U.S. Leads in High-Frequency Trading, Trails in Rules

Given the missteps that have prolonged and deepened the European debt crisis, one wouldn’t necessarily expect the continent to be home to far-sighted financial reform. But that is exactly what seems to be happening in the realm of high-frequency, computer-driven trading.

High-speed trading comes with real benefits: lower trading expenses, better prices for investors and increased market liquidity. The costs, however, are fairly significant and can be seen in wild volatility and destabilizing trading snafus.

http://www.bloomberg.com/news/2012-10-01/u-s-leads-in-high-frequency-trading-trails-in-rules.html

The U.S. Securities and Exchange Commission, stung by criticism that it lacks the knowledge to analyze the computerized trading that has come to dominate American stock markets, is planning to catch up.

Initiatives to increase the breadth of data received from exchanges and to record orders from origination to execution are at the center of the effort. Gregg Berman, who holds a doctorate in physics from Princeton University, will head the commission’s planned office of analytics and research.

http://www.businessweek.com/news/2012-10-01/sec-leads-from-behind-as-high-frequency-trading-shows-data-gap

High frequency trading, which some consider the root of all evil in today’s markets, may be on the verge of new regulations that could help avert future catastrophe. The problem is the potential new rules may not solve all of the market’s problems.

At least that’s what Larry Tabb, founder and CEO of the research firm Tabb Group, concludes in prepared commentary ahead of today’s roundtable discussion between the Securities and Exchange Commission and several companies within the industry. High frequency trading is often characterized as the use of supercomputers by sophisticated trading outfits to jump rapidly in and out of markets.

http://blogs.wsj.com/marketbeat/2012/10/02/high-frequency-trading-the-evil-red-headed-stepchild/

China shows more signs of slowing down

HONG KONG (CNNMoney) -- Activity in China's factory sector continued to slide last month, bringing more bad news for the country's political class as they prepare for a once-a-decade leadership transition.

The Chinese government said Monday that its official manufacturing index hit 49.8 in September, up from 49.2 in August. Any reading below 50 indicates that factory activity is shrinking rather than growing.

http://money.cnn.com/2012/09/30/news/economy/china-pmi/index.html?iid=HP_River

Baltic Dry Index near all time low

http://www.marketoracle.co.uk/images/2012/Sept/baltic_dry_index-1985.png

http://en.wikipedia.org/wiki/Baltic_Dry_Index Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).

The supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in deserts. So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. e.g. "if you have 100 ships competing for 99 cargoes, rates go down, whereas if you've 99 ships competing for 100 cargoes, rates go up. In other words, small fleet changes and logistical matters can crash rates..."^[5] The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal,metallic ores, and grains.

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.^[6]

The end of the euro’s Indian summer

THE sugar-rush brought on by the European Central Bank’s pledge to intervene in bond markets to help troubled euro-zone countries—some diplomats call it “Mario Draghi’s ice cream”—was bound to fade at some point. But nobody expected it to fade quite so suddenly this week.

http://www.economist.com/node/21563774/print

At some point, it will get the balance wrong. And then either Spain will be forced out of the euro. Or the Germans will walk.     http://blogs.wsj.com/eurocrisis/2012/09/28/europes-never-ending-crisis/tab/print/

Listen to EES on Traders Radio Network Friday Sept 28th 3pm EST

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Social unrest in Spain, fears of Catalonia secession

(Reuters) - Violent protests in Madrid and growing talk of secession in Catalonia are piling pressure on Spanish Prime Minister Mariano Rajoy as he moves closer to asking Europe for rescue money.

In public, Rajoy has been resisting calls from bankers at home and the leaders of France and Italy to move quickly to request assistance, but behind the scenes he is putting together the pieces to meet the stringent conditions for aid.

With protesters stepping up anti-austerity demonstrations, Rajoy presents painful economic reforms and a tough 2013 budget on Thursday, aiming to persuade euro zone partners and investors that Spain is doing its deficit-cutting homework despite a recession and 25 percent unemployment.

 http://www.reuters.com/article/2012/09/26/us-spain-rajoy-idUSBRE88P09F20120926

Study Reveals Germans Less Confident than they Seem

Despite the euro crisis, Germany has largely flourished in recent years. So why are its people always complaining? A recent study shows they're plagued by self-doubt and fears of losing their prosperity. There may be something to the stereotype of the tortured German soul after all.

http://www.spiegel.de/international/germany/study-reveals-germans-less-confident-than-they-seem-a-857918.html

German High-Frequency Bill to Affect Hedge Funds, Official Says

Chancellor Angela Merkel’s Cabinet will vote on a bill tomorrow that limits high-frequency trading even for market participants outside Germany and requires automated orders to be marked as such, a government official said.

High-frequency traders will have to seek authorization and will be supervised under the legislation proposal, the official told reporters in Berlin today on condition of anonymity because the bill has not yet been published. High-frequency trade will be curbed and market abuse will be punished, he said in Berlin.

http://www.bloomberg.com/news/2012-09-25/german-high-frequency-bill-to-affect-hedge-funds-official-says.html

EES: Has the Euro Peaked

The EUR/USD has surprised many with its run up to 1.3172, but it had a lot of help from the Fed with the announcement of a new round of QE3.We've been waiting for the EUR/USD to stop going up for an opportunity to sell -- is this it?

http://seekingalpha.com/article/881041-has-the-euro-peaked

Bankers among the least trusted, says Which?

