Shrinking Market Liquidity, or the Soon to Appear Black Swan of Black Swans

"Anyone who is doing anything sensible right now is either losing money or is out of the market entirely." These are the words of a quant trader, who is seeing something scary in the capital markets. Scary enough to merit a warning that we could be on the verge of another October 87, August 2007, or January 2008.

Let's back up. I recently posted a chart which tracks equity market neutral strategies: in essence a cross section of quant funds for which there is public performance tracking. The chart is presented below (click to enlarge).



There is not much publicly available data to follow what goes on in the mystery shrouded quant world. However, another chart that tracks the market neutral performance is the Highbridge Statistical Market Neutral Fund (HSKAX), presented below (click to enlarge). As one can see, we have crossed into major statistically deviant territory, likely approaching a level that is 6 standard deviation away from the recent norms.



What do these charts tell us? In essence, that there is a high likelihood of substantial market dislocations based on previous comparable situations. More on this in a second.

Why quant funds? Or rather, what is so special about quant funds? The proper way to approach the question is to think of the market as an ecosystem of liquidity providers, who, based on the frequency of their trades, generate a cushioning to the open market trading mechanism. It is a fact that the vast majority of transactions in the market are not customer driven buy/sell orders, but are in fact high frequency, small block trades that constantly cross between a select few of these same quant funds and program traders.

This is a market in which the big players are Renaissance Technologies Medallion, Goldman Sachs (GS) and GETCO. Whereas the first two are household names, the last is an entity known primarily to quant market participants. Curiously, the Philosophy section in GETCO's website exactly captures the critical role that quant funds play in an "efficient" market.

What’s good for the market is good for GETCO

GETCO’s strategy is to align our business plan with what is best for the marketplace. We earn our revenues by providing enhanced liquidity and efficiency to electronic financial markets, which in turn results in lower costs for market participants (e.g. mutual funds, pension funds, and individual investors).

In addition to actively trading, we partner with many exchanges and their regulators to increase transparency throughout the industry and to create more efficient means for the transference of financial risk.

A good example to visualize the dynamic of this liquidity "ecosystem" is presented below (click to enlarge):

In order to maintain market efficiency, the ecosystem has to be balanced: liquidity disruptions at any one level could and will lead to unexpected market aberrations, such as exorbitant bid/ask margins, inability to unwind large block positions, and last but not least, explosive volatility: in essence a recreation of the market conditions approximating the days of August 2007, the days post the Lehman collapse, the first November market low, the irrational exuberance of the post New Year rally, and the 666 market lows.

The above tracking charts indicate that something is very off with the "slow", "moderate" and "fast" liquidity providers, indicating that liquidity deleveraging is approaching (if not already is at) critical levels, as the vast majority of quants are either sitting on the sidelines, or are merely playing hot potato with each other (more on this also in a second). What this means is that marginal market participants, such as mutual and pension funds, and retail investors who are really just beneficiaries of the liquidity efficiency provided them by the higher-ups in the liquidity chain, are about to get a very rude awakening.

Also, it needs to be pointed out that the very top tier of the ecosystem is shrouded in secrecy: conclusions about its state can only be implied based on observable metrics from the HSKAX and HFRXEMN. It is safe to say that any conclusion drawn based upon observing these two indices are likely not too far off the mark.

Skeptics at this point will claim that it is impossible that quant and program trading has such as vast share of trading. The facts, however, indicate that not only is program trading a material component of daily volumes, it is in fact growing at an alarming pace. The following most recent weekly data from the New York Stock Exchange puts things into perspective (click to enlarge):

According to the NYSE, last week, program trading was 8% higher than the 52 week average, which on almost 4 billion shares is a material increase. It is probably safe to say that the 1 billion in program trades last week does not account for significant additional low- to high-frequency trades originated at non NYSE members, implying the real number for the overall market is likely even higher. Some more program trading statistics:

principal trading is running 21% above 52 week average, agency trading is 11% below average, while NYSE weekly volume is running about 9% below 52 wk average.

A very interesting data point, also provided by the NYSE, implicates none other than administration darling Goldman Sachs in yet another potentially troubling development. The chart below (click to enlarge) demonstrates the program trading broken down by the top 15 most active NYSE member firms. I bring your attention to the total, principal, customer facilitation and agency columns.

