whether they be hedge funds or asset managers, have learned that if you are in an individual name the liquidity disappears and you are trapped,” said Alec Levine, an equity derivatives strategist with Newedge group. “It becomes you against the [algorithmic traders] as no bank will interposition in those types of markets.”

Some of this computer trading is done on behalf of exchange-traded funds, which make it possible to buy and sell whole sectors and markets as easily as a single stock. The popularity of these vehicles is also adding to the correlation and decreased opportunities for successful stock picking, traders said.

The major players at the pure ‘HFT’ game include the firms Getco, Tradebot, Citadel, Quantlab, D.E. Shaw, SAC Global Advisors and investment banks Goldman Sachs, Morgan Stanley and Deutsche Bank, according to the journal.

“High frequency trading are firms using high speed, co-located servers at exchanges to trade ahead of bids and offers from real investors by fractions of a penny for nanoseconds,” said Jon Najarian of TradeMonster.com. “If the SEC sits idly by then the U.S. capital markets will collapse. Nanosecond trading will give way to picosecond trading and so forth. All they do is push out any other potential real liquidity provider with their fake liquidity.”

Originally Published: Wednesday, 24 Aug 2011

By: John Melloy

[barrytrot]

Is High-Speed Computer Trading Killing Investing?
Source: http://www.genesisselect.com/is-high-sp ... investing/

High speed computer trading by funds with holding periods of sometimes just milliseconds are to blame for rising volatility, the disappearance of diversification and the death of individual stock picking, and the problem is going to get worse, say an number of traders and market strategists.

“From our perch, trading customer business day in and day out, we can certainly say that high frequency trading has amplified market moves, both up and down,” said Sal Arnuk, co-head of equity trading at Themis Trading who advised the SEC after last year’s so-called flash crash. “High frequency trading does not analyze fundamental metrics of corporations. It analyzes data patterns.”

Notice the key phrase here *amplified market moves* They aren't defining the direction, they are just amplifying it.

Need evidence? The S&P 500 rose or fell greater than 2 percent during half of the trading days in August. This unprecedented volatility stretch included, for the first time ever, four consecutive days where the Dow Jones Industrial Average moved more than 400 points. The CBOE Volatility Index was up 45 percent in August.

Since the recent decline really began to take hold on July 7, every sector of the market, from financials to the very different utilities, has had a daily correlation of 0.9 or higher to the S&P 500, according to Bespoke Investment Group. Even crude oil has moved in lockstep with the S&P 500, trading in-line with the equity benchmark during 85 percent of the trading days.

Trying your hand at stock picking? Over the last month, just 22 stocks in the S&P 500 are higher. One Dow member, McDonald’s, is positive over that same period, with a 1 percent return. This data begs the question: Are individual prospects for these companies simply just all deteriorating at the same time or is the mass buying and selling by computers detaching stock prices from fundamentals?

High frequency traders “hold positions between 10 milliseconds and 10 seconds,” according to a recent study in the Review of Futures Markets journal. The study estimates that anywhere from 40 to 70 percent of all volume on U.S. equities market is done by a type of computer trading, but many traders speculate that percentage has increased recently.

“Individual stocks seem to have less alpha and more beta in their returns,” said Ed Yardeni of Yardeni Research and a former chief strategist at Prudential and Deutsche Bank, in a note to clients this month. “This explains why valuation multiples have both declined and converged across different sectors, industries, and styles.”

What's funny is they are saying not to pick individual stocks just because fewer of them did well? So we should pick "the average" (BAD) meaning we are guaranteed to do poorly? No, I think this is a STRONG TESTIMONY that we need to pick companies not indexes. 23 companies did well. I don't have a list, but I bet if we listed them out that the members of this board could pick 23 companies and 18 or so of them would be in the "good category". It's not difficult to find the good companies. And it's even easier to find the bad ones.

The price-earnings ratios, based on forward analyst estimates, for the 9 major market sectors all hover around ten, according to Finviz.com. Financials have the lowest forward multiple at 8.8 and utilities have the highest at 13. Health care, industrials, basic materials and conglomerates all have P-E ratios of about 10 times estimates.

Low PE = lower risk.

I love the fact that even companies that have been doing exceptionally well for 5+ years have PEs lower than ever before. It makes the up side better and the down side "less bad". It takes out so much of the risk when the valuation can't just compress by 50% without a blink. Compressing from 10 to 5 is nigh impossible for any growing company so, virtually no extreme downside risk!

Professor Luc Bauwens of Catholic University in Louvain, Belgium, who is quoted frequently in the recent Review of Futures Markets piece, believes that computer trading could add to market liquidity, but also acknowledges it could be making markets less efficient.

“Correlation between intraday returns of stocks has increased without apparently much reason, and this may be caused by HFT driven by econometric models disconnected from fundamentals,” the paper cites Bauwens as saying.

“Since 2008 investors, whether they be hedge funds or asset managers, have learned that if you are in an individual name the liquidity disappears and you are trapped,” said Alec Levine, an equity derivatives strategist with Newedge group. “It becomes you against the [algorithmic traders] as no bank will interposition in those types of markets.”

Some of this computer trading is done on behalf of exchange-traded funds, which make it possible to buy and sell whole sectors and markets as easily as a single stock. The popularity of these vehicles is also adding to the correlation and decreased opportunities for successful stock picking, traders said.

The major players at the pure ‘HFT’ game include the firms Getco, Tradebot, Citadel, Quantlab, D.E. Shaw, SAC Global Advisors and investment banks Goldman Sachs, Morgan Stanley and Deutsche Bank, according to the journal.

“High frequency trading are firms using high speed, co-located servers at exchanges to trade ahead of bids and offers from real investors by fractions of a penny for nanoseconds,” said Jon Najarian of TradeMonster.com. “If the SEC sits idly by then the U.S. capital markets will collapse. Nanosecond trading will give way to picosecond trading and so forth. All they do is push out any other potential real liquidity provider with their fake liquidity.”

Originally Published: Wednesday, 24 Aug 2011

By: John Melloy

My constant mantra: Forget about the inter-day moves or even the inter-week moves. Good companies make money. Money = stock price in the long run.


This is the best market in 5 years for being able to make safe trades easily.

[Market Harmony]

Yes, it is rigged. There is no doubt in my mind. The time of change will only come when a big chunk of money (whether lots of money from one person or smaller amounts from lots of people) figure out how to beat the machine and the large banks implode because they are the major users of the technology. And it is possible to beat the machine... it's just an unadaptable series of 1's and 0's programmed by a human to prey on the emotion of a trade. If it can be beaten, it will be beaten.

[Lemon Thrower]

all the markets are rigged.

btw, the first battle is to save, second battle is to figure asset allocation. we are about halfway through a 15-20 year bear market in stocks right now.

[theo]

Its my understanding that high frequency trading makes money off the market in two ways.

1. These high speed programs react a little faster than other participants. This allows the users to buy at a fraction lower or sell at a fraction higher. However, when millions of shares are being traded these fractions add up. Kind of like the penny stealing program on the movie "office space."

2. They increase volatility by using emotion to manipulate trades as MH suggested. It amplies down moves to force selling which creates bargains, and then it pushes the up move a little higher to allow them to make money when selling. Not unlike "Boiler Room's" pump and dump but en mass.

[Diggin4copper]

If someone beats the machine, they will go to jail. Unless it is the right person......