Mis-selling scandals and the financial crisis means bankers are now less trusted than estate agents, according to consumer group Which?.

But the group's survey suggested that bankers remained more trusted than journalists and politicians.
Which? said that recent banking scandals meant there was an urgent need for a "fundamental change" in banking culture and practice.
An industry body said that there was a commitment for change among banks.
Which? conducted a survey of 2,060 people, asking how much they trusted various professions. Nurses, doctors and teachers were the most trusted, with bankers, journalists and politicians in the bottom three.
The consumer group said that bankers should comply with a code of conduct or be struck off. They should also be punished for mis-selling, with bonuses clawed back.

http://www.bbc.co.uk/news/business-19639795?print=true

System Expectations

I found myself outside today looking for an excuse to make a video. It's 80°F / 27°C, sunny skies and a soft breeze in Dallas. The last place anyone wants to be is in front of the computer when the weather is this nice.

No doubt that some active daytraders or people that hate their jobs are thinking the same thing. I suspect that the motivation for most people making automated expert advisors is the dream of making money without doing anything. Turn on the software and wait for the trading profits to roll in. That was certainly the case with the company Forex Made Sleazy... I mean, Forex Made Easy several years ago.

We do have a handful of customers that trade profitably, but even then, it takes a long time for an automated system to get to the point where it's largely hands off. The best conceived ideas, which I would define as plausibly worthy of my own investment funds, takes a bare minimum of several months to execute from start to finish. This also presumes the unlikely notion that the idea has genuine potential to start with.

Even the most simple, valid concepts encounter substantial setbacks before the system can truly run hands-free. It's usually not some kind of epic programming disaster where the client wants black and the programmer makes white. Don't get me wrong; communication is critical. The smoothest projects are always the ones where both parties understand one another readily.

Nonetheless, even the most well-oiled team experiences countless hiccups in the process of morphing from idea to reality. Simple ideas often fall the most vulnerable to real world problems. Trade execution stands out as the most common obstacle. If anything goes remotely unexpected, a potentially profitable scenario may lead to unexpected losses.

I worked with one client that came up with a simple idea that mathematically showed a heavy positive expectation. Yet when we launched the idea in the real world, the prices that the system absolutely required in order to function never came through. Slippage occurred precisely when it was the most damaging.

We had to go back to the drawing board looking for ways to re-engineer the expert advisor where the importance of execution declined. That setback alone took several months to overcome in any meaningful sense.

The take away here is that it's totally unreasonable to expect to hire a forex programmer and expect a dramatic shift in profits and life style. The best ideas take several months before they are worthy of running their full account balance. Unfortunately, most of the ideas out there are not good to begin with. That's why making an EA that is profitable over the long run is so incredibly difficult.

Deutche Bank: Gold is Money

Deutsche Bank analysts Daniel Brebner and Xiao Fu  have just released a new report saying that gold is money (via Business Insider):
http://www.zerohedge.com/contributed/2012-09-19/deutsche-bank-gold-money

Financial Times reported in 2010:

Intercontinental Exchange, the US futures exchange group, has followed rival CME Group by allowing its European clearing house to accept gold bullion as collateral for transactions.

JP Morgan accepts gold bullion as collateral.

So does Donald Trump.

China is paying for oil with gold.  India is probably doing so as well.

And central banks are considering allowing banks to hold gold as a risk-free, tier 1 asset.

Caveats:  Be careful with unallocated accounts, accounts held by big banks,  paper forms of gold and tungsten (see this,this, this and this).

Finally, note that FDR was not the only leader to confiscate gold.  Gary North alleges:

When World War I broke out in 1914.  The banks suspended redemption of gold for paper money.  This broke their contracts, but the governments all ratified this action.  Then the governments had their central banks confiscate the gold that had been stored in the vaults of the commercial banks.

Hitler, Mao and Stalin also allegedly confiscated gold.

Coin mintage collapsed the Roman Empire. Is history repeating itself?

In the third century AD, the Roman Empire went through a hard period, know as the “military crisis”. This period is characterized by political problems, such as the violent death of the emperors and their family, caused by revolts, plots and military uprisings, military problems caused by the invasion of the empire by the barbarian populations such as the Goths and economic problems such as the lack of production, the decrease of the population, famine in some cases and inflation.

http://www.coins-auctioned.com/docs/coin-articles/coin-mintage-collapsed-the-roman-empire-is-history-repeating-itself

EES: QE3 to start new US Dollar Carry Trade

With the new QE3 announcement, and the Fed stating it will not raise interest rates before 2015, it's likely that the US Dollar will be the new carry trade. The idea is to borrow cheaply in US Dollars and invest anywhere outside of the USD. This will be most felt in emerging markets, which rallied after the Fed announcement.

http://seekingalpha.com/article/872541-qe3-to-start-new-u-s-dollar-carry-trade 

EES: Competitive Devaluation of Currencies via QE3

The Fed's recent announcement of QE3 has undoubted effects on financial markets; but what does it mean for Forex?

The initial reaction would be that it's bad for the US Dollar (UUP) (UDN) which was reflected in Friday's move of EURUSD (FXE) to above 1.31 against the US Dollar. But just last week, traders were expecting a collapse of the EURUSD as the European financial crisis deepens.

http://seekingalpha.com/article/870971-competitive-devaluation-of-currencies-what-qe3-means-for-forex