Key to note here is that Goldman's program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x.

The implication is that Goldman Sachs, due to its preeminent position not only as one of the world's largest broker/dealers (pardon, Bank Holding Companies), but also as being on the top of the high-frequency trading/liquidity provision "food chain", trades much more often for its own (principal) benefit, likely in tandem with the other top dogs on the list: RenTec, Highbridge (JP Morgan (JPM)), and GETCO. In this light, the program trading spike over the past week could be perceived as much more sinister. For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this.

Following on the circumstantial evidence track, as Zero Hedge pointed out previously, over the past month, the Volume Weighted Average Price of the SPY index indicates that the bulk of the upswing has been done through low volume buying on the margin and from overnight gaps in afterhours market trading.

The VWAP of the SPY through yesterday indicated that the real price of the S&P 500 would be roughly 60 points lower, or about 782, if the low volume marginal transactions had been netted out. And yet the market keeps on rising. This is an additional data point demonstrating that the equity market has reached a point where the transactions on the margin are all that matter as the core volume/liquidity providers slowly disappear one by one through ongoing deleveraging.

Unfortunately for them, this is not a sustainable condition.

As more and more quants focus on trading exclusively with themselves, and the slow and vanilla money piggy backs to low-vol market swings, the aberrations become self-fulfilling. What retail investors fail to acknowledge is that the quants close out a majority of their ultra-short term positions at the end of each trading day, meaning that the vanilla money is stuck as a hot potato bagholder to what can only be classified as an unprecedented ponzi scheme. As the overall market volume is substantially lower now than it has been in the recent past, this strategy has in fact been working and will likely continue to do so... until it fails and we witness a repeat of the August 2007 quant failure events... at which point the market, just like Madoff, will become the emperor revealing its utter lack of clothing.

So what happens in a world where the very core of the capital markets system is gradually deleveraging to a point where maintaining a liquid and orderly market becomes impossible: large swings on low volume, massive bid-offer spreads, huge trading costs, inability to clear and numerous failed trades. When the quant deleveraging finally catches up with the market, the consequences will likely be unprecedented, with dramatic dislocations leading the market both higher and lower on record volatility. Furthermore, high convexity names such as double and triple negative ETFs, which are massively disbalanced with regard to underlying values after recent trading patterns, will see shifts which will make the November SRS jump to $250 seem like child's play.

For readers curious about just how relevant liquidity is in the current market, I recommend another recent post that discusses DE Shaw's opinion on the infamous basis trade, in which their conclusion was that establishing a basis trade, which is effectively the equivalent of selling a put option on market liquidity, ended up in massive financial carnage as the market rolled from one side of the trade to another. Is it possible that what the basis trade was for credit markets (most notably Citadel, Merrill and Boaz Weinstein), so the quant unwind will be to equity markets?

So when will all this occur? The quant trader I spoke to would not commit himself to any specific time frame but noted that a date as early as next Monday could be a veritable D-day. His advice on a list of possible harbingers: continued deleveraging in quant funds as per the charts noted above, significant pre-market volatility swings as quants rebalance their end of day positions, increasing principal program trading by Goldman Sachs on decreasing relative overall trading volumes, ongoing index VWAP dislocations.

One thing is for certain: the longer the divergence between real volume trading/liquidity and absolute market changes persists, the more memorable the ensuing market liquidity event will be. At the end of the day, despite the pronouncements by the administration and more and more sell-side analysts that the market is merely chasing the rebound in fundamentals in what has all of a sudden become a V-shaped recovery, the "rally" could simply be explained by technical factor driven capital-liquidity aberrations, which will continue at most for mere weeks if not days.

Comments

[investor88:]

OK a welcome article to be on guard although the trend is still bullish.

Apr 12 07:57 AM

[Russian:]

To Cetin and many others like him: Tyler Durden always gives a unique perspective, whether you agree with him or not, unlike many other posts and frequent authors that recite the same themes as everyone else and add nothing to at least my knowledge. I just don’t get people who instead of arguing the issues accuse this author of everything including his weird picture and name. If you don’t like his posts, don’t read them. If disagree, please give your reasons. But please, don’t junk up this website with non-informative and nonsensical comments. Cetin has 567!!! many of which are negatively rated by others.

Apr 12 10:08 AM

[maxjones:]

Does Goldman Sachs qualify as a "quant fund" or is it in some other class or group or category of "liquidity providers"? (and hot air providers too.... and for why I think so, please see my next point)

Its CEO Mr. Blankfein (a guy I wouldn't buy a used car from) was less than impressive (to anyone watching carefully) the other evening when he spoke on CNBC from some venue I can't recall.

At one point those two protesting ladies holding up that banner saying "give us our money back" came up and stood behind him. Whatever one may think of their tactics (and personally I really don't think much of them) what was most interesting was Mr. Blankfein's response and way of handling the situation which went something like this: "since people have now seen your banner, why don't you just run along now and I will answer your point at the end of my talk".

They the pari of ladies left (and they should never have been there in the first place) (but since they went up there they shouldn't have let him talk them out of whatever they were up there for, so easily) but Mr. Blankfein predictably DID NOT take up "their point" (whatever it was) "at the end of his talk".

In other words he just lied to them as he is accustomed to doing the rest of the time anyway. What he basically said was "you just trust in me and I will address your concerns "later". With "later" of course never coming! This seemed to me confirm precisely what those protesters were protesting about: Making empty promises, lying, using smooth talk and jargon to bamboozle anyone but the most expert....and going on doing precisely the same self interested things under the guise of extremely helpful and sophisticated "wall -street - ism". (to coin a new term)

And so it "populism" (another slightly older term) to want to put a guy like that (and his other happy "partners" and cohorts that "thin out" by natural selection at Goldman Sachs) comfortably behind bars maybe as Mr. Made-Off's next door neighbours? (they would have plenty to talk about over the next 150 years)

Apr 12 11:53 AM

[D. McHattie:]

OK. Getting scared now.

Apr 12 11:56 AM

[dcb:]

If you want to understand the psychology think. What is in it for me each and every time you think of something or do anything. As an MD I am starting to believe that the traits that get you to the top of the investment world are to be a sociopath. To avoid any confusion, look it up. Also a huge degree of narcissism, but they may go together.


On Apr 12 11:53 AM maxjones wrote:

> Does Goldman Sachs qualify as a "quant fund" or is it in some other
> class or group or category of "liquidity providers"? (and hot air
> providers too.... and for why I think so, please see my next point)
>
>
> Its CEO Mr. Blankfein (a guy I wouldn't buy a used car from) was
> less than impressive (to anyone watching carefully) the other evening
> when he spoke on CNBC from some venue I can't recall.
>
> At one point those two protesting ladies holding up that banner saying
> "give us our money back" came up and stood behind him. Whatever
> one may think of their tactics (and personally I really don't think
> much of them) what was most interesting was Mr. Blankfein's response
> and way of handling the situation which went something like this:
> "since people have now seen your banner, why don't you just run
> along now and I will answer your point at the end of my talk".
>
>
> They the pari of ladies left (and they should never have been there
> in the first place) (but since they went up there they shouldn't
> have let him talk them out of whatever they were up there for, so
> easily) but Mr. Blankfein predictably DID NOT take up "their point"
> (whatever it was) "at the end of his talk".
>
> In other words he just lied to them as he is accustomed to doing
> the rest of the time anyway. What he basically said was "you just
> trust in me and I will address your concerns "later". With "later"
> of course never coming! This seemed to me confirm precisely what
> those protesters were protesting about: Making empty promises, lying,
> using smooth talk and jargon to bamboozle anyone but the most expert....and
> going on doing precisely the same self interested things under the
> guise of extremely helpful and sophisticated "wall -street - ism".
> (to coin a new term)
>
> And so it "populism" (another slightly older term) to want to put
> a guy like that (and his other happy "partners" and cohorts that
> "thin out" by natural selection at Goldman Sachs) comfortably behind
> bars maybe as Mr. Made-Off's next door neighbours? (they would have
> plenty to talk about over the next 150 years)
>
>
>
>
>
>

Apr 12 01:55 PM

[notsosmart:]

its so easy-dont listen any of these financial scoundrels. think for yourself & to the best of your ability do your own homework.

Apr 12 02:08 PM

[PainfullyAware:]

Too Big To Fail = Big Enough To "Game" The Markets.

Goldman, Morgan, and the other avenues of the "Presidents Working Group On Financial Markets" should be scrutinized before considering "Bull Market Reality". Their influence effects those with shallow analysis.

"Conspiracy" has become a dirty word in our society, automatically calling in to question ones faculties. The unfortunate thing is that all Conspiracy means is that two or more people are working to achieve the same outcome. Many Conspiracies exist in everyday life.

Some of the more nefarious "Conspiracies" that still have "Questions" in my opinion would be - Vince Foster's Suicide in the park without walking to the point of his demise. Ted Kennedy kills a woman and is allowed to remain in office. Karl Rove and the boys use Lobbying at a whole new level of influence and investigations are hampered. There are many more if one cares to look and suspend judgment based upon emotion. Party Lines Are Irrelevant. All information, except personal experience, is filtered through others, and is thus tainted with bias. Always - Que Bono and Follow The Money Applies.

To Not Evaluate The "Possible" Undermines The Preparation For Contingencies. When Possible And Probable Cross; Events Happen.

If you consider the populous the "Root Driver" of the economy, then things are not improving.

If you consider the "Market" to be its own entity and the populous is just a factor, then we may be able to "Continue The Shell Game" indefinitely.

I personally believe that if people are forced into desperation they will do desperate things. Hunger and Unemployment Do Not Make Rational People.

Kindness Is Never Wasted. Many will "Need" before this is over.

Justice Has Many Forms. Good By Evil Means Is Still Evil.

Apr 12 06:03 PM

[Bruce Pile:]

The problem of big quant fund events like the one shown at August '07 above are one nice thing about owning small, unpopular, low profile, low volume stocks that tend not to be as dramatically effected by such things. The typical net effect is a brief interruption of whatever the stock was doing before, be it a climb or a decline - hardly worth trying to trade around. On a 2 year chart, you can scarcely notice that anything happened other than the usual volatility. Of course, if it happens in conjunction with a credit freeze-up or some other major fundamental problem, that's different. But the quant fund traffic accidents, even fender benders, just by themselves, are a big problem for anything that's popular and heavily traded by them.

Apr 12 06:17 PM

[wobatus:]

Twas ever thus. Traders trade and in the long run it is all meaningless. Shares in companies have an intrinsic value which eventually outs, no matter what manic mr. market, whether a quant trader or ma or pa kettle, is willing to pay for or take to part with shares on a given day.

Am I supposed to care what "deleveraging liquidity event" is gonna do to the price of shares this Monday unless I am in the market to buy or sell a slice of a business on Monday?

MCD, PG, XOM, INTC, MMM, AAPL, etc. are all going to earn a certain amount of free cash flow over their lives which will have x present value depending on riskless rates, etc.

Apr 12 08:59 PM

[wobatus:]

Good point Bruce, but it evidently offended someone. :)


On Apr 12 06:17 PM BrucePile wrote:

> The problem of big quant fund events like the one shown at August
> '07 above are one nice thing about owning small, unpopular, low profile,
> low volume stocks that tend not to be as dramatically effected by
> such things. The typical net effect is a brief interruption of whatever
> the stock was doing before, be it a climb or a decline - hardly worth
> trying to trade around. On a 2 year chart, you can scarcely notice
> that anything happened other than the usual volatility. Of course,
> if it happens in conjunction with a credit freeze-up or some other
> major fundamental problem, that's different. But the quant fund traffic
> accidents, even fender benders, just by themselves, are a big problem
> for anything that's popular and heavily traded by them.

Apr 12 09:00 PM

[wobatus:]

What was Blankfein supposed to say? They didn't have a question. They want "their" money back. GS wants to pay back TARP. if they meant the AIG bailout money, well, maybe congress can force the toothpaste back in the tube, but if the point was to make sure AIG didn't default so THEIR counter-parties got paid and default on their obligations to prevent a meltdown, well...

Was the idea to bailout AIG just so AIG would keep all the money? No.

I don't have much of a problem with Blankfein. System-wide disaster. He's just one guy and not an especially evil one if you ask me.


On Apr 12 11:53 AM maxjones wrote:

> Does Goldman Sachs qualify as a "quant fund" or is it in some other
> class or group or category of "liquidity providers"? (and hot air
> providers too.... and for why I think so, please see my next point)
>
>
> Its CEO Mr. Blankfein (a guy I wouldn't buy a used car from) was
> less than impressive (to anyone watching carefully) the other evening
> when he spoke on CNBC from some venue I can't recall.
>
> At one point those two protesting ladies holding up that banner saying
> "give us our money back" came up and stood behind him. Whatever
> one may think of their tactics (and personally I really don't think
> much of them) what was most interesting was Mr. Blankfein's response
> and way of handling the situation which went something like this:
> "since people have now seen your banner, why don't you just run
> along now and I will answer your point at the end of my talk".
>
>
> They the pari of ladies left (and they should never have been there
> in the first place) (but since they went up there they shouldn't
> have let him talk them out of whatever they were up there for, so
> easily) but Mr. Blankfein predictably DID NOT take up "their point"
> (whatever it was) "at the end of his talk".
>
> In other words he just lied to them as he is accustomed to doing
> the rest of the time anyway. What he basically said was "you just
> trust in me and I will address your concerns "later". With "later"
> of course never coming! This seemed to me confirm precisely what
> those protesters were protesting about: Making empty promises, lying,
> using smooth talk and jargon to bamboozle anyone but the most expert....and
> going on doing precisely the same self interested things under the
> guise of extremely helpful and sophisticated "wall -street - ism".
> (to coin a new term)
>
> And so it "populism" (another slightly older term) to want to put
> a guy like that (and his other happy "partners" and cohorts that
> "thin out" by natural selection at Goldman Sachs) comfortably behind
> bars maybe as Mr. Made-Off's next door neighbours? (they would have
> plenty to talk about over the next 150 years)
>
>
>
>
>
>

Apr 12 10:08 PM

[Mistrofan:]

Thank you again Tyler. Hmm, for whatever reason, these articles leads me again to think that ther might be just too much market manipulation and this "credit crisis" is/was nothing else than a huge setup so GS, JPM and MS would benefit from buying competition assets. I know what all of you will say that the financial crisis is REAL - and I agree with you - the fundamentals of it as damn too real. But one of my point is why didn't the crash happend earlier (Aug '07, or with Bear Stearns). And I can tell you - because the BIG 3 where not prepared to take advantage of the situation. The best would be to confirm my theory to ask John Thain - and I have a feeling he will confirm.

Apr 12 11:36 PM

[insideoil:]

As long as they keep getting paid to take the bets and are covered for the losses, they will keep on betting till they make lots of money to have "profits" they do not have to give back.
If the added liquidity pumps the market, the government program will be seen as a success.
As you rightly point out this is nothing more than a clever scheme backed with tax payers money designed to force you to spend money and/or lose it through inflation. An investment nightmare for "buy and hold" and now a nightmare for traders as well. The game of the last 10 years has to be paid for, and there is no cheap escape, but there will be winners and a lot more losers. I think now the game is up, and unless main street starts showing some benefit - as in real money, real value creation, with real people to offer investors - we are all doomed to paying the price of past follies. Even the trick of getting somebody else to pay is simply not working any more as the "smart" money can smell the manipulation and are simply abandoning the game. Maybe its time to play in 3rd world markets that are not quite so sophisticated, or in physical commodities that are less easy to game.

Apr 13 04:49 AM

[maxjones:]

That that Blankfein character is only one guy and not even necessarily one of the worse ones, is true. That there are incorrigible buffoons out there cheering for people like him...i.e. Mr. "O.K. Getting scared now" (above) is also true (and self-evident).

Instead I think the comment by the M.D. was dead on: A lot of these guys are just narcisissitic sociopaths. And there are so many of them around that we shouldn't play into their narcissism by giving any single one of them too much importance as a single case.

It is indeed a systemic problem that then produces lots of specific individual cases. (if his name wasn't Blankfein...."a rose by any other name would smell as sweet" )... And it may even be true (as Mr. Greenspan suggested at the end of House of Cards) that they are just an intrinsic part of human nature and that we can never get rid of them.

But does that mean we should all become great retired philosophers and wise elders like Mr. Greenspan and just give up? I think we should go after them when they break the law and we should go after the system that produces them by whatever means of reform are appropriate and can work.

Otherwise we may as well all move to Mars. (And if somebody can guarantee the Terraforming there and a safe spaceship I don't mind volunteering to go first) But PLEASE....do not include some of those scumbags in the same spaceship because otherwise they will indeed have good reason to Get Scared)

If populism doesn't get them some people eventually will. They prey and surivive on the fact that we are mainly a nation of laws and of law-abiding citizens. They live themselves by the law of the jungle but they would be the first to pray it would disappear if it were there for real. They are tough guys in the given safe context but nothing but cowards and scoundrels in the big wide world out there that they love to manipulate.

Apr 13 05:28 AM

[wobatus:]

Why do you think Blankfein is a sociopath? He seems fairly level-headed to me. Certainly more so than Prince, Thain, O'Neal. The personalization of this crisis over the systemic breakdown gets away from the root and solution.


On Apr 13 05:28 AM maxjones wrote:

> That that Blankfein character is only one guy and not even necessarily
> one of the worse ones, is true. That there are incorrigible buffoons
> out there cheering for people like him...i.e. Mr. "O.K. Getting scared
> now" (above) is also true (and self-evident).
>
> Instead I think the comment by the M.D. was dead on: A lot of these
> guys are just narcisissitic sociopaths. And there are so many of
> them around that we shouldn't play into their narcissism by giving
> any single one of them too much importance as a single case.
>
>
> It is indeed a systemic problem that then produces lots of specific
> individual cases. (if his name wasn't Blankfein...."a rose by any
> other name would smell as sweet" )... And it may even be true (as
> Mr. Greenspan suggested at the end of House of Cards) that they are
> just an intrinsic part of human nature and that we can never get
> rid of them.
>
> But does that mean we should all become great retired philosophers
> and wise elders like Mr. Greenspan and just give up? I think we
> should go after them when they break the law and we should go after
> the system that produces them by whatever means of reform are appropriate
> and can work.
>
> Otherwise we may as well all move to Mars. (And if somebody can
> guarantee the Terraforming there and a safe spaceship I don't mind
> volunteering to go first) But PLEASE....do not include some of
> those scumbags in the same spaceship because otherwise they will
> indeed have good reason to Get Scared)
>
> If populism doesn't get them some people eventually will. They prey
> and surivive on the fact that we are mainly a nation of laws and
> of law-abiding citizens. They live themselves by the law of the
> jungle but they would be the first to pray it would disappear if
> it were there for real. They are tough guys in the given safe context
> but nothing but cowards and scoundrels in the big wide world out
> there that they love to manipulate.
>
>
>
>

Apr 13 08:44 AM

[wobatus:]

Several lines in this article really jump out on second look:

1. "mutual, pension funds and retail are really JUST beneficiaries of the liquidity efficiency." Emphasis added. Well, yes and no. Yes, i suppose, in that if they have to trade there will be a someone to trade with. But an emphatic no in the sense that these trading "efficiencies" in any way truly benefits them as far as price discovery. Nothing about fundamental value is being "discovered" at all.

2. "Vast majority of quants are merely playing hot potato with each other." How is this difefrent than any other time as far as quants are concerened. I am being a bit harsh, and i am sure some price anomalies between securities are smoothed out, but these are anomalies in relation to each other or historical norms, not intrinsic or fundamental value.

3. "the vanilla money is just stuck as a hot potato bagholder." I guess for play at home traders that think momentum in the triple leveraged bear and bull etfs mean anything, but vanilla money that is interested inlong term value shouldn't give a hoot about what deleveraging quants does to vale, except that it might lead to some exceptional bargains. Either way. A short forced to deleverage can also cover too high. But that's not really my bag.

4. Some unidentified quant thinks "a date as early as Monday could be d-day" for the financial deleveraging tsunami, or black swan of black swans.

This last one is the crux of it. TD is a fright-monger. All of his articles are of this ilk. Not a single, well, it could be this or it could be that, or tehre are some positives in this. Nope. Every last one of these is fire-breathing negativosity, often of the imminent variety. A trader says, a quant says, a hedge fund guy tells me.

And a lot of it is very well-thought, not garden variety, and possible. And no one needs another fence-sitter. But it all pretty clealrly agenda- and attention-driven to me.

And in the final analysis, it doesn't change what the actual value of an ownership stake in a business really is. Joe's Privately Held Business doesn't change in value based on some goldman sachs quant strategy, and properly viewed, neither does a publicly traded share.

Apr 13 01:07 PM

[User 305589:]

Tyler, thanks for a very insightful article.
However, I think it is somewhat odd, how you describe the relationship between 'vanilla' folks (retail, pension funds, mutual funds etc) on the one side and the quants and broker/dealers on the other.
Of course, the latter provide the liquidity. But I think, you miss the crucial point when you think that they are, what matters. What really does matter, are the 'vanilla' folks, i.e. people who do not flip their holdings every few hours or days! They seem to disappear at a fast clip which exactly is the reason why the quants (i.e. Goldman, which you focussed on) are increasingly on their own - and have to play hot potatoes with themselves by now. If the folks whom you make money from (ehm, provide liquidity to) disappear, then your business model is in trouble.

What I conclude from your data, therefore, is the following:
The wider bid-offer spreads, growing illiquidity, spikes in volatility etc. will likely come, but, frankly, to me, being one of the 'vanilla' guys this is not a threat of a black swan. I am not dependent on the market for the value of my holdings to materialize. It will, over time, with or without the quants (remember the buffet quote that he didn't need a daily price for his investments, because to him profts, cash flow etc. are what matters). It will rather be a black swan for daytraders, overlevered 'vanilla' folks who can't absorb temporary adverse price movements (margin calls) and the quants themselves. The latter face a rapid shrinking of their primary source for profits and at one point they will get burned from flipping around their own hot potatoes.
As a side note, may Goldman's equity offering have something to do with that - rather than the really silly explanation given by them (repayment of Tarp money)?

Apr 14 04:32 AM

[wobatus:]

Hmm. This was all done in conjunction with Credit Derivative Research, LLP. Presented as a 'folksy" a-quant-trader-tells-me narrative. Here is a reurters article on the CDR "study":

www.reuters.com/articl...

I note he says that credit markets are not following the equity run. Interesting, since high yield bonds were up for the year at close yesterday, counting the distributions, by 2.36%. Investment grade bonds were down 3%. S&P 500 down 6.8%.

Since March 9, s&p up about 25%, junk 20%, investment grade corporates 6.6%, a fairly normal distribution across the risk spectrum.

And it is fairly normal for a crash to be on heavy volume (we aren't given the crash volumes in "Tyler's" analysis, 2d week of january to midmarch, just the 52 week avgs. and the recvery volume in relation thereto), with the recovery at first on lighter volume (wall of worry).

In any event, both the crash and the recovery put equities still below beginning of year. both may be "manipulative" heavy liquidity in and out churning trade, since both the low pointa nd the high point may be meaningless.

None of this is that abnormal or suggests some liqudity draining disaster trade is right around the corner (2 days ago was the quant trader fear-mongering prediction). And this is all quite obviously agenda driven. Nothing wrong with that. You have pump hypesters and bashers, and you have to figure out the truth in the midle. or forget it and look at fundamental, actual values.

How shocking that the market gets oversold and overbought by momo leveraged money and the truth is somewhere in between or somewhere else all together. Keep watching the hand, ignore what is in the box.

Apr 15 03:19 PM

[Freya:]

Bush said Getting to Mars by 2010 was a priority.

ooops.

Apr 13 08:43 AM

[Freya:]

Acknowledging the importance of Program Trading is a step in the right direction but their ranks have thinned out quite a bit over the last couple of years and they do not have the control they once had.

Your focus is a little too short. Suggest looking into the 2004-2006 time frame when Program Trading was much more prolific.

In addition, there is NYSE Membership trading. There is an overlap but not total. Short selling by the members when it gets extreme usually portends a plunge. By extreme, I mean shorts exceed buys, by at least 30 million shares daily.

The reverse is also true when looking for sharp upside moves. Currently they have been selling this move, but it hasn't reached extremes on any day.

Keep up the good work Tyler, Yellowhoard was right in recommending you.

Apr 13 12:55 